Question

The president of a small manufacturing firm is concerned about the continual increase in manufacturing costs over the past several years. The following figures provide a time series of the cost per unit for the firm’s leading product over the past eight years

Year	Cost/Unit ($)	Year	Cost/Unit ($)
1	20.00	5	26.6
2	24.5	6	30.0
3	28.2	7	31.0
4	27.5	8	36.0

Construct time series plot. What type of pattern exists in the data?

simple linear regression analysis to find the parameters for the line that minimizes mSe for this time series.

What is the average cost increase that the firm has been realizing per year?

an estimate of the cost/unit for next year

Answer 1

Here, Year is the independent variable (x) and Cost/Unit($) is the dependent variable (y). We carry out a simple linear regression analysis to construct the time series plot. We input the data in MS Excel and select Regression option under Data > Data Analysis to carry out the analysis. The output is given below.



The time series plot is given below. There exists a trend pattern in the data given here.


The y-intercept value is 19.99 and the slope value is 1.77. MSE is also equal to 3.89.
Average cost increase per year = $1.77
An estimate of cost/unit for next year = 19.99 + (1.77 * 9) = $35.96 or $35.92 (both are correct).