3. Suppose that regression is run on 30 months of data. The dependent variable i

Question

3. Suppose that regression is run on 30 months of data. The dependent variable is overhead, and the independent variable is machine hours. The coefficient of determination is 0.78. Which of the following is true? A. Machine hours and overhead are negatively correlated. B. The coefficient of correlation is approximately 60.8%. C. Machine hours account for about 60.8% percent of the variation in overhead. D. Factors other than machine hours account for 22 percent of the variation in overhead E. None of the above

Explanation / Answer

4. Coefficient of determination – or R^2 – is 0.78 in this case.

Coefficient of determination = explained variation/total variation.

Thus 78% of variation is explained. Thus the amount of unexplained variation = 100%-78% = 22%.

Hence the answer is “D” – Factors other than machine hours account for 22 percent of the variation in overhead.

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