An important application of regression analysis in accounting is in the estimation of cost. By collecting data on volume and cost and using the least squares method to develop an estimated regression equation relating volume and cost, an accountant can estimate the cost associated with a particular manufacturing volume. Consider the following sample of production volumes and total cost data for a manufacturing operation.
Production Volume (units) Total Cost ($)
400 ................... 4000
450 ................... 5000
550 ................... 5400
600 ................... 5900
700 ................... 6400
750 ................... 7000
a. Use these data to develop an estimated regression equation that could be used to predict the total cost for a given production volume.
b. What is the variable cost per unit produced?
c. Compute the coefficient of determination. What percentage of the variation in total cost can be explained by production volume?
d. The company’s production schedule shows 500 units must be produced next month. Predict the total cost for this operation?