Chapter 3, Problem 33P

Big Mike’s, a large hardware store, has gathered data on its overhead activities and associated costs for the past 10 months. Nizam Sanjay, a member of the controller’s department, believes that overhead activities and costs should be classified into groups that have the same driver. He has decided that unloading incoming goods, counting goods, and inspecting goods can be grouped together as a more general receiving activity, since these three activities are all driven by the number of receiving orders. The 10 months of data shown below have been gathered for the receiving activity.

Required:

1. 1. Prepare a scattergraph, plotting the receiving costs against the number of purchase orders. Use the vertical axis for costs and the horizontal axis for orders.
2. 2. Select two points that make the best fit, and compute a cost formula for receiving costs.
3. 3. Using the high-low method, prepare a cost formula for the receiving activity.
4. 4. Using the method of least squares, prepare a cost formula for the receiving activity. What is the coefficient of determination?