Elliott Bay Tarp and Tent (EBTT) Company has difficulty controlling its use of supplies. The company has traditionally regarded supplies as a purely variable cost. But nearly every time production was above average, EBTT spent less than predicted for supplies; when production was below average, EBTT spent more than predicted. This pattern suggested to Kosta Kane, the new controller, that part of the supplies cost was probably not related to production volume, or was fixed.

He decided to use regression analysis to explore this issue. After consulting with production personnel, he considered two cost drivers for supplies cost: (1)

number of tents and tarps produced, and (2) square metres of material used. He obtained the following results based on monthly data:

1. Which is the preferred cost function? Explain.
2. What percentage of supplies cost depends on square metres of materials?
Do fluctuations in supplies cost depend on anything other than square metres of materials? What proportion of the fluctuations are not explained by square metres of materials?

Transcribed Image Text:

Constant Variable Coefficient R NUMBER OF TENTS AND TARPS 2,200 COST DRIVER SQUARE METRES OF MATERIAL USED 1,900 0.033 0.072 0.220 0.686