Richard Ellis, the director of cost operations of American Micro Devices, wishes to develop an accurate cost function to explain and predict support costs in the company's printed circuit board assembly operation. Mr. Ellis is concerned that the cost function that he currently uses - based on direct labor costs - is not accurate enough for proper planning and control of support costs. Mr. Ellis directed one of his financial analysts to obtain a random sample of 25 weeks of support costs and three possible cost drivers in the circuit-board assembly department: direct labor hours. number of boards assembled, and average cycle time of boards assembled. (Average cycle time is the average time between start and certified completion-after quality testing-of boards assembled during a week.) Much of the effort in this assembly operation is devoted to testing for quality and reworking defective boards, all of which increase the average cycle time in any period. Therefore, Mr. Ellis believes that average cycle time will be the best support cost driver. Mr. Ellis wants his analyst to use regression analysis to demonstrate which cost driver best explains support costs.
- Circuit Board Number of Average Cycle
- Assembly Support Direct Labor Boards Time (Hours)
- Week Costs, Y Hours, X1 Completed, X2 X3
1 $66,402 7,619 2,983 186.44
2 56,943 7,678 2,830 139.14
3 60,337 7,816 2,413 151.13
4 50,096 7,659 2,221 138.30
5 64,241 7,646 2,701 158.63
6 60.846 7,765 2,656 148.71
7 43,119 7,985 2,495 105.85
8 63,412 7,962 2,128 174.02
9 59,283 7,793 2,127 155.30
10 60,070 7,732 2,127 162.20
11 53,345 7,771 2,338 142.97
12 65,027 7,842 2,685 176.08
13 58,220 7,940 2,602 150.19
14 65,406 7,750 2,029 194.06
15 35,268 7,954 2,136 100.51
16 46,394 7,768 2,046 137.47
17 71,877 7,764 2,786 197.44
18 61,903 7,635 2,822 164.69
19 50,009 7,849 2,178 141.95
20 49,327 7,869 2,244 123.37
21 44,703 7,576 2,195 128.25
22 45,582 7,557 2,370 106.16
23 43,818 7,569 2,016 131.41
24 62,122 7,672 2,515 154.88
25 52,403 7,653 2,942 140.07
Assume the following measured cost functions:
Y = $9,000 / week + ($6 x direct labor hours); R2 = .10
Y = $20,000 / week + ($14 x number of boards completed); R2 = .40
Y = $5,000 / week + ($350 x average cycle time); R2 = .80
1. 1. Which of the support cost functions would you expect to be the most reliable for explaining and predicting support costs? Why?
2. 2. Assume that American Micro Devices prices its products by adding a percentage markup to its product costs. Product costs include assembly labor, components, and support costs. Using each of the cost functions, compute the circuit board portion of the support cost of an order that used the following resources:
a. Effectively used the capacity of the assembly department for 3 weeks
b. Assembly labor hours : 20,000
c. Number of boards : 6,000
d. Average cycle time : 180 hours
3. Which cost driver would you recommend that American Micro Devices use? Why
4. Assume that the market for this product is extremely cost competitive. What do you think of American Micro Devices%u2019s pricing method?