Heywood Game Systems produces a variety of video game consoles. The company has been using activity- based costing to determine the cost of the “Ultimate” game block. Heywood incurs setup costs for each batch of consoles it produces. Currently the company is using the number of setups as the cost driver for setup costs. Jerry Crofton has been hired recently to assist in the production department. He frequently boasts about the managerial accounting classes he has taken as a student. He thinks that setup hours may be a better driver for setup costs. Heywood has collected the following data related to setting up the machines for production of the game consoles:

Jerry runs regressions on each of the possible cost drivers and estimates these cost functions:

Setup costs = $ 327.25 + ($ 9.83 * Number of setups)
Setup costs = $ 212.89 + ($ 8.26 * Setup hours)
Required
1. Explain why number of setups and setup- hours are plausible cost drivers of setup costs.
2. Plot the data and regression line for number of setups and setup costs. Plot the data and regression line for setup hours and setup costs. Which cost driver of setup costs would you choose? Explain.
3. What, if any, are the implications of Heywood choosing the cost driver you did not choose in requirement 2 when evaluating the productionprocess?

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