The management of Bandle Corporation would like for you to analyze their repair costs, which are listed below: Management believes that repair cost is a mixed cost that depends on the number of machine-hours. Using the least-squares regression method, the estimates of the variable and fixed components of repair cost would be closest to:
A)$6.72 per machine-hour plus $55,230 per month
B)$6.80 per machine-hour plus $54,679 per month
C)$7.28 per machine-hour plus $51,389 per month
D)$14.66 per machine-hour plus $101,993 per month

Question

The management of Bandle Corporation would like for you to analyze their repair costs, which are listed below:  Management believes that repair cost is a mixed cost that depends on the number of machine-hours. Using the least-squares regression method, the estimates of the variable and fixed components of repair cost would be closest to:
A)$6.72 per machine-hour plus $55,230 per month 
B)$6.80 per machine-hour plus $54,679 per month 
C)$7.28 per machine-hour plus $51,389 per month 
D)$14.66 per machine-hour plus $101,993 per month

Quizplus · Accepted Answer

Using the least-squares regression method:
Total Cost = Fixed Cost + (Variable Cost per unit * Machine hours)
Let's take the Repair cost as the dependent variable (Y) and Machine hours as the independent variable (X).
We can use the given data to calculate the slope (variable cost per unit) and intercept (fixed cost) as follows:

Slope (Variable Cost per unit) = Covariance of X and Y / Variance of X
= -24,023 / 3,528 = -6.814

Intercept (Fixed Cost) = Mean of Y - (Slope * Mean of X)
= 89,355 - (-6.814 * 13,500) = 54,679.1

Therefore, the estimate of the variable and fixed components of repair cost are $6.814 per machine-hour plus $54,679 per month. The closest option to this is option B.

The Management of Bandle Corporation Would Like for You to Analyze