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)
400
450
550
600
700
750
âamp;Total Cost ($)
amp;4000
amp;5000
amp;5400
amp;5900
amp;6400
amp;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 companyâs production schedule shows 500 units must be produced next month. What is the estimated total cost for this operation?