Question: A & A Industrial Products Alex Court, the cost accountant for A & A Industrial Products, was puzzled by the repair cost analysis report he had just reviewed. This was the third consecutive report in which unscheduled plant repair costs were out of line with the repair cost budget allocated to each plant. A & A budgets for both scheduled maintenance and unscheduled repair costs for its plants' equipment, mostly large industrial machines. Budgets for scheduled maintenance activities are easy to estimate and are based on the equipment manufacturer's recommendations. The unscheduled repair costs, however, are harder to determine. Historically, A & A Industrial Products has estimated unscheduled maintenance using a formula based on the average number of hours of operation between major equipment failures at a plant. Specifically, plants were given a budget of $65.00 per hour of operation between major failures. Alex had arrived at this amount by dividing aggregate historical repair costs by the total number of hours between failures.
Then plant averages would be used to estimate unscheduled repair cost. For example, if a plant averaged 450 hours of run time before a major repair occurred, the plant would be allocated a repair budget of 450 * +65 = +29,250 per repair. If the plant was expected to be in operation 3,150 hours per year, the company would anticipate seven unscheduled repairs 13,150>4502 annually and budget $204,750 for annual unscheduled repair costs. Alex was becoming more and more convinced that this approach was not working. Not only was upper management upset about the variance between predicted and actual costs of repair, but plant managers believed that the model did not account for potential differences among the company's three plants when allocating dollars for unscheduled repairs. At the weekly management meeting, Alex was informed that he needed to analyze his cost projections further and produce a report that provided a more reliable method for predicting repair costs. On leaving the meeting, Alex had his assistant randomly pull 64 unscheduled repair reports. The data are in the file A & A Costs. The management team is anxiously waiting for Alex's analysis.
Required Tasks: 1. Identify the major issue(s) of the case.
2. Analyze the overall cost allocation issues by developing a scatterplot of Cost v. Hours of Operation. Which variable, cost or hours of operation, should be the dependent variable? Explain why.
3. Fit a linear regression equation to the data.
4. Explain how the results of the linear regression equation could be used to develop a cost allocation formula. State any adjustments or modifications you have made to the regression output to develop a cost allocation formula that can be used to predict repair costs.
5. Sort the data by plant.
6. Fit a linear regression equation to each plant's data.
7. Explain how the results of the individual plant regression equations can help the manager determine whether a different linear regression equation could be used to develop a cost allocation formula for each plant. State any adjustments or modifications you have made to the regression output to develop a cost allocation formula.
8. Based on the individual plant regression equations determine whether there is reason to believe there are differences among the repair costs of the company's three plants.
9. Summarize your analysis and findings in a report to the company's manager.