Randy Harris, controller, has been given the charge to implement an advanced cost man¬

agement system. As part of this process, he needs to identify activity drivers for the activi¬

ties of the firm. During the past four months, Randy has spent considerable effort identify¬

ing activities, their associated costs, and possible drivers for the activities' costs.

Initially, Randy made his selections based on his own judgment using his experience and input from employees who perform the activities. Later, he used regression analysis to confirm his judgment. Randy prefers to use one driver per activity, provided that an of at least 80 percent can be produced. Otherwise, multiple drivers will be used, based on ev¬

idence provided by multiple regression analysis. For example, the activity of inspecting fin¬

ished goods produced an R^ of less than 80 percent for any single activity driver. Randy be¬

lieves, however, that a satisfactory cost formula can be developed using two activity drivers:

the number of batches and the number of inspection hours. Data collected for a fifteen-month period are given next:

Required:
1. Calculate the cost formula for inspection costs using the two drivers, inspection hours, and number of batches. Are both activity drivers useful? What does the R^ indicate about the formula?
2. Using the formula developed in Requirement 1, calculate the inspection cost when 300 inspection hours are used and 30 batches are produced. Prepare a 90 percent confidence interval for this prediction.

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Inspection Cost Hours of Inspection Number of Batches $17,689 100 10 18,350 120 20 13,125 60 15 28,000 320 30 30,560 240 25 31,755 200 40 40,750 280 35 29,500 230 22 47,570 350 50 36,740 270 45 43,500 350 38 26,780 200 18 28,500 140 28 17,000 160 14