Regression; choosing among models. (chapter appendix) Tilbert Toys (TT) makes the popular Floppin' Freddy Frog and Jumpin' Jill Junebug dolls in batches. TT has recently adopted activity-based costing. TT incurs setup costs for each batch of dolls that it produces. TT uses "number of setups" as the cost driver for setup costs. TT has just hired Bebe Williams, an accountant. Bebe thinks that "number of setup-hours" might be a better cost driver because the setup time for each product is different. Bebe collects the following data.

Required:1. Estimate the regression equation for (a) setup costs and number of setups and (b) setup costs and number of setup-hours. You should obtain the following results:Regression 1: Setup costs = a + (b X Number of setups)

Regression 2: Setup costs = a + (b X Number of setup-hours)

2. On two different graphs plot the data and the regression lines for each of the following cost functions:a. Setup costs = a + (b X Number of setups)b. Setup costs = a + (b X Number of setup-hours)3. Evaluate the regression models for "Number of setups" and "Number of setup-hours" as the cost driver according to the format of Exhibit 10-18 (p. 372).4. Based on your analysis, which cost driver should Tilbert Toys use for setup costs, andwhy?

Transcribed Image Text:

Number of Setups Setup Costs $104,600 Month Number of Setup Hours 300 1,840 410 2,680 126,700 150 1,160 57,480 480 236,840 4 3,800 310 3,680 178,880 6 460 3,900 2,980 1,200 3,280 213,760 420 209,620 90,080 221,040 8 300 270