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Regression Analysis to Understand Cost Drivers in a Purchasing Department Business Case Each year Joe reviews the financial information for all the CWWR stores. This

Regression Analysis to Understand Cost Drivers in a Purchasing Department Business Case

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 replacements of all inventory. Joe did notice however that purchasing department costs varied considerably between stores. The minimum was $575, 000 and the maximum was $2.2 Billion. This was perplexing, and he thought this 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 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 contracted purchasing managers from three different stores who agreed that these were potentially good cost drivers and they no others were readily apparent. The managerial cost specialist gathered the data for four variables from last years financial information and reported in Table 1. The data was also entered into an Excel spreadsheet (See appendix) By the teams administrative assistant.

Store Location Purchasing Dept. Cost Merchandise Purchased No. of Purchase Orders Number of Suppliers
Sheridan $575,000 $47,239,000 1708 61
Denver 1,226,000 102,364,000 2519 95
Salt Lake City 1,710,000 100,162,000 2506 139
Kansas City 881,000 95,760,000 1719 91
Omaha 1,544,000 51,466,000 2883 155
Milwaukee 794,000 50,631,000 647 75
Minnealops 1,341,000 84,753,000 2978 103
Phoenix 794,000 103,464,000 3761 117
Las Vegas 2,216,000 96,162,000 2584 73
Albaqurque 2,030,000 62,364 5497 176
Tucson 1,338,000 65,635,000 4347 130
Houston 856,000 88,524,000 2878 62
Oklahoma 1,122,000 72,645,000 819 129
Tulsa 863,000 61,638,000 1247 145
Dallas 1,085,000 105,666,000 2162 141
San Antonio 952,000 59,437,000 2822 105
Austin 1,134,000 38,542,000 5115 51
El paso 1,042,000 33,020,000 382 131
Nashville 1,634,000 36,322,000 5293 172
Memphis 699,000 34,121,000 967 34
Indianapolis 875,000 31,920,000 2425 48

1. Prepare a statistical analysis of the costs provided.

Plot the purchase department cost vs each cost driver (Graph per page)

Analyze the data for the potential problems, correct data problems if necessary and report any changes made.

Use the regression analysis to develop cost model for all potential cost drivers.

Identify the best model and explain why.

Explain what the model means from an economic perspective.

2. Use the model to make two recommendation to the CWWR management team for improving the efficiency of the purchasing operations

Be specific with the details of the recommendations

Estimate the cost saving from the implementation of your recommendations.

Consider the secondary implications, quantitative and/or qualitative.

Indicate how these changes (recommendations) should be implemented.

Discuss

1. What cost drivers are useful for predicting the purchasing departments 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 system? Why would the company use this strategy? Under what circumstances would a decentralized strategy be more valuable?

3. You developed recommendations, which are essentially are changes to human behavior. Is change in an organization easy? How can human behaviors be changed in a management setting?

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