Albama Company's Cost Department has compiled weekly records of production volume (in units), electric power used, and direct labor hours employed. The range of output for which the following statistics were computed is from 500 to 2,000 units per work:
Electric Power:
y = 1,000 + .4x, where y is electric power and x is units of production
Standard error of the estimate: 100
Coefficient of correlation: .45
Direct labor:
y = 100 + 1.2x, where y is direct labor hours and x is units of production
Standard error of the estimate: 300
Coefficient of correlation: .70
Required:
(1) Compute the best estimate of the additional number of required direct labor hours, if production for the next period is 500 units greater than production in this period.
(2) Comment on the reliability of the above equations for estimating electric power and direct labor requirements, together with the necessary assumptions if the estimating equations are to be used to predict future requirements. An interpretation of the coefficient of correlation and the standard error of the estimate should be included.