CHAPTER 3

DISCUSSION QUESTIONS

Q3-1.

Q3-2.

Q3-3.

Q3-4.

The total dollar amount of a fixed cost is constant at different levels of activity within the
relevant range, but fixed cost per unit of
activ-ity varies. In contrast, the total
amount of a variable cost varies at different
levels of activ-ity, but the variable cost per
unit remains con-stant within the relevant
range. A semivariable cost contains both
fixed and variable ele-ments.
Consequently, both total semivariable cost
and semivariable cost per unit vary with
changes in activity.
The relevant range is the range of activity
over which a fixed cost remains constant in
total or a variable cost remains constant per
unit of activity. The underlying assumptions
about the relationship of the activity and the
incurrence of cost change outside the relevant range of activity. Consequently,
the amount of fixed cost or the variable cost
rate must be recomputed for activity
above or below the relevant range.
The fixed and variable components of a
semi-variable cost should be segregated in
order to plan, analyze, control, measure, and
evaluate costs at different levels of activity.
Separation of the fixed and variable
components of semi-variable cost is
necessary to:
(a) compute predetermined factory overhead
rates and analyze variances;
(b) prepare flexible budgets and analyze
vari-ances;
(c) analyze direct cost and the contribution
margin;
(d) determine the break-even point and analyze the effect of volume on cost and
profit;
(e) compute differential cost and make comparative cost analyses;
(f) maximize short-run profits and minimize
short-run costs;
(g) budget capital expenditures;
(h) analyze marketing profitability by territories, products, and customers.
The obvious advantage to using managerial
judgement to separate fixed and variable

Q3-5.

Q3-6.

Q3-7.

costs is expediency, i.e., it requires less

time and is, therefore, less costly than the
use of any of the three computational
methods. The disadvantage is that the use
of managerial judgment to separate fixed
and variable costs often results in unreliable
estimates of cost. Cost behavior is not
always readily apparent from casual
observation. As a consequence, managers
often err in determining whether a cost is
fixed or variable and frequently ignore the
possibility that some costs are semivariable.
The three computational methods available
for separating the fixed and variable
compo-nents of semivariable costs are: (1)
the high and low points method; (2) the
statistical scat-tergraph method; and (3) the
method of least squares.
The high and low points method has the
advantage of being simple to compute, but it
has the disadvantage of using only two data
points in the computation, thereby resulting in
a significant potential for bias and inaccuracy
in cost estimates. The scattergraph has the
advantage of using all of the available data,
but it has the disadvantage of determining
the fixed and variable components on the
basis of a line drawn by visual inspection
through a plot of the data, thereby resulting
in bias and inaccuracy in cost estimates.
The method of least squares has the
advantage of accu-rately describing a line
through all the avail-able data, thereby
resulting in unbiased estimates of the
fixed and variable elements of cost, but it
has the increased disadvantage of
computational complexity.
The $200 in the equation, referred to as the
y intercept, is an estimate of the fixed portion
of indirect supplies cost. The $4 in the equation, referred to as the slope of the regression equation, is an estimate of the variable
cost associated with a unit change in
machine hours. These estimates may not be
perfectly accurate because they were
derived from a sample of data that may not
be entirely

3-1

3-2

Q3-8.

Q3-9.

Chapter 3

representative of the universe population,

and because activities not included in the
regression equation may have some influence on the cost being predicted.
The coefficient of correlation, denoted r, is a
measure of the extent to which two variables
are related linearly. It is a measure of
the covariation of the dependent and
independ-ent variables, and its sign
indicates whether the independent variable
has a positive or negative relationship to
the dependent vari-able. The coefficient of
determination is the square of the
coefficient of correlation and is denoted
r 2. The coefficient of determination is a more
easily interpreted measure of the
covariation than is the coefficient of correlation, because it represents the percentage of
variation in the dependent variable explained
by the independent variable.
The standard error of the estimate is defined
as the standard deviation about the regression line. It is essentially a measure of the
variability of the actual observations of the
dependent variable from the points predicted
on the regression line. A small value for the
standard error of the estimate indicates a

good fit. A standard error of zero would indicate a perfect fit, i.e., all actual observations
would be on the regression fine.
Q3-10. Heteroscedasticity means that the
distribution of observations around the
regression line is not uniform for all values
of the independent variable. If
heteroscedasticity is present, the standard
error of the estimate and confidence interval
estimates, based on the standard error,
are unreliable measures.
Q3-11. Serial correlation means that rather than
being random, the observations around the
regression line are correlated with one
another. If serial correlation is present, the
standard error of the estimate and confidence
interval estimates, based on the standard
error, are unreliable measures.
Q3-12. Multicollinearity means that two or more of
the independent variables in a multiple
regression analysis are correlated with one
another. When the degree of multicollinearity
is high, the relationship between one or more
of the correlated independent variables and
the dependent variable may be obscured.
However, this circumstance would normally
not affect the estimate of cost.

Chapter 3

3-3

EXERCISES
E3-1
Activity Level
High............................................
Low.............................................
Difference ..................................

Cost

2,600 hours
$1,300 2,100
1,100
500 hours
$ 200

Variable rate: $200 500 machine hours = $.40 per machine hour
High
Total cost ................................... $1,300
$1,100 Variable cost:
$.40 2,600 hours........
1,040
$.40 2,100 hours........
Fixed cost.................................. $ 260

Low

840
$ 260

E3-2
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
0

200

400

600

DIRECT LABOR HOURS

Average cost ($7,575 total 10 months)....................

Fixed cost per month ...................................................

$757.50
350.00

Average total variable cost ..........................................

$407.50

$407.50 average total variable cost

5,875 total direct labor hours 10 months

$.6936 variable cost

per direct labor hour

800

3-4

Chapter 3

E3-3
(x i x )(y i y )
2
(x i x )

87,000
,450

a = y bx = $10,000 ($60 125) = $2,500

Travel and entertainment expense for 200 sales calls would be:
yi = a + bxi = $2,500 + ($60 200 calls) = $14,500
E3-4
(1)
y
Electricity
Month
Cost
January...... $1,600
February .... 1,510
March ......... 1,500
April ........... 1,450
May............. 1,460
June ........... 1,520
July ............ 1,570
August ....... 1,530
September . 1,480
October...... 1,470
November .. 1,450
December .. 1,460
Total
$18,000

(2)
(y y)
Cost
Deviation
100
10
0
(50)
(40)
20
70
30
(20)
(30)
(50)
(40)
0

(3)
x
Machine
Hours
2,790
2,680
2,600
2,500
2,510
2,610
2,750
2,700
2,530
2,520
2,490
2,520
31,200

(4)
(5)
(x x )
(x x )2 (x
Activity
Deviation (4) Squared
190
36,100
80
6,400
0
0
(100)
10,000
(90)
8,100
10
100
150
22,500
100
10,000
(70)
4,900
(80)
6,400
(110)
12,100
(80)
6,400
0
123,000

y = y = n = $18,000 12 = $1,500
x = x = n = 31,200 12 = 2,600
(x x )(y y )

Variable rate (b)

Column 5 total

Fixed cost (a) = y bx

= $1,500 ($.44)(2,600)
= $356

123,000

$.44

(6)
x )(y y)
(4) (2)
19,000
800
0
5,000
3,600
200
10,500
3,000
1,400
2,400
5,500
3,200
54,600

