Albatross Plc, the Australian subsidiary of a British packaging company, is preparing its budget for the year to 30 June 2019. In respect of fuel oil consumption, it is desired to estimate an equation of the form y = a + bx, where y is the total expense at an activity level x, a is the fixed expense and bis the rate of variable cost.The following data relates to the year ending 30 June 2018:

The annual total and monthly average figures for the year ending 30 June 2018 were as follows:

You are required to:(a) Estimate fixed and variable elements of fuel oil expense from the above data by both the following methods:(i) High and low points.(ii) Least-squares regression analysis;(b) Compare briefly the methods used in (a) above in relation to the task of estimating fixed and variable elements of a semi-variable cost;

(c) Accepting that the coefficient of determination arising from the data given in the question is approximately 0.25, interpret the significance of this fact.

Transcribed Image Text:

Machine Fuel oil Machine Fuel oil hours hours expense (£000) Month expense Month (£000) (£000) (£000) January February July 500 34 640 26 620 26 500 August September 30 34 620 March 31 530 October 39 590 April May 35 550 580 November 42 500 43 December 32 530 June 48 680 Machine Fuel oil expense ($) hours (000) Annual total Monthly average 420 35 6840 570