Question

The McGraw Company is accumulating data to be used 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 that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows: (CMA adapted)

	Hours of Activity				Maintenance Costs
January		486			$	4,260
February		326				3,060
March		406				3,660
April		306				2,880
May		506				4,410
June		316				3,020
July		326				3,090
August		526				4,530
September		496				4,320
October		476				4,110
November		356				3,360
December		346				3,220
Sum		4,872			$	43,920
Average		406				3,660
A coefficient						700.92
B coefficient						7.2884
Standard error of the a coefficient		50.228
Standard error of the b coefficient		0.12126
Standard error of the estimate						34.469
R2						0.99724
T-value a						13.955
T-value b						60.105

Based upon the data derived from the regression analysis, 435 maintenance hours in a month would mean the maintenance costs would be budgeted at: (rounded to the nearest whole dollar)

Multiple Choice

• $3,720

• $3,900

• $3,925

• $3,871

Answer 1

Answer : $3871

Form the Regression Output

Cost Equation = Intercept+ ( B- coeffivient * Maintenance Hours )

Cost = 700.92+(7.2884 *435) =$3,871.374