Question

Thane Company is interested in establishing the relationship between electricity costs and machine hours. Data have been collected and a regression analysis prepared using Excel. The monthly data and the regression output follow:
  

Month	Machine Hours	Electricity Costs
January	3,500	$	18,900
February	3,900	$	22,000
March	2,900	$	14,000
April	4,100	$	24,000
May	4,800	$	28,750
June	4,300	$	23,000
July	5,500	$	25,250
August	4,500	$	23,250
September	3,000	$	16,500
October	4,700	$	27,000
November	6,800	$	32,000
December	6,000	$	28,250

  

Summary Output
Regression Statistics
Multiple R	.919
R Square	.844
Adjusted R2	.829
Standard Error	2,165.73
Observations	12.00

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	5,084.31	2,589.60	1.96	0.08	(685.68)	10,854.29
Machine Hours	4.11	0.56	7.36	0.00	2.86	5.35

If the controller uses high-low method to estimate costs, the cost equation for electricity cost is:( Round intermediate calculations to 2 decimal places)

Multiple choice:

1. Electricity costs= $21.716
2. Electricity costs= $5,084.31 + ($4.11 * machine-hours)
3. Electricity cost = $584 + (4.62 * machine-hours)
4. Electricity costs = $5.40 * Machine-hours

Answer 1

Highest electricity cost is $ 32000 in the month of november for which machine hours given is 6800.

Lowest electricity cost is $ 14000 in the month of march for which machine hours given is 2900.

The cost equation for electricity cost is :-

variable cost portion calculation :-

( 32000 - 14000 ) / ( 6800 - 2900 ) =

18000 / 3900 = $ 4.62 * machine hours

fixed cost portion calculation :-

32000 - [ 6800 * 4.62 ] = $ 584

The cost equation for electricity cost is :-$584 + (4.62 * machine-hours)

Option C is correct.