In an attempt to determine the best basis for predicting machine repair costs, t

Question

In an attempt to determine the best basis for predicting machine repair costs, the production supervisor accumulated daily information on these costs and production over a one-month period. Applying simple regression analysis to the data, she obtained the following estimating equation: Y = $800 – $2.60X

Where

Y = total daily machine repair costs

X = daily production in units

Because of the negative relationship between repair costs and production, she was somewhat skeptical of the results, even though the R-squared was a respectable 0.765.

Required

a. What is the most likely explanation of the negative variable costs?

b. Suggest an alternative procedure for estimating machine repair costs that might prove more useful.

Explanation / Answer

a. Negative variable costs implies that there were some discrepancy in the data recording.

b. alternative procedure for estimating the machine repair costs could be the use of "high low method"

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