Multiple Regression Analysis for a Special Decision (Requires Computer Spreadsheet)

For billing purposes, South Town Health Clinic classifies its services into one of four major procedures,

X1 through X4. A local business has proposed that South Town provide health services to its

employees and their families at the following set rates per procedure:

X1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45

X2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

X3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

X4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

Because these rates are significantly below the current rates charged for these services, management

has asked for detailed cost information on each procedure. The following information is

available for the most recent 12 months.

Number of Procedures

Mont Total cost X1 X2 X3 X4

1 . . . . . . . . . . . . . $23,000 30 100 205 75

2 . . . . . . . . . . . . . 25,000 38 120 180 90

3 . . . . . . . . . . . . . 27,000 50 80 140 150

4 . . . . . . . . . . . . . 19,000 20 90 120 100

5 . . . . . . . . . . . . . 20,000 67 50 160 80

6 . . . . . . . . . . . . . 27,000 90 75 210 105

7 . . . . . . . . . . . . . 25,500 20 110 190 110

8 . . . . . . . . . . . . . 21,500 15 120 175 80

9 . . . . . . . . . . . . . 26,000 60 85 125 140

10 . . . . . . . . . . . . 22,000 20 90 100 140

11 . . . . . . . . . . . . . 22,800 20 70 150 130

12 . . . . . . . . . . . . . 26,500 72 60 200 120

Required

a. Use multiple regression analysis to determine the unit cost of each procedure. How much

variation in monthly cost is explained by your cost-estimating equation?

b. Evaluate the rates proposed by the local business. Assuming South Town has excess capacity

and no employees of the local business currently patronize the clinic, what are your recommendations

regarding the proposal?

c. Evaluate the rates proposed by the local business. Assuming South Town is operating at capacity

and would have to turn current customers away if it agrees to provide health services to the

local business, what are your recommendations regarding the proposal?