Question

The director of surgery at a local hospital is interested in understanding his unit’s costs. An assistant collected data for the past 36 months on unit cost (labor, supplies, and so on) along with the number of procedures performed in the unit. The assistant analyzed the data using a spreadsheet program, and the following output was generated:

Equation
Intercept	$	1,008,000
Coefficient on procedures	$	240
Statistical data
Correlation coefficient		0.528
R2		0.278

The unit is planning to perform an average 19,500 procedures per month for the coming year.

Required:

a. Use the regression output to write the surgical unit cost equation.

b. Based on the cost equation, compute the estimated costs for the surgical unit per month for the coming year.

c. The director of surgery has asked you for advice on whether he should rely on the estimate.

	Yes
	No

Answer 1

a
Surgical unit cost = $ 1008000 + 240 X Procedures
b
Estimated costs	5688000	=1008000+(19500*240)

c

No, The R2 of the equation is 27.8% so the estimate of an average procedure cost is not very precise.