Question

Explain what the cost model below means

Cost = $2,000 + 21.50X with R square .95

Answer 1

Cost model :

Cost = $2,000 + $ 21.50 (X)       ( $2000 =fixed Cost, $ 21.50 = variable cost)

R- square 0.95

Regression Cost model :

Regression Equation with Two variables = Y= a+b(X)

Y= Dependent Variable ,

a= Intercept ( Which is constant for all levels of X) ,

b=slope ( which is same per unit of X Variable)

X= Independent Variable.

In Our Cost Equation :

Cost is the Dependent Variable : Dependents on X Variable.

$2000= Intercept , we take it as a fixed Cost portion in the Total Cost

$21.50 = Slope , Variable Cost per unit of X Variable

X= Independent Variable

R Square = Co-efficient of Determination , Between the X variable and Cost .