Chapter 3

3-5

E3-5
r

1 564

(x i x )(y i y )
2

(x i x ) (y i y )
2

.92

(850) (3,400)

r (.92) .8464
E3-6
(1)
y
Shipping
Month
Expense
January ..... $ 560
February....
600
March ........
600
April...........
580
May ............
570
June...........
550
July............
590
August.......
610
September
650
October .....
620
November .
630
December..
640

(2)
(y y)
Expense
Deviations
(40)
0
0
(20)
(30)
(50)
(10)
10
50
20
30
40
33,500

Total....... $7,200

(3)
x
Sales
Revenue
$26,500
30,000
29,000
28,000
27,000
25,500
30,000
33,000
35,000
32,000
30,500

(4)
(x x )
Activity
Deviations
(3,500)
0
(1,000)
(2,000)
(3,000)
(4,500)
0
3,000
5,000
2,000
500
3,500
0

(5)
(x x )2

(6)
(x x )(y y)

(7)
(y y)2

(4) Squared
12,250,000
0
1,000,000
4,000,000
9,000,000
20,250,000
0
9,000,000
25,000,000
4,000,000
250,000
12,250,000

(4) (2)
140,000
0
0
40,000
90,000
225,000
0
30,000
250,000
40,000
15,000
140,000

(2) Squared
1,600
0
0
400
900
2,500
100
100
2,500
400
900
1,600

97,000,000

970,000

$360,000

y y n $7,200 12 $600
x x n $360,000 12 $30,000
970,000
(x x )(y y )

r
2
2
(97,000,000) (11,000)
(x x ) (y y )
i

r (.939) .882

11,000

3-6

Chapter 3

E3-7
(1)

r
2

(x i x )(y i y )

(x i x ) (y i y )

2,400
(6,250) (1 000)

r (.96) .9216

(2)

(3)

(x i x )(y i y )
2
(x i x )

2,400
6,250

variable maintenance
cost per machine hour

y y i n $50,000 10 $5,000
x x i n 40,000 10 4,000 hours
Since y a bx , then :
a y bx a $5,000
($.384)(4,000) a $5,000
$1,536 a $3,464

E3-8
(1)

For electricity cost and direct labor hours:

r
2

(x i x )(y i y )
2

(x i x ) (y i y )

5,700
(28,500) (1 264)

5,700
6,002

r (.9497) .9019
(2)

For electricity cost and machine hours:

r
2

(x i x )(y i y )
2

(x i x ) (y i y )

7,000
(50,000) (1 264)

7,000
7,950

r (.8805) .7753
(3)

In this case, direct labor hours should be chosen as the appropriate

activity measure to be used in predicting electricity cost because the
coefficient of determination (r2 = .9019) is higher than that for machine hours
(r2 = .7753).

Chapter 3

3-7

E3-8 (Concluded)
(4)

(x i x )(y i y )
2
(x i x )

5,700
28,500

variable electricity
cost rate

Since y a bx and y y i n and x x i n, then :

a (y i n) b(x i n) a (42,000 20) (.20)
(180,000 20) a 2,100 (.20)(9,000)
a 2,100 1,800 $300 fixed electricity cost
E3-9
(1)
xi
Month
January ..................
February ................
March .....................
April........................
May .........................
June........................
July.........................
August....................
September .............
October ..................
November ..............
December ..............
Total....................

(y i y i )
n 2

Labor
Hours
2,650
3,000
2,900
2,800
2,700
2,550
3,000
3,300
3,500
3,200
3,050
3,350
36,000

(2)
y
Actual
Utility
Cost
$ 3,600
4,000
4,000
3,800
3,700
3,500
3,900
4,100
4,500
4,200
4,300
4,400
$48,000

Column 5 total
12 2

(3)
(4)
(5)
(y = a + bx ) (y y )
(yi y i)2
Predicted Prediction
(4)
Utility
Error
Squared
Cost
(2) (3)
$2,500
$ 3,650
(50)
0
4,000
0
10,000
3,900
100
0
3,800
0
0
3,700
0
2,500
3,550
(50)
10,000
4,000
(100)
40,000
4,300
(200)
0
4,500
0
0
4,200
0
62,500
4,050
250
2,500
4,350
50
$130,000
$48,000
0

$130,000

$114.018

3-8

Chapter 3

E3-10
s

(y i y i )
n 2

$49,972
15 2

3,844 $62

The 90 percent confidence interval estimate at the 1,500-hour level of activity

would be:
y i t 90% s

1
n

$500 (1.771 ($62)

(x i x )
2
(x i x )
1
15

$500 (1.771 ($62) 1.3333

$500 (1.77 )($62) (1.1547)
$500 $126.79

(1 500 1 300)
150,000

Chapter 3

3-9

PROBLEMS
P3-1
(1)

Coefficient of correlation and coefficient of determination

between: (a)
Travel expenses and the number of calls made:
(1)
y
Travel
Expense

Month
January............
February ..........
March ...............
April .................
May ..................
June .................
July ..................
August .............
September.......
October............
November ........
December ........
Total

$ 3,000
3,200
2,800
3,400
3,100
3,200
2,900
3,300
3,500
3,400
3,200
3,400
$38,400

(3)
x
Calls
Made

(200)
0
(400)
200
(100)
0
(300)
100
300
200
0
200

410
420
380
460
430
450
390
470
480
490
440
460

(30)
(20)
(60)
20
(10)
10
(50)
30
40
50
0
20

900
400
3,600
400
100
100
2,500
900
1,600
2,500
0
400

6,000
0
24,000
4,000
1,000
0
15,000
3,000
12,000
10,000
0
4,000

40,000
0
160,000
40,000
10,000
0
90,000
10,000
90,000
40,000
0
40,000

5,280

13,400

79,000

520,000

(x i x )(y i y )
2

(x i x ) (y i y )
79,000
(13,400)(520,000)
79,000
83,475

(2)
(y y)
Expense
Deviations

r .8957

(4)
(x x )
Activity
Deviations

(5)
(x x )2

(6)
(x x )(y y)

(7)
(y y)2

(4) Squared

(4) (2)

(2) Squared

Column 6 total
(Column 5 total) (Column 7 total)

79,000
6,968,000,000

3-10

Chapter 3

P3-1 (Concluded)
(b)

Travel expenses and orders received:

Month
January............
February .........
March ...............
April .................
May ..................
June .................
July ..................
August .............
September.......
October............
November ........
December ........

(1)
y
Travel
Expense
$ 3,000
3,200
2,800
3,400
3,100
3,200
2,900
3,300
3,500
3,400
3,200
3,400

Total ............

