# Problem 3-30

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For the following requirements, round the fixed cost to the nearest dollar and round the variable rates to the nearest cent. Required:

1. Prepare a scattergraph by plotting power costs against machine hours. Does the scattergraph show a linear relationship between machine hours and power cost? 2. Using the high and low points, compute a power cost formula. 3. Use the method of least squares to compute a power cost formula. Evaluate the coefficient of determination. 4. Rerun the regression, and drop the point (20,000, $26,000) as an outlier. Compare the results from this regression to those for the regression in Requirement 3. Which is better?

SOLUTION:

1.

[pic]

The overall relationship looks reasonably linear—although the data point for the first quarter may be an outlier.

2.Using the high-low method:

Variable power cost = [pic] = $1.13 (rounded)

Fixed power cost = $42,500 – ($1.13 × 30,000) = $8,600

Total power cost = $8,600 + ($1.13 × Number of machine hours)

3.Output of regression program:

|SUMMARY OUTPUT | | | | | | | | | | | | | | | | | |Multiple R |0.89336...

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