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Question - 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 ($)
450
4000
550
4900
650
5400
700
6300
750
7200
800
7700
The data on the production volume x and total cost y for particular manufacturing operation were used to develop the estimated regression equation y^ = -965.69 + 10.59x.
a. The company's production schedule shows that 500 units must be produced next month. Predict the total cost for next month.
b. Develop a 98% prediction interval for the total cost for next month.
c. If an accounting cost report at the end of next month shows that the actual production cost during the month was $6,000, should managers be concerned about incurring such a high total cost for the month? Discuss.
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