Prepare a statistical analysis of the costs by
- Plotting the purchase department cost vs. each cost driver.
- Identify potential problems with the data and correct data problems if necessary. Report any changes you made.
- Develop cost models for all potential cost drivers - use regression analysis.
- Which is the best model? Explain why you think it is the best model.
- Explain what the model chosen in (d) means from an economic perspective.
- Us the model chosen to make one recommendation that you believe would reduce purchasing cost. Briefly explain your answer
*** ONLY answer the above questions please, using the table of data below *** 
Table 1: CWWR Purchasing Department Costs and Cost Drivers Purchasing Dept Cost (USS) $575,000 1,226,000 1,710,000 Store Location Sheridan Denver Salt Lake City Kansas City Omaha Number of Purchase Orders 1,708 2,519 2,506 Number of Suppliers 61 95 139 1,719 2,883 91 155 881,000 1,544,000 794,000 1,341,000 647 75 2,978 103 794,000 3,761 117 Milwaukee Minneapolis Phoenix Las Vegas Albuquerque Tucson 73 Merchandise Purchased (USS) $47,239,000 102,364,000 100,162,000 95,760,000 51,466,000 50,631,000 84,753,000 103,464,000 96,162,000 62,364,000 65,635,000 88,524,000 72,645,000 61,638,000 105,666,000 59,437,000 38,542,000 33,020,000 36,322,000 34, 121,000 31,920,000 2,584 5,497 4,347 176 130 2,216,000 2,030,000 1,338,000 856,000 1,122,000 863,000 1,085,000 2,878 62 Houston Oklahoma City Tulsa 819 129 1,247 145 2,162 141 Dallas San Antonio 952,000 2,822 105 Austin 5,115 51 El Paso 1,134,000 1,042,000 1,634,000 382 131 5,293 172 Nashville Memphis Indianapolis 34 699,000 875,000 967 2,425 48 Consolidated Western Wear Retailers: Regression Analysis to Understand Cost Drivers in a Purchasing Department Anne M. A Sergeant, PhD, CMA School of Accounting Seidman College of Business Grand Valley State University INTRODUCTION Dan's Western Wear began its humble roots on Main Street in Sheridan, Wyoming, where Thomas George, a Greek immigrant, settled his family in 1919 and began a cobbler business that served ranchers, cowboys, and coal miners. Dan George, Thomas' son, was nine years old when they arrived in the United States and was soon active in his father's cobbler business. Ultimately, he took over the business and began to increase the store's inventory, creating the business that is known today as Dan's Western Wear, which sells quality boots, work clothes, western apparel, and jewelry to just about anybody. Dan believes that if clothes can hold up to a dusty hard day's work, and look great at the same time, all the better. The company prides itself on quality clothes with good old-fashioned service. Customers are greeted at the door and helped throughout their experience. A visit to Dan's Western Wear is like a visit to an old friend. Dan's Western Wear is typical of western wear retail outlets. The industry is characterized by many independent regional shops. Frequently, these retail shops have been in operation for many years and have a multigenerational, loyal customer base. Recently, the online western wear business has shown some growth, but customers are primarily interested in face-to-face shopping where they can feel the products, try them on, and visit with locals who share their interests. Because these specialty retail outlets have relatively little competition from online and discount retailers, western wear stores have enjoyed relatively high profit margins for retail businesses. If managed well, these can be profitable stores. Joe West, a young entrepreneur who had worked at Dan's Western Wear prior to going to graduate school for a master's in business administration, saw an opportunity to consolidate western wear retail outlets to gain efficiencies. Thus, he founded Consolidated Western Wear Retailers (CWWR) and began purchasing profitable western wear stores, starting with Dan's Western Wear. He also assembled a management team to help him grow his business. As a new store is purchased, Joe and the management team study the store to learn how it is successful. Initially, they do not make major changes, keeping the same store name and encouraging the store to operate as before. Over time, Joe and the management team implement changes to improve profitability. Currently, CWWR owns 21 retail stores, and Joe believes this is large enough to aggressively pursue efficiencies from consolidation. THE PROBLEM d. Identify the best model, and explain why. e. Explain what the model means from an economic perspective. 2. Use the model to make two recommendations to the CWWR management team for improving the efficiency of purchasing operations. a. Be specific with details of the recommendations, b. Estimate the cost savings from the implementation of your recommendations. c. Consider secondary implications, quantitative and/or qualitative. d. Indicate how these changes (recommendations) should be implemented. DISCUSSION QUESTIONS Each year Joe reviews the financial information for all the CWWR stores. This past year was a relatively good year; company profits were up despite the huge July Fourth fire in Las Vegas, Nevada, that shut down the store for four months and required replacement of all the inventory. Joe did notice, however, that purchasing department costs varied considerably between stores. The minimum was $575,000 and the maximum was $2.2 million. This was perplexing, and he thought this might be an area where efficiencies could be achieved. Currently, each store has its own purchasing department with full autonomy. In the western wear industry, regional customers have regional tastes and desires. Local purchasing agents are thought to be best able to understand the desires of local customers and to meet those needs. On his management team, Joe has a managerial cost specialist with skills in data analytics. Together they discussed the purchase department cost problem and identified three potential cost drivers: merchandise purchased, number of purchase orders, and number of suppliers. To verify these ideas, Joe contacted purchasing managers from three different stores who agreed that these were potentially good cost drivers and that no others were readily apparent. The managerial cost specialist gathered data for the four variables from last year's financial information and reported it in Table 1. The data was also entered into an Excel spreadsheet (see Appendix) by the team's administrative assistant. At the next team meeting, the agenda will cover the contents of your memo as well as the following discussion items. Please be prepared to discuss them. 1. What cost drivers are useful for predicting purchasing department costs? What is the recommended model? What does it mean? How can this model be used to reduce costs? 2. Does CWWR use a centralized or decentralized purchasing strategy? Why would the company use this strategy? Under what circumstances would a centralized strategy be more valuable? Under what circumstances would a decentralized strategy be more valuable? 3. You developed recommendations, which essentially are changes to human behavior. Is change in an organization easy? How can human behaviors be changed in a management setting REQUIREMENTS Joe asked you, the managerial cost specialist on his management team, to examine the data and to recommend some courses of action to reduce purchasing department costs. Joe would like you to write a two-page memo (plus attachments) outlining your analytical findings as well as recommendations. This memo will be shared with the team before the meeting to discuss purchasing department costs. Use the following requirements as a guide: 1. Prepare a statistical analysis of the costs provided. a. Plot the purchase department cost vs. each cost driver (include these at the end of the memo as an attachment, one graph per page). b. Analyze the data for potential problems, correct data problems if necessary, and report any changes made. c. Use regression analysis to develop cost models for all potential cost drivers. ABOUT IMA (INSTITUTE OF MANAGEMENT ACCOUNTANTS) IMA, the association of accountants and financial professionals in business, is one of the largest and most respected associations focused exclusively on advancing the management accounting profession. Globally, IMA supports the profession through research, the CMA (Certified Management Accountant) program, continuing education, networking and advocacy of the highest ethical business practices. IMA has a global network of more than 85,000 members in 140 countries and 300 professional and student chapters. Headquartered in Montvale, N.J., USA, IMA provides localized services through its four global regions: The Americas, Asia/Pacific, Europe, and Middle East/India. For more information about IMA, please visit www.imanet.org
