An important application of regression analysis in accounting is in the estimati

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. Use these data to develop an estimated regression equation that could be used to predict the total cost for a given production volume. What is the variable cost per unit produced? Compute the coefficient of determination. What percentage of the variation in total cost can be explained by production volume? The company's production schedule shows 500 units must be produced next month. Predict the total cost for this operation?

Explanation / Answer

A)

Using technology, we get              
              
slope =    7.6          
intercept =    1246.666667          
              
Thus, the regression line is              
              
TotalCost^ =    7.6*(ProductionVolume)   + 1246.666667 [ANSWER]

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b)

Hence, per additional unit, it is the slope,

variable cost per unit = $7.60 [ANSWER]

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c)

Also, getting the correlation,  
  
r =    0.979127101
  
Thus, the coefficient of determination is  
  
r^2 =    0.958689879

Hence, 95.8689879% of variation in total cost can be explained by production volume. [CONCLUSION]

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d)

Thus, if x =    500
  
Then  
  
y^ =    5046.666667 [ANSWER]

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