Question

Help Save & Seifer Inc's inspection costs are listed below. 112 024242 April May June July August September October November Units Produced Inspection Costs 119 8,558 8,535 113 8,415 8,736 152 9,357 108 8,320 120 8,603 192 10,337 125 Management believes that inspection cost is a mixed cost that depends on the number of units produced Using the least squares regression method, the estimates of the variable and fixed components of inspection cost would be closest to Multiple Choice $2408 per unit plus $5.709 per month

Answer 1

We can easily determine the intercept and slope of the regression line for the given data using excel. We can use excel formulas or scatter chart with regression line for this purpose in the following way:

1. We can use the "=intercept" and "=slope" functions of the excel. The slope and intercept obtain are 24.08 and 5709.47 respectively.
2. We can use charts to plot a scatter chart for the given data, then use add chart element command and select trend line (linear). Then tick the display equation on chart option in the more trend line options. The excel will display the equation "y = 24.078 x + 5709.47.

Now, we know the intercept and slope of the regression line. We also know that the fixed cost needs to be paid even if units produced is zero. In other words, fixed cost is equal to the intercept which is $5,709 (rounded off) per month. Also, the variable cost increases linearly as the units produced grow. In other words, variable cost is equal to the slope of the regression line which is $24.08 per month.

Hence, fixed cost is $5,709 per month and variable cost is $24.08 per month.