The controller of Terrance Corporation has asked for help in the selection of the appropriate activity measure to be used in estimating variable supplies cost for the company's budget. The following information about past expenses and two potential activity measures has been supplied:

Required:
(1) Compute the coefficient of correlation, r, and the coefficient of determination, r2, between supplies cost and each of the two activity measures.
(2) Identify which of the two activity measures should be used as a basis upon which to estimate the allowable supplies cost.
(3) Using the activity measure selected in requirement 2 above, determine the fixed cost and the variable cost rate by the method of least squares.

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Labor Hours 5,000 4,600 5,160 5,100 4,830 4,750 4,900 5,080 5,200 5,130 4,950 Machine Hours 2,000 1,990 2,140 2,080 1,960 1,940 2,020 1,990 2,140 2,050 2,030 Supplies Month Cost S 1,505 1,395 1,565 1,515 1,445 1,415 1,465 1,505 1,575 1,535 1,500 1,580 $18,000 January February.. March April June.... July August... September.. October Total.