$38,400

(2)
(3)
(4)
(5)
(6)
(7)
2
(y y)
x
(x x )
(x x )
(x x )(y y) (y y)2
Expense
Orders
Activity
Deviations Received Deviations
(4) Squared
(4) (2) (2) Squared
(200) (13,000)
169,000,000
2,600,000
40,000
$53,000 0
(1,000)
1,000,000
0
0
65,000 (400) (18,000)
324,000,000
7,200,000 160,000
48,000 200
7,000
49,000,000
1,400,000
40,000
73,000 (100)
(4,000)
16,000,000
400,000
10,000
62,000 0
1,000
1,000,000
0
0
67,000 (300)
(6,000)
36,000,000
1,800,000
90,000
60,000 100
10,000
100,000,000
1,000,000
10,000
76,000 300
16,000
256,000,000
4,800,000
90,000
82,000 200
(4,000)
16,000,000
(800,000) 40,000
62,000 0
(2,000)
4,000,000
0
0
64,000
14,000
196,000,000
2,800,000
40,000
200
80,000
0
1,168,000,000 21,200,000 520,000
0
$792,000

(x i x )(y i y )
2

(x i x ) (y i y )
21 200,000
(1 168,000,000)
(520,000)

Column 6 total
(Column 5 total) (Column 7 total)
21 200,000
607,360,000,000,000

21 000,000
24,644,675
2

r .7399
(2)

Perfect direct correlation would be evidenced by a correlation coefficient of

one. The coefficient of .9464 revealed in (1)(a) is closer to one than the
coefficient of .8602 in (1)(b). This means that the variable portion of travel
expense varies more directly with movements in the number of calls made than
with the value of orders received. To explain this further, the relative
coefficients of determination are obtained by squaring the coefficients of
correlation and expressing the answer as a percentage in each case. The
coefficients of determination are 89.57% for calls made and only 73.99% for
orders received. This means that approximately 90% of the movements in the
variable portion of travel expense are related to fluc-tuations in the number of
calls made, and the remaining 10% of the movements are related to other

factors.

Chapter 3

3-11

P3-2
(1)

Month
January............
February ..........
March ...............
April ................
May ..................
June .................
July ..................
August .............
September.......
October............
November ........
December ........

(1)
y
Supplies
Cost
$ 1,505
1,395
1,565
1,515
1,445
1,415
1,465
1,505
1,575
1,535
1,500
1,580

(2)
(y y)
Cost
Deviations
5
(105)
65
15
(55)
(85)
(35)
5
75
35
0
80

Total ............. $18,000

(3)
x
Labor
Hours
5,000
4,600
5,160
5,100
4,830
4,750
4,900
5,080
5,200
5,130
4,950
5,300
60,000

(4)
(x x )
Activity
Deviations
0
(400)
160
100
(170)
(250)
(100)
80
200
130
(50)
300

(5)
(x x )2
(4) Squared
0
160,000
25,600
10,000
28,900
62,500
10,000
6,400
40,000
16,900
2,500
90,000

y y n $18,000 12 $1,500
x x n $60,000 12 $5,000
r

(x x )(y y )
2

(x x ) (y y )
2

r (.977) .955

131 950
(452,800) (40,250)

452,800

(6)
(7)
(x x )(y y) (y y)2
(4) (2)
0
42,000
10,400
1,500
9,350
21,250
3,500
400
15,000
4,550
0
24,000
131,950

(2) Squared
25
11,025
4,225
225
3,025
7,225
1,225
25
5,625
1,225
0
6,400
40,250

3-12

Chapter 3

P3-2 (Concluded)

Month
January............
February ..........
March ...............
April .................
May ..................
June .................
July ..................
August .............
September.......
October............
November ........
December ........

(1)
y
Supplies
Cost
$ 1,505
1,395
1,565
1,515
1,445
1,415
1,465
1,505
1,575
1,535
1,500
1,580

(2)
(y y)
Cost
Deviations
5
(105)
65
15
(55)
(85)
(35)
5
75
35
0
80

Total ............ $18,000

(3)
(4)
x
(x x )
Machine Activity
Hours Deviations
2,000
(50)
1,990
(60)
2,140
90
2,080
30
1,960
(90)
1,940
(110)
2,020
(30)
1,990
(60)
2,140
90
2,050
0
2,030
(20)
2,260
210
24,600

(5)
(x x )2
(4) Squared
2,500
3,600
8,100
900
8,100
12,100
900
3,600
8,100
0
400
44,100
92,400

(6)
(7)
(x x )(y y) (y y)2
(4) (2)
(250)
6,300
5,850
450
4,950
9,350
1,050
(300)
6,750
0
0
16,800

(2) Squared
25
11,025
4,225
225
3,025
7,225
1,225
25
5,625
1,225
0
6,400

50,950

40,250

y y n $18,000 12 $1,500
x x n $24,600 12 2,050
50,950
(x x )(y y )

r
2
2
(92,400) (40,250)
(x x ) (y y )
2

r (.835) .697

(2)

Since the coefficient of determination for supplies cost and labor hours (r 2 = .
955) is greater than the coefficient of determination for supplies cost and
machine hours (r 2 = .697), labor hours should be used as the basis for
estimating supplies cost. Labor hours explain more of the variance in supplies
cost than do machine hours.

(3)

With labor hours as the basis for predicting supplies cost, the fixed cost and
the variable cost rate can be determined by the method of least squares as
follows:
(x x )(y y )
(x x )
Fixed cost (a)

Column 6 total

131,950

Column 5 total

452,800

y bx $1,500
($.29141)(5,000) $42.95

Chapter 3

3-13

P3-3

Month
January............
February ..........
March ...............
April .................
May ..................
June .................
July ..................
August .............
September.......
October............
November ........
December ........

(1)
y
Electricity
Cost
$1,600
1,570
1,610
1,550
1,530
1,540
1,520
1,530
1,580
1,650
1,660
1,620

(2)
(y y)
Cost
Deviations
20
(10)
30
(30)
(50)
(40)
(60)
(50)
0
70
80
40

Total ............. $18,960

(3)
x
Labor
Hours
4,200
4,000
4,360
4,000
4,050
4,100
4,150
4,250
4,150
4,500
4,600
4,400
50,760

(4)
(x x )
Activity
Deviations
(30)
(230)
130
(230)
(180)
(130)
(80)
20
(80)
270
370
170
0

y y n $18,960 12 $1,580
x x n $50,760 12 4,230
r

(x x )(y y )
2

(x x ) (y y )
2

r (.826) .682

85,800
(424,800) (25,400)

(5)
(x x )2
(4) Squared
900
52,900
16,900
52,900
32,400
16,900
6,400
400
6,400
72,900
136,900
28,900
424,800

(6)
(7)
(x x )(y y) (y y)2
(4) (2) (2) Squared
(600)
400
2,300
100
3,900
900
6,900
900
9,000
2,500
5,200
1,600
4,800
3,600
(1,000)
2,500
0
0
18,900
4,900
29,600
6,400
6,800
1,600
85,800

25,400

3-14

Chapter 3

P3-3 (Concluded)

Month
January............
February ..........
March ..............
April .................
May ..................
June .................
July ..................
August ............
September.......
October............
November ........
December ........

