Question

An important application of regression analysis in accounting is in the estimation of cost. By collecting data on volume and cost and using the least squares method to develop an estimated regression equation relating volume and cost, an accountant can estimate the cost associated with a particular manufacturing volume. Consider the following sample of production volumes and total cost data for a manufacturing operation.

Production Volume (units) Total Cost ($)

400 4,900

450 5,900

550 6,300

600 6,800

700 7,300

750 7,900

Compute b1 and b0 (to 1 decimal). b1 b0 Complete the estimated regression equation (to 1 decimal). ŷ = + x

What is the variable cost per unit produced (to 1 decimal)?

Compute the coefficient of determination (to 3 decimals). Note: report r2 between 0 and 1. r2 =

What percentage of the variation in total cost can be explained by the production volume (to 1 decimal)? %

The company's production schedule shows 500 units must be produced next month.

What is the estimated total cost for this operation (to the nearest whole number)? $

Answer 1

Total Cost ($) = 2146.7 + 7.6 Production Volume

2) What is the variable cost per unit produced (to 1 decimal)?

The variable cost per unit produced is 7.6 $.

3)

Compute the coefficient of determination

R2 = 0.300

30 % percentage of the variation in total cost can be explained by the production volume

4)

The company's production schedule shows 500 units must be produced next month.

What is the estimated total cost for this operation (to the nearest whole number)? $

Total Cost ($) = 2146.7 + 7.6 Production Volume

Total Cost ($) = 2146.7 + 7.6*500

Total Cost ($) = 5946.7$