Data Set 2 provides additional information for the 48 observations collected by Julie. It includes information for setup costs, purchasing costs, labor-related costs, and total conversion costs. The total conversion costs are equal to the sum of setup costs, purchasing costs and labor-related costs. Julie also provides you with the number of setups, the number of purchase orders, and direct labor hours used for products FTC/A105 and FTC/B107.

Product # of Setups # of POs DLHs

FTC/A105 30 30 9,000

FTC/B107 110 150 2,000

Jordan is concerned that the relationship between conversion costs and direct labor hours has weakened since automation, given the significant decrease in the required number of direct labor hours. At the same time, overhead costs resulting from the new automation has increased dramatically.

First, recalculate the product costs for FTC/A105 and FTC/B107 using activity-based costing.

What can you tell Jordan and Alfred about the relationships between the different costs and the cost drivers?

What happens when you calculate the correlations or perform some simple regressions between the different costs and the cost drivers?