(1)
y
Electricity
Cost
$1,600
1,570
1,610
1,550
1,530
1,540
1,520
1,530
1,580
1,650
1,660
1,620

(2)
(3)
(4)
(y y)
x
(x x )
Cost
Machine Activity
Deviations Hours Deviations
20
2,300
0
(10)
2,150
(150)
30
2,400
100
(30)
2,250
(50)
(50)
2,160
(140)
(40)
2,240
(60)
(60)
2,180
(120)
(50)
2,170
(130)
0
2,260
(40)
70
2,500
200
80
2,540
240
40
2,450
150

Total ........... $18,960

27,600

(5)
(x x )2

(6)
(7)
(x x )(y y) (y y)2

(4) Squared
0
22,500
10,000
2,500
19,600
3,600
14,400
16,900
1,600
40,000
57,600
22,500

(4) (2)
0
1,500
3,000
1,500
7,000
2,400
7,200
6,500
0
14,000
19,200
6,000

(2) Squared
400
100
900
900
2,500
1,600
3,600
2,500
0
4,900
6,400
1,600

211,200

68,300

25,400

y y n $18,960 12 $1,580
x x n $27,600 12 2,300
r

(x x )(y y )
2

(x x ) (y y )

68,300
(211,200) (25,400)

r (.933) .870
(2)

Since the coefficient of determination for electricity cost and machine

hours (r2 = .870) is greater than the coefficient of determination for
electricity cost and labor hours (r2 = .682), machine hours should be used
as the basis for estimating electricity cost. Machine hours explain more of
the variance in electricity cost than do labor hours.

(3)

With machine hours as the basis for predicting electricity cost, the fixed
cost and the variable cost rate can be determined by the method of least
squares as follows:
(x x )(y y )

Column 6 total

Fixed cost (a)

(x x )
Column 5 total
211,200
y bx $1,580
($.32339)(2,300) $836.20

68,300

Chapter 3

3-15

P3-4
(1)
High .................................................................
Low ..................................................................

Maintenance
Cost
$2,290
2,000

Machine
Hours
2,700
2,000

$ 290

700

Difference........................................................

Variable rate = $290 700 hours = $.4142857 per machine hour

Total cost ........................................................
Total variable cost ..........................................
Average fixed cost .........................................
(2)

(1)
(2)
yi
(yi y)
Maintenance
Cost
Month
Cost
Deviations
January............
$2,200
40
February ..........
2,130
(30)
March ...............
2,000
(160)
April .................
2,170
10
May ..................
2,050
(110)
June .................
2,220
60
July ..................
2,150
(10)
August .............
2,250
90
September.......
2,290
130
October............
2,150
(10)
November ........
2,210
50
December ........
2,100
(60)
Total ........... $25,920

High
$2,290.00
1,118.57
$1,171.43

(3)
xi
Machine

(4)
(xi x )
Activity

(5)
(xi x )2

Hours
2,500
2,350
2,000
2,400
2,100
2,600
2,450
2,550
2,700
2,450
2,400
2,300

Deviations
100
(50)
(400)
0
(300)
200
50
150
300
50
0
(100)

(4) Squared
10,000
2,500
160,000
0
90,000
40,000
2,500
22,500
90,000
2,500
0
10,000

28,800

y y i n $25,920 12 $2,160
x x i n $28,800 12 2,400
(x x )(y y )
(x x )

Column 6 total

172,000

Column 5 total

430,000

Since y a bx , then :
a y bx a $2,160
($.40)(2,400) a $2,160
$960 a $1 200

430,000

Low
$2,000.00
828.57
$1,171.43
(6)
(7)
(xi x )(yi y ) (yi y )2
(4) (2)
4,000
1,500
64,000
0
33,000
12,000
(500)
13,500
39,000
(500)
0
6,000
172,000

(2) Squared
1,600
900
25,600
100
12,100
3,600
100
8,100
16,900
100
2,500
3,600
75,200

3-16

Chapter 3

P3-4 (Concluded)
(x x )(y y )

(3)

r (x i x )2 (y i y )2
r
2

172,000
(430,000)(75,200)

Column 6 total
(Column 5 total) (Column 7 total)

32,336,000,000

179,822

.9565

r (.9565) .91489
(1)

(4)

Month
January ..................
February ................
March .....................
April........................
May .........................
June........................
July.........................
August....................
September .............
October ..................
November ..............
December ..............
Total....................

s
(5)

(2)

Machine
Hours
2,500
2,350
2,000
2,400
2,100
2,600
2,450
2,550
2,700
2,450
2,400
2,300
28,800

(y i y i )
n 2

(3)

(4)

(5)

(y = a + bx ) (y y )
y
Actual
Predicted Prediction
Maintenance Maintenance
Error
Cost
Cost
(2) (3)
$2,200
$2,200
$0
2,130
2,140
(10)
2,000
2,000
0
2,170
2,160
10
2,050
2,040
10
2,220
2,240
(20)
2,150
(30)
2,180
2,250
30
2,220
2,290
10
2,280
(30)
2,150
2,180
50
2,210
2,160
(20)
2,100
2,120
$25,920
$0
$25,920

xi

Column 5 total
12 2

$6,400

(yi y i)2
(4)
Squared
$0
100
0
100
100
400
900
900
100
900
2,500
400
$6,400

$25.29822

The 95% confidence interval for maintenance cost at the 2,500 machine
hour level of activity is
y t 95% s 1

(x x )

2
2

$1 200 ($.40)(2,500) (2.228)(25.29822)

$2,200 $59.29

1
12

(2,500 2,400)
430,000

Chapter 3

3-17

P3-5
(1)

(a)

The method of least squares:

(1)
yi

(2)
(yi y)
Difference
from
Average of
$700
Electricity
Guest
Cost
$(300)

Electricity
Cost

Month

January............ $ 400
February ..........
500
(200) March ...............
500
(200) April .................
700
0 May ..................
600
(100)
June .................
800
July ..................
1,000
August .............
900
September.......
900
October............
700
November ........
600
December ........
800
Total ...........

100
300
200
200
0
(100)
100

$8,400

(x x )(y i y )

(3)
xi

(4)
(xi x )
Difference
from
Average of

(5)
(xi x )2

3,500

(4) Squared
(000s
omitted)

Guest
Days
1,000
1,500
2,500
3,000
(500)
4,500
6,500
6,000
5,500
3,000
2,500
3,500

Days
(2,500)
(2,000)
(1,000)
2,500
(1,000)
1,000
3,000
2,500
2,000
(500)
(1,000)
0

42,000

Column 6 total

Since y a bx , then:
$700 a ($.1015
3,500)
a $700 $355
a $345 fixed cost per month

3 450

3 ,

6,250

(6)

(7)

(xi x )(yi y) (yi y)2

(4) (2)
(000s
omitted)
$ 750
90 4,000
40 1,000
40 250
0 1,000

(2)
Squared
(000s
omitted)

1,000
9,000
6,250
4,000
250
1,000
0

100
900
500
400
0
100
0

$
400
200
0
100
10
10
90
40
40
0
10
10

34,000

$3,450

$380

$.1015 variable rate

3-18

Chapter 3

P3-5 (Continued)
(b)

The high and low points method:

High ............................................................
Low.............................................................
Difference ..................................................

Electricity
Cost
$1,000
400
$ 600

Variable rate
Fixed cost

$.1091per guest day

5,500
$1,000 (6,500
$.1091
$1 000 $709
$291
OR

Fixed cost

$400 (1 000
$.1091
$400 $109
$291

(c)

A scattergraph with trend line fitted by inspection:

$1,100
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0

Guest
Days
6,500
1,000
5,500

July
Dec.

Sept.
June

Apr. & Oct.

May
Feb.

Aug.

Nov.

Mar.

Jan.
Approx. $ 35
0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Average cost ...........

