Pacific Air Corporation is a business 'providing a wide variety of aviation products to pilots throughout the world. Dana Lombardi, the recently hired assistant controller, has been asked to develop a cost function to forecast shipping costs. The previous assistant controller had forecasted shipping department costs each year by plotting cost data against; direct labor-hours for the most recent 12 months and visually fitting a straight line through the points. The results were not satisfactory.

After discussions with the shipping department personnel, Lombardi decided that shipping costs could be more closely related to the number of orders filled. She based this conclusion on the fact that 10 months ago the shipping department added some automated equipment. Furthermore, she believes that using linear regression analysis will improve the forecasts of shipping costs. Cost data for the shipping department have been accumulated for the last 25 weeks. She ran two regression analysis of the data, one using direct labor-hours, and one using the number of cartons shipped. The information from the two linear regressions is the following:

QUESTION 2 PACIFIC AIR CORPORATION (18 marks) Pacic Air Corporation is a business rproviding a Wide variety of aviation products to pilots throughout the world. Dana Lombardi, the recently hired assistant controller, has been asked to develop a cost function to forecast shipping costs. The previous assistant controller had forecasted shipping department costs each year by plotting cost data against; direct labor-hours for the most recent 12 months and visually tting a straight line through the points. The results were not satisfactory. After discussions with the shipping department personnel, Lombardi decided that shipping costs could be more closely related to the number of orders lled. She based this conclusion on the fact that 10 months ago the shipping department added some automated equipment. Furthermore, she believes that using linear regression analysis will improve the forecasts of shipping costs. Cost data for the shipping department have been accumulated for the last 25 weeks. She ran two regression analysis of the data, one using direct labor-hours, and one using the number of cartons shipped. The information from the two linear regressions is the following: Regression 1 Regression 2 Equation SC = 804.3 + 15.68 SC = 642.9 + 3.92 NR DL R-squared 0.365 0.729 Standard error of the 2.652 1.884 estimate Where: SC = Total shipping department costs DL = Total direct labour hours NR = Number of cartons shipped Required: a) Identify which regression equation (Regression 1 or Regression 2) that Pacic Air should adopt for forecasting total shipping department costs and explain your reasons. (7 marks) b) If Pacic Air estimates that 600 orders will be lled in the coming week, calculate the total shipping department costs using the regression that you have selected in part (a). (3 marks) c) Are there any limitations to the regression that you have selected in part (a) above? Ifso, identify ways to address the limitations. Include in your answer the effect, if any, of the global nature of Pacific Air Corporation business. (8 marks)