Question

Armer Company is accumulating data to use 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 the use of linear regression to derive an equation for maintenance hours and costs. Data regarding the maintenance hours and costs for the last year and the results of the regression analysis follow:

Month	Maintenance Cost			Machine Hours
Jan.	$	5,150			860
Feb.		3,950			700
Mar.		4,550			780
Apr.		3,770			680
May		5,300			880
June		3,910			690
July		3,980			700
Aug.		5,420			1,000
Sept.		5,210			870
Oct.		5,000			850
Nov.		4,250			730
Dec.		4,110			720
Sum	$	54,600			9,460
Average	$	4,550		$	788
Average cost per hour				$	6.00
a (intercept)				$	-125.35
b (coefficient)					5.9307
Standard error of the estimate					171.8873
R-squared					0.9314
t-value for b					11.648

Based on the data derived from the regression analysis, 420 maintenance hours in a month mean that maintenance costs should be budgeted to the nearest dollar at

• $2,538.

• $3,279.

• $2,549.

• $2,366.

• None of these answer choices are correct.

Answer 1

The correct answer is $ 2,366

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The linear regression equation is of the form

y = a + b x

where a = intercept ; b = slope ; y = Maintenance Cost ; x = Machine Hours

Using the results of the regression analysis, the equation relating maintenance cost and machine hours is given as

y = -125.35 + 5.9307 x

The maintenance cost at 420 maintenance hours in a month is calculated to be

y =  -125.35 +   5.9307 * 420

y = $ 2,365.54 $ 2,366