$700 Less fixed cost........
350
Variable cost ........... $350

Chapter 3

3-19

P3-5 (Continued)
(2)

The coefficient of correlation (r) and the coefficient of determination (r2),

using data from the requirement (1)(a) answer:
r

(x i x )(y i y )
2

(x i x ) (y i y )

Column 6 total
(Column 5 total) (Column 7 total)

3,450,000
(34,000,000)(380,000)

3,450,000
12,920,000,000,000

3,450,000
3,594,440
2

r .9212
(3)

The standard error of the estimate:

Month
January ..................
February ................
March .....................
April........................
May .........................
June........................
July ........................
August....................
September .............
October ..................
November ..............
December ..............
Total....................

(1)
xi

(2)
yi

(3)
(y i = a + bxi )

Guest
Days
1,000
1,500
2,500
3,000
2,500
4,500
6,500
6,000
5,500
3,000
2,500
3,500
42,000

Actual
Electricity
Cost
$ 400
500
500
700
600
800
1,000
900
900
700
600
800
$8,400

Predicted
Electricity
Cost
$ 447
497
599
650
599
802
1,005
954
903
650
599
700
$8,405*

(4)
(yi y i)

(5)
(y y )2
Prediction
Error
Prediction
Squared
Error
(4)
(2) (3)
Squared
$(47)
$ 2,209
3
9
(99)
9,801
50
2,500
1
1
(2)
4
(5)
25
(54)
2,916
(3)
9
50
2,500
1
1
100
10,000
$ (5)*
$29,975

*rounding error
s

(y i y i )
n 2

Column
5 total
12 2

$29,975
10

$2,997.5 $54.75

3-20

Chapter 3

P3-5 (Concluded)
(4)

The 90% confidence interval for electricity cost at 2,000 guest days would be:

y i t 90% s

1
n

(x i x )
2
(x i x )

1
($345 ($.1015)(2,000)) (1.812)($54.75)
12
$548 (1.812)($54.75)(1.072)
$548

(2,000 3,500)
34,000,000

$106.35

P3-6
(1)

(a)

The high and low points method:

High ................................................................
Low .................................................................
Difference .......................................................
Variable rate = $100 1,000 Billets = $.10
Fixed cost = $500 ($.10 2,400 Billets) = $260
or
Fixed cost = $400 ($.10 1,400 Billets) = $260

Cost
$500
400
$100

Activity
2,400
1,400
1,000

Chapter 3

3-21

P3-6 (Continued)
(b)

A scattergraph with a trend line fitted by inspection:

$500

$400

$300

$200

$100

$0
0

500

1,000

1,500

2,000

BILLETS

Fixed cost determined by inspection = $260

Average cost = $5,520 total cost 12 months = $460
Average activity = 24,000 total Billets 12 months = 2,000
Variable cost = ($460 average cost $260 fixed cost) 2,000 average
activity = $.10 per Billet

2,500

3-22

Chapter 3

P3-6 (Continued)
(c)
(1)
y
Electricity
Month
Cost
January............
$ 455
February ..........
450
March ...............
435
April .................
485
May
..................
470
June .................
475
July
..................
400
August .............
450
September.......
435
October............
500
November ........
495
December ........
470
Total ...........

$5,520

(2)
(y y)
Cost

(3)
x
Number

(4)
(x x )
Activity

(5)

(6)
2

(x x )
(4)
Deviations of Billets Deviations
Squared
(5)
2,000
0
0
(10)
1,800
(200)
(25)
1,900
100 (100)
25
2,200
625 200
10
2,100
625 100
15
2,000
100 0
(60)
1,400
225 (600)
(10)
1,900
3,600 (100)
(25)
1,800
100 (200)
40
2,400
625 400
35
2,300
1,600 300
10
2,200
200
40,000
0
24,000
0
800,000

(7)

(x x )(y y) (y y)2
(2)
(4) (2)
Squared
0
25
40,000
2,000
10,000
2,500
40,000
5,000
10,000
1,000
0
0
360,000
36,000
10,000
1,000
40,000
5,000
160,000
16,000
90,000
10,500
1,225
2,000
100
81,000

8,950

y = y n = $5,520 12 = $460
x = x n = 24,000 12 = 2,000
(x x )(y y )

Variable rate (b)

Fixed cost (a)

Column 6 total

800,000

$.10125

y bx
$460 ($.10125)(2,000)
$257.50

(2)

The coefficient of correlation (r) and the coefficient of determination (r2),

using data from the answer in requirement (1)(c) follow:
r
2

(x i x )(y i y )
2

(x i x ) (y i y )
2

r (.957) .916

81 000
(800,000) (8,950)

Chapter 3

3-23

P3-6 (Concluded)
(3)

Month
January ..................
February ................
March .....................
April........................
May .........................
June........................
July.........................
August....................
September .............
October ..................
November ..............
December ..............
Total....................

(1)
y
Actual
Electricity
Cost
$ 455
450
435
485
470
475
400
450
435
500
495
470
$5,520

(y y )
n 2

(2)
x
Number
of
Billets
2,000
1,800
1,900
2,200
2,100
2,000
1,400
1,900
1,800
2,400
2,300
2,200
24,000

Column 5 total
12 2

(3) (y
= a + bx)
Estimated
Electricity
Cost
$ 460
440
450
480
470
460
399
450
440
501
490
480
$5,520

$752

(4)
(y y )

(5)
(y y )2

(1) (3)
(5)
10
(15)
5
0
15
1
0
(5)
(1)
5
(10)
0

(4)
Squared
25
100
225
25
0
225
1
0
25
1
25
100
752

$8.672

The 95% confidence interval for electricity costs at the 2,200 Billets level of
activity would be determined as follows:
a bx t 95% s 1

( x

x)

1
12
$480.25 (2.228)($8.672)(1.065)

$257.50 ($.10125)(2,200) (2.228)($8.672)

$480.25 $20.58
or between a low of $459.67 and a high of $500.83.

(2,200 2,000)
800,000

3-24

Chapter 3

P3-7
(1)

(2)
(yi y)
Difference
from
Average

Direct
Labor

Cost

of $7,900

Hours

Hours

Squared

(4) (2)

Squared

$8,500
9,900
8,950
9,000
8,150
7,550
7,050
6,450
6,900
7,500
7,150
7,800

600
2,000
1,050
1,100
250
(350)
(850)
(1,450)
(1,000)
(400)
(750)
(100)

2,000
2,400
2,200
2,300
2,000
1,900
1,400
1,000
1,200
1,700
1,600
1,900

200
600
400
500
200
100
(400)
(800)
(600)
(100)
(200)
100

40,000
360,000
160,000
250,000
40,000
10,000
160,000
640,000
360,000
10,000
40,000
10,000

120,000
1,200,000
420,000
550,000
50,000
(35,000)
340,000
1,160,000
600,000
40,000
150,000
(10,000)

360,000
4,000,000
1,102,500
1,210,000
62,500
122,500
722,500
2,102,500
1,000,000
160,000
562,500
10,000

8,700
9,300
9,300
8,700
8,000
7,650
6,750
7,100
7,350
7,250
7,100
7,500

800
1,400
1,400
800
100
(250)
(1,150)
(800)
(550)
(650)
(800)
(400)

2,100
2,300
2,200
2,200
2,000
1,800
1,200
1,300
1,500
1,700
1,500
1,800

300
500
400
400
200
0
(600)
(500)
(300)
(100)
(300)
0

90,000
250,000
160,000
160,000
40,000
0
360,000
250,000
90,000
10,000
90,000
0

240,000
700,000
560,000
320,000
20,000
0
690,000
400,000
165,000
65,000
240,000
0

