The Tent Division of PEI Outdoor Equipment Company has had difficulty controlling its use of supplies. The company has traditionally regarded supplies as a purely variable cost. Nearly every time production was above average, however, the division spent less than predicted for supplies; when production was below average, the division spent more than predicted. This pattern suggested to Yuki Li, the new controller, that part of the supplies cost was probably not related to production volume, or was fixed.
She decided to use regression analysis to explore this issue. After consulting with production personnel, she considered two cost drivers for supplies cost: (1) number of tents produced, and (2) square metres of material used. She obtained the following results based on monthly data.

1. Which is the preferred cost function? Explain.

2. What percentage of the fluctuation 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 is not explained by square metres of materials?

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Cost Driver Number of Tents Square Metres of Material Used Constant Variable coefficient $2,300 $1,900 $0.033 $0.072 R2 0.220 0.686