In: Accounting
Jill Jackson collects the following data to identify cost drivers of distribution costs at Saratoga Corporation. Distribution costs include the costs of organizing shipments and moving packaged units. Jackson thinks that because the product is heavy, the number of units moved will affect distribution costs significantly, but she is uncertain.
Jackson estimates the following regression equations for each cost driver:
(a) y =$1349 +$.496x, where x = number of packaged units moved
(b) y =$10417 +$63.77x, where x = number of shipments made (Note: The dependent variable y = total distribution costs.)·
Required:
1. Evaluate each cost driver based on the following criteria: economic plausibility, goodness of fit, and slope. Based on this analysis, which cost driver do you think Jill Jackson should use?
2. Jackson forecasts that 50,000 units in 190 shipments will be made next month. Using each of the regression • equations above, what are forecasted variable and fixed overhead costs? (Be sure to clearly identify FC vs VC.) Why do these amounts differ?
3. Overall, what insights do the analyses provide about controlling distribution costs at Saratoga Corporation?
1) As according to Jackson the moving cost is the major issue . In first equation its slope is approx 0.00036 and slope of second equation is approx 0.0061, which is approx 10 times of first one. But in a shipment there is multiple units that decreases the distribution cost as seen by second cost driver equation(equation 2).In equation 1 distribution cost increases whenever each unit added this means as we increase number of unit value of y given by equation 1 becomes more and more than value of y given by equation 2.
So cost driver given by equation 2 is preffered.
2) For 50,000 units in 190 shipment equation 1 gives after putting x= 50,000 gives forecasted variable (y) = 26149.00 while for equation 2 , x takes value = 190 this gives value of forecasted variable( y) = 22533.3.
Now cost of 1 unit(overhead cost ) from equation 1 is 0.522 while that from equation 2 is 0.45.
Forecased variable (y) gives value of 50,000 units in both equation so we have to divide it by 50,000 to get fixed overhead cost.
3) As we increase the number of shipments which has multiple units in it then cost driver given by equation 2 becomes more and more economical than other one. This means in order to decrease or control distribution cost Saratoga Corporation has to ship more and more units in shipments with the help of cost driver given by equation 2.