640,000
1,960,000
1,960,000
640,000
10,000
62,500
1,322,500
640,000
302,500
422,500
640,000
160,000

8,600
9,300
9,400
8,700
8,100
7,600
7,000
6,900
7,100
7,500
7,000
7,600

700
2,000
1,400
2,300
1,500
2,300
800
2,200
200
2,000
(300)
1,800
(900)
1,300
(1,000)
1,200
(800)
1,300
(400)
1,800
(900)
1,500
Total .................
$284,400

200
500
500
400
200
0
(500)
(600)
(500)
0
(300)
(300)

40,000
250,000
250,000
160,000
40,000
0
250,000
360,000
250,000
0
90,000
1,900

490,000
140,000
700,000 1,960,000
750,000 2,250,000
640,000
320,000
40,000
40,000
90,000
0
810,000
450,000
600,000 1,000,000
640,000
400,000
160,000
0
810,000
270,000
0
64,800

(1)
yi
Factory
Overhead
Month
20A
Jan ...................
Feb ...................
Mar ...................
Apr ...................
May ..................
June .................
July ..................
Aug...................
Sep...................
Oct ...................
Nov...................
Dec...................

(3)
xi

(4)
(5)
(xi x )
(xi x )2
Difference
from Average
of 1,800
(4)

(6)
(7)
(xi x )(yi y) (yi y)2

(2)

20B
Jan ...................
Feb ...................
Mar ...................
Apr ...................
May ..................
June .................
July ..................
Aug...................
Sep...................
Oct ...................
Nov...................
Dec...................
20C
Jan ...................
Feb ...................
Mar ...................
Apr. ..................
May ..................
June .................
July ..................
Aug...................
Sep...................
Oct ...................
Nov...................
Dec...................

100

10,000

0
5,280,000

(30,000)
90,000

11,625,000 29,155,000

Chapter 3

3-25

P3-7 (Continued)
(x x )(y i y )

Column 5 total

5,280,000

$2.20 variable cost rate

Since y a bx and y y i n and x x i n, then :

($284,400 36) a ($2.20)(64,800 36)
$7,900 a $3,960
a $3,940 fixed overhead cost
(2)

The coefficient of correlation and the coefficient of determination, using

data from the requirement (1) answer:
r

(x i x )(y i y )
2

(x i x ) (y i y )
11 625,000
(5,280,000)
(29,155,000)
2

r (.9370) .8780

Column 6 total
(Column 5 total) (Column 7 total)
11 625,000
153,938,400,000,000

11 625,000
12,407,191

3-26

Chapter 3

P3-7 (Continued)
(3)
The standard error of the estimate:
(1)
xi
Direct
Labor
Hours

Month
20A
January ..................
2,000
February ................
2,400
March .....................
2,200
April .......................
2,300
May.........................
2,000
June .......................
1,900
July.........................
1,400
August ...................
1,000
September .............
1,200
October..................
1,700
November ..............
1,600
December ..............
1,900
20B
January ..................
2,100
February ................
2,300
March .....................
2,200
April .......................
2,200
May.........................
2,000
June .......................
1,800
July.........................
1,200
August ...................
1,300
September .............
1,500
October..................
1,700
November ..............
1,500
December ..............
1,800
20C
January ..................
2,000 February ................
2,300 March .....................
2,300 April .......................
2,200 May.........................
2,000 June .......................
1,800 July.........................
1,300 August ...................
1,200 September .............
1,300 October ..................
1,800 November ..............
1,500 December ..............
1,900 Total....................
64,800

(2)
y
Actual
Factory
Overhead
Cost

(3)
(4) (y
(5) (y
(y = a + bx ) i yi)
y )2
Predicted
Prediction
Prediction
Factory
Error
Error
Overhead
Squared
(2) (3) (4) Squared
Cost

$ 8,500
9,900
8,950
9,000
8,150
7,550
7,050
6,450
6,900
7,500
7,150
7,800

$ 8,340
9,220
8,780
9,000
8,340
8,120
7,020
6,140
6,580
7,680
7,460
8,120

$160
680
170
0
(190)
(570)
30
310
320
(180)
(310)
(320)

$ 25,600
462,400
28,900
0
36,100
324,900
900
96,100
102,400
32,400
96,100
102,400

8,700
9,300
9,300
8,700
8,000
7,650
6,750
7,100
7,350
7,250
7,100
7,500

8,560
9,000
8,780
8,780
8,340
7,900
6,580
6,800
7,240
7,680
7,240
7,900

140
300
520
(80)
(340)
(250)
170
300
110
(430)
(140)
(400)

19,600
90,000
270,400
6,400
115,600
62,500
28,900
90,000
12,100
184,900
19,600
160,000

8,600
9,300
9,400
8,700
8,100
7,600
7,000
6,900
7,100
7,500
7,000
7,600
$284,400

8,340
9,000
9,000
8,780
8,340
7,900
6,800
6,580
6,800
7,900
7,240
8,120
$284,400

260
300
400
(80)
(240)
(300)
200
320
300
(400)
(240)
(520)
0

67,600
90,000
160,000
6,400
57,600
90,000
40,000
102,400
90,000
160,000
57,600
270,400
$3,560,200

Chapter 3

3-27

P3-7 (Concluded)
s

(4)

(y i y i )
n 2

Column 5 total
36 2

$3,560,200
34

Since a large sample is used in this problem, t

interval is:
yi

z 95% s

($3,940 ($2.20)(2,200)) (1.960)($324)

$8,780 $635

= z

$104,712 $324

and the confidence

3-28

Chapter 3

P3-8
(1)
(1)
yi
Maintenance
Months
Cost
Jan., 20A.......... $ 1,195
1,116
Feb., 20A .........
1,390
Mar., 20A..........
1,449
Apr., 20A..........
1,618
May,
1,525
20A ..........
1,687
June, 20A ........
1,650
July,
1,595
20A ..........
1,675
Aug., 20A .........
1,405
Sep., 20A .........
1,251
Oct., 20A..........
950
Nov.,
20A
1,175
.........
Dec.,
1,425
20A ......... Jan.,
1,506
20B.......... Feb.,
1,608
20B ......... Mar.,
1,653
20B.......... Apr.,
1,675
20B.......... May,
1,724
20B ..........
1,626
June, 20B ........
1,575
July,
1,653
20B ..........
1,418
Aug., 20B .........
Sep., 20B ......... $35,544
Oct., 20B..........
Nov.,
20B
.........
Dec.,
20B .........

