Question

Cross Distribution Company uses three different independent variables (number of orders, weight of orders, number of letters in delivery address) in three different equations to evaluate costs of the packaging department. The most recent results of the two regressions are as follows:

Number of orders:

           Variable                    Coefficient    Standard Error        t-Value                

      Constant                          $854.50             $571.02                  2.10                        

      Predictor Variable             $12.40                $1.47                  7.12                        

      r2 = 0.87

Weight of orders:

           Variable                  Coefficient     Standard Error        t-Value                 

      Constant                        $1,642.54             $705.33                  1.50                        

      Predictor Variable              $9.80                $2.10                  4.65                       

      r2 = 0.72

Number of letters in delivery address:

           Variable                  Coefficient     Standard Error        t-Value                 

      Constant                        $2,143.30             $444.21                  1.60                        

      Predictor Variable           $(11.80)                $3.10                  5.32                       

      r2 = 0.92

Required:

a.   What are the estimating equations for each cost driver?

b.   Which cost driver is best and why?

c.   Prepare the cost equation using the following high and low points:

      High point = $12,900 and 700 orders

      Low point = $5,200 and 200 orders

      Comment on the appropriateness of this cost equation compared to the results obtained in requirement a.

Answer 1