Using Both High-Low and Regression

John Meeks Company is a medium-size manufacturing company with plants in three small mid-Atlantic towns. The company makes plastic parts for automobiles and trucks, primarily door panels, exterior trim, and related items. The parts have an average cost of $5 to $20. The company has a steady demand for its products from both domestic and foreign automakers and has experienced growth in sales averaging between 10 and 20 percent over the last 8 to 10 years.

Currently, management is reviewing the incidence of scrap and waste in the manufacturing process at one of its plants. Meeks defines scrap and waste as any defective unit that is rejected for lack of functionality or another aspect of quality. The plants have a number of different inspection points, and failure or rejection can occur at any inspection point. The number of defective units is listed in the following table; management estimates the cost of this waste in labor and materials is approximately $10 per unit.

An unfavorable trend appears to exist with regard to defects, and management has asked you to investi- gate and estimate the defective units in the coming months. A first step in your investigation is to identify the cost drivers of defective parts, to understand what causes them, and to provide a basis on which to esti- mate future defects. For this purpose, you have obtained these recent data on the units produced, the units shipped, and the cost of sales since these numbers are easily available and relatively reliable on a monthly basis:

Required Use the high-low method and regression analysis to estimate the defective units in the coming months and to determine which method provides the best fit for this purpose.