(2)
(yi y)
Cost
Deviation
(286)
(365)
(91)
(32)
137
44
206
169
114
194
(76)
(230)
(531)
(306)
(56)
25
127
172
194
243
145
94
172
(63)
0

(3)
(4)
xi
(xi x )
Labor
Activity
Hours Deviation
950
(290)
1,024
(216)
1,109
(131)
1,148
(92)
1,313
73
1,261
21
1,552
312
1,372
132
1,366
126
1,455
215
1,221
(19)
1,150
(90)
999
(241)
1,022
(218)
1,220
(20)
1,283
43
1,339
99
1,250
10
1,440
200
1,290
50
1,335
95
1,164
(76)
1,373
133
1,124
(116)
29,760

(5)
(xi x )2
(4)

(6)
(7)
(xi x )(yi y) (yi y)2
(2)

Squared
84,100
46,656
17,161
8,464
5,329
441
97,344
17,424
15,876
46,225
361
8,100
58,081
47,524
400
1,849
9,801
100
40,000
2,500
9,025
5,776
17,689
13,456

(4) (2)
82,940
78,840
11,921
2,944
10,001
924
64,272
22,308
14,364
41,710
1,444
20,700
127,971
66,708
1,120
1,075
12,573
1,720
38,800
12,150
13,775
(7,144)
22,876
7,308

Squared
81,796
133,225
8,281
1,024
18,769
1,936
42,436
28,561
12,996
37,636
5,776
52,900
281,961
93,636
3,136
625
16,129
29,584
37,636
59,049
21,025
8,836
29,584
3,969

553,682

651,300

1,010,506

Total ............

y = y n = $35,544 24 = $1,481
x = xi n = 29,760 24 = 1,240
r

(
xi

x )(y i y ) (x i x ) (y i y )

651,300
(553,682)(1,010,506)

C mn 6 total (Column 5 total)

o (Column 7 total)
l
300

.870725
u 559,498
,092 747,997

r (.870725) .758162

Chapter 3

3-29

P3-8 (Continued)
(1)
yi
Maintenance
Months
Cost
$1,195
Jan., 20A..........
1,116
Feb., 20A .........
1,390
Mar., 20A..........
1,449
Apr., 20A ..........
1,618
May,
1,525
20A ..........
1,687
June, 20A ........
1,650
July,
1,595
20A ..........
1,675
Aug., 20A .........
1,405
Sep., 20A .........
1,251
Oct., 20A..........
950
Nov.,
20A
1,175
.........
Dec.,
1,425
20A ......... Jan.,
1,506
20B.......... Feb.,
1,608
20B ......... Mar.,
1,653
20B.......... Apr.,
1,675
20B.......... May,
1,724
20B ..........
1,626
June, 20B ........
1,575
July,
1,653
20B ..........
1,418
Aug., 20B .........
Sep., 20B ......... $35,544
Oct., 20B..........
Nov.,
20B
.........
Dec.,
20B .........

(2)
(yi y)
Cost
Deviation
(286)
(365)
(91)
(32)
137
44
206
169
114
194
(76)
(230)
(531)
(306)
(56)
25
127
172
194
243
145
94
172
(63)
0

(3)
(4)
xi
(xi x )
Machine Activity
Hours Deviation
809
(266)
744
(331)
987
(88)
987
(88)
1,186
111
1,154
79
1,291
216
1,238
163
1,186
111
1,246
171
997
(78)
841
(234)
502
(573)
733
(342)
1,090
15
1,135
60
1,174
99
1,246
171
1,264
189
1,323
248
1,230
155
1,165
90
1,237
162
1,035
(40)
25,800

(5)
(xi x )2
(4)
Squared
70,756
109,561
7,744
7,744
12,321
6,241
46,656
26,569
12,321
29,241
6,084
54,756
328,329
116,964
225
3,600
9,801
29,241
35,721
61,504
24,025
8,100
26,244
1,600
1,035,348

(6)
(7)
(x x )(y y) (yi y)2
(2)
(4) (2)
Squared
76,076
81,796
120,815
133,225
8,008
8,281
2,816
1,024
15,207
18,769
3,476
1,936
44,496
42,436
27,547
28,561
12,654
12,996
33,174
37,636
5,928
5,776
53,820
52,900
304,263
281,961
104,652
93,636
(840)
3,136
1,500
625
12,573
16,129
29,412
29,584
36,666
37,636
60,264
59,049
22,475
21,025
8,460
8,836
27,864
29,584
2,520
3,969
1,013,826

1,010,506

Total .............

y = y n = $35,544 24 = $1,481
x = xi n = 25,800 24 = 1,075
r

(x i x )(y i y )
2

(x i x ) (y i y )

1 013,826
(1 035,348)(1 010,506)

Column 6 total
(Column 5 total) (Column 7 total)

,046,225,366,088

1,022,852

.991176

(.991176) .982430

3-30

Chapter 3

P3-8 (Continued)
(2)
The activity measure used to predict maintenance expense should be
machine hours, which will result in the following cost estimates:
(x x )(y y )

Column 6 total

1 013,826

$.979213 variable rate

Since y a bx , then the estimated fixed cost is determined as

follows: a y bx
a $1,481($.979213)(1,075)
a $1 481$1 052.65
a $428.35
(3)

Months
Jan., 20A ................
Feb., 20A ................
Mar., 20A ................
Apr., 20A
................ May,
20A.................
June, 20A ...............
July,
20A.................
Aug., 20A ...............
Sep., 20A................
Oct., 20A ................
Nov.,
20A ................ Dec.,
20A................ Jan.,
20B ................ Feb.,
20B ................ Mar.,
20B ................ Apr.,
20B ................ May,
20B.................
June, 20B ...............
July,
20B.................
Aug., 20B ...............
Sep., 20B................
Oct., 20B ................
Nov.,
20B ................ Dec.,
20B................
Total....................
*rounding error

(1)
xi
Machine
Hours
809
744
987
987
1,186
1,154
1,291
1,238
1,186
1,246
997
841
502
733
1,090
1,135
1,174
1,246
1,264
1,323
1,230
1,165
1,237
1,035
25,800

(2)
(3)
(4)
y
(y = a + bx ) (y y )
Actual
Predicted Prediction
Maintenance Maintenance
Error
Cost
Cost
(2) (3)
$(26)
$ 1,221
$ 1,195
(41)
1,157
1,116
(5)
1,395
1,390
1,395
1,449
54
1,590
1,618
28
1,558
1,525
(33)
1,693
1,687
(6)
1,641
1,650
9
1,590
1,595
5
1,648
1,675
27
1,405
1,405
0
1,252
1,251
(1)
920
950
30
1,146
1,175
29
1,496
1,425
(71)
1,540
1,506
(34)
1,578
1,608
30
1,648
1,653
5
1,666
1,675
9
1,724
1,724
0
1,633
1,626
(7)
1,569
1,575
6
1,640
1,653
13
1,442
1,418
(24)
$35,547*
$35,544
$ (3)*

(5)
(yi y i)2
(4)
Squared
$
676
1,681
25
2,916
784
1,089
36
81
25
729
0
1
900
841
5,041
1,156
900
25
81
0
49
36
169
576
$17,817

(y i y )
n 2

Column 5 total
24 2

$17,817

$28.458103

Chapter 3

3-31

P3-8 (Concluded)
(4)

The 95% confidence interval for maintenance cost at the 1,100 machine
hour level of activity is:
y i t 95% s

1
n

(x i x )
2
(x i x )

$428.35 ($.979213)(1 100) (2.074)(28.458103)

$1 505.48 $60.26

1
24

(1 100 1 075)
1 035,348

3-32

Chapter 3

CASES
C3-1
(1)

=
=
=
=

a + bS
5.062 + (.023) (1,200)
5.062 + 27.6
32.662 or about 33 total workers

Total workers needed ..........................................................

Less permanent workers ....................................................

33
10

Number of temporary workers needed..............................

