Question

15. Your client wants to determine the relationship between its annual research & development costs and a potential cost driver (number of units produced). The output of a regression analysis showed the following information:  

Y-Intercept = 89,620

X Variable = 62.53

R-square = 0.9852

Should your client use the equation (Y = $89,620 + $62.53X) to predict next year’s research & development costs?

A. Yes, because R-square is so high.

B. No, because R-square is so high.

C. Yes, because regression analysis can be relied upon.

D. There is not enough information to make this prediction.

Martha Manufacturing produces a single product that sells for $80. Variable costs per unit equal $32. The company expects total fixed costs to be $72,000 for the next month at the projected sales level of 2,000 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately.

33.    Suppose management believes that a $16,000 increase in the monthly advertising expense will result in a considerable increase in sales. If sales increase by 400 units, what will be the increase in net income?

          a.   $1,200

          b.   $2,200

          c.   $3,200

          d.   $4,200

         34.    Suppose that management believes that a 10% reduction in the selling price will result in a 10% increase in sales. If this proposed reduction in selling price is implemented,

          a.   operating income will decrease by $8,000.

          b.   operating income will increase by $8,000.

          c.   operating income will decrease by $16,000.

          d.   operating income will increase by $16,000.

35.       Cost structure refers to the relative proportion of:

	A. Variable costs to contribution margin.
	B. Total costs to sales.
	C. Fixed costs to variable costs.
	D. Sales price per unit to variable costs per unit.

36.      Operating leverage measures:

	A. How sensitive profit is to a change in fixed costs.
	B. How sensitive profit is to a change in sales volume.
	C. How sensitive profit is to a change in sales price per unit.
	D. How sensitive profit is to a change in tax rates.

Answer 1

We have given information:
Y-intercept = 89,620
X variable = 62.53
R-square = 0.9852

The value of r square helps to know how much percentage of data fits the regression analysis well. However, if r-square is 0, this means that not even a single data point fits the regression analysis. Whereas, if r-square is 1, this means that complete data fits the regression analysis well and can provide accurate results for the next forecast.

Therefore, the client should use the equation (Y= $ 89,620 + $ 62.53X ) to predict next year’s research & development cost because the R square is so high. This indicates that almost all data points fit this regression analysis.

Answer: A. Yes, because r-square is so high