Question

Armer Company is accumulating data to use in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested the use of linear regression to derive an equation for maintenance hours and costs. Data regarding the maintenance hours and costs for the last year and the results of the regression analysis follow: Month Maintenance Cost Machine Hours Jan. $ 5,150 480 Feb. 3,950 330 Mar. 4,550 420 Apr. 3,770 290 May 5,300 510 June 3,910 280 July 3,980 350 Aug. 5,420 570 Sept. 5,210 450 Oct. 5,000 440 Nov. 4,250 390 Dec. 4,110 370 Sum $ 54,600 4,880 Average $ 4,550 $ 407 Average cost per hour $ 11.00 a (intercept) $ 1,821.97 b (coefficient) 6.7083 Standard error of the estimate 205.4081 R-squared 0.9020 t-value for b 11.648

Answer 1

From the results of regression regression, total maintenance cost equation can be derived by tracing data of 'Intercept' and 'Coefficient' as below: Intercept (a) Coefficient (b) 1821.97 --> Fixed costs 6.7083 --> Variable costs per hour Cost equation: Total Maintenance cost (y=a+bx) = $1821.97 + ($6.7083X) In the equation, 'x' refers to maintenance hour. It means that 'x' must be substituted by maintenance hours to estimate total maintenance cost.