23

(2)

Regression 2 appears to be better than Regression 1 because:

(a)
Data outside the relevant range have been excluded, thereby
removing any bias.
(b)
The standard error of the estimate (s ) for Regression 2 is smaller
than the standard error of the estimate for Regression 1 (.432
compared to 2.012).
(c)
The coefficient of determination (r 2) is higher for Regression 2 than
the coefficient of determination for Regression 1 (.998 compared to .
962).

(3)

Jim Locter can use the regression in his planning for temporary workers if
the following conditions exist:
(a)
The forecasted daily shipments are greater than 300 and do not
deviate too much from the actual shipments.
(b)
The amount of work to be done is dependent only on the number of
shipments to be made and does not change from shipment to shipment.
(c)
Worker productivity is expected to remain approximately the same
as that experienced during the period used to develop the
regression.
(d)
A strong cause and effect relationship exists between the
dependent variable and the independent variable.
(e) The time frame for a forecast is short-term.

(4)

The regression could be improved by the following:

(a)
Redeveloping the regression using the number of hours worked as
the dependent variable.
(b)
Performing another analysis if rush orders or deviations of actual
orders from forecasts occur with any degree of regularity.
(c)
Investigating the historical data used as a basis for the regression to
determine if there are any further unusual circumstances that should be
removed from the data set.
(d)
Redoing the regression after a period of time, such as four to six
months, to discover if there have been any changes in the relationship
between the dependent and the independent variables.

Chapter 3

3-33

C3-2
(1)
(2)

The increase in y associated with a unit increase in x is 1.2. Therefore, a

500-unit increase in x will result in a 600-unit increase (1.2 500) in y (direct
labor hours).
(a)
The equation may be unreliable if the correlation is spurious. The
assumption is that there is a logical relationship between output and the
use of electric power and direct labor.
(b)
The equation may be reliable under the conditions at the time of
the study, but if conditions change, the results may be unreliable.
(c) Data used were limited to a range of 5002,000 units.
(d) It is assumed that a straight-line assumption is valid.
(e)
The coefficient of correlation is a measure of the extent to which two
variables are related linearly. It is a relative measure of goodness of fit.
More of the variation in y is explained by the regression equation for
direct labor hours than for electric power, that is, the equation for direct
labor hours is a better fit than the equation for electric power.
(f)
The standard error of the estimate is a measure of variation from the
regression line. If the observations are normally distributed about the
regression equation, the standard error can be interpreted in the same
way as the standard deviation. The standard error is greater in the case
of direct labor hours than in the case of electric power.
CGA-Canada (adapted). Reprint with permission.

C3-3
(1)

An advantage of Alternative A is that using time as an independent variable

is a convenient way to take into consideration all possible factors that may
be influencing the dependent variable during each period of time. A
disadvantage of Alternative A is that there is no logical relationship between
years and rental expense.
An advantage of Alternative B is that this method is logical because as
rev-enues increase, the stores increase, and, thus, rental expense increases. A
dis-advantage of Alternative B is that an estimate of revenues is required.
An advantage of Alternative C is that the mathematical calculations are relatively easy and the method is easy to understand. A disadvantage
of Alternative C is that the arithmetic average is an oversimplification that
does not recognize any relationship between variables.

3-34

Chapter 3

C3-3 (Concluded)
(2)
(3)

Motorco Corporation should select Alternative B because the

relationship between revenue and the rental expense is logical, the coefficient
of correlation is high, and the standard error of the estimate is low.
A statistical technique is an appropriate method for estimating rental
expense before Motorco actually contacts Alpha Auto Parts. A statistical
technique attempts to measure the covariation between the variables that are
presumed to have a cause and effect relationship, and such a relationship
appears to exist in this situation. Of course, Motorco is assuming that any
relationships that exist in the historical data will continue in the future
without change. Management may want to adjust the variables for changes
that it expects will occur, and Motorco may wish to introduce other
quantitative variables.

C3-4
(1)

(2)

(3)

The phrase regression provides a relational statement rather than a

causal statement means that regression analysis is used to determine a
relationship, but not necessarily a cause-and-effect relationship. A specific
value for a regression coefficient does not imply that the independent
variable(s) causes a change in the dependent variable.
The meaning of each of the symbols in the basic formula for a regression
equa-tion follows:
y = estimated value of the i th observation of the dependent variable.
a = the y-axis intercept or constant term (e.g., the fixed portion of a
semivariable expense).
b = the regression coefficient corresponding to the independent variable x
(e.g., the variable cost element associated with a one unit change in
activity x).
x = the i th observation of the first independent variable.
c = the regression coefficient corresponding to the independent variable z
(e.g., the variable cost element associated with a one unit change in
activity z).
z = the i th observation of the second independent variable.
e = the error term associated with the i th observation.
Statistical factors used to test a regression equation for goodness of fit
include: (a) The coefficient of determination, r 2, which indicates the portion of
the
variance in the dependent variable explained by the independent
variables. A coefficient of determination approaching 1 indicates a
good fit.

Chapter 3

3-35

C3-4 (Concluded)
(b)
(4)

(a)

(b)

(c)

(d)
(e)

The standard error of the estimate which measures the dispersion of

the observed points about the regression line. A standard error of the
estimate approaching zero indicates a good fit.
The term linearity within a relevant range means that in a specific
situation, a straight-line relationship between the dependent variable and
the independent variables can be assumed only within the range of
historically observed values.
The term constant variance (homoscedasticlty) means that the
distribution of the observations about the regression line is uniform for
all values of the independent variables within the observed range of
values.
The term serial correlation refers to the lack of independence in a
series of successive observations over time. The deviation of a value
from the regression line should be unrelated to the deviation of any
other point from this line.
The term normality means that the joint probability distribution of
the variables is normally distributed (multivariate normal). The
frequency of the observations should approximate a normal curve.
The term multicollinearity refers to the correlation of independent
variables. When independent variables are highly correlated with each
other, the relationship(s) between the independent variables may
obscure the relationship between the independent variables(s) and the
dependent variable.

C3-5
(1)

(2)

(a)

D = (2.455 + (.188)(1,500,000 100,000)) 10,000 units

= (2.455 + 2.82) 10,000 units
= 5.275 10,000 units
= 52,750 units
(b) D = (2.491 + (.44)(12,000,000 1,000,000)) 10,000 units
= (2.491 + 5.28) 10,000 units
= 7.771 10,000 units
= 77,710 units
The 50% confidence interval for demand is calculated as follows:
D = 104,160 units (.69)(.922 10,000 units)
= 104,160 units 6,361.8 units
or between 97,798 units and 110,522 units.

3-36

Chapter 3

C3-5 (Concluded)
(3)

(4)

Equation 4 is the best. The coefficient of correlation and the coefficient of

deter-mination are the highest of the four equations. The coefficient of
determination indicates that 70.3% of the sample variance of automobile sales
is explained by the regression. For predictive purposes, the standard error of
the estimate at .922 is also the lowest of the four models, giving the tightest
(smallest) physi-cal confidence interval of any of the equations.
Equation 3 assumes that factory rebates (R) are dependent on
advertising funds (A). The results of the analysis show that factory rebates and
advertising funds are almost totally independent and, therefore, cannot be
used to predict each other. The results of Equation 3 lend credibility to the
use of A and R in Equation 4. The independence of A and R reduces the
possible negative aspects of collinearity.