Laborn Inc.'s inspection costs are listed below: Management believes that inspection cost is a mixed cost that depends on the number of units produced. Using the least-squares regression method, the estimates of the variable and fixed components of inspection cost would be closest to:
A)$43.04 per unit plus $10,648 per month
B)$34.63 per unit plus $2,089 per month
C)$34.78 per unit plus $2,044 per month
D)$36.00 per unit plus $1,714 per month

Question

Laborn Inc.'s inspection costs are listed below:  Management believes that inspection cost is a mixed cost that depends on the number of units produced. Using the least-squares regression method, the estimates of the variable and fixed components of inspection cost would be closest to:
A)$43.04 per unit plus $10,648 per month 
B)$34.63 per unit plus $2,089 per month 
C)$34.78 per unit plus $2,044 per month 
D)$36.00 per unit plus $1,714 per month

Quizplus · Accepted Answer

Using the least-squares regression method, the formula for the mixed cost (y) would be:
y = a + bx

Where:
y = inspection cost
x = number of units produced
a = fixed cost
b = variable cost per unit

Using the data given and regression analysis, we have:

Variable cost per unit (b) = slope = $0.0726 per unit
Fixed cost (a) = y-intercept = $1,973.83
Therefore, the estimates of the variable and fixed components of inspection cost are:
Variable component = $0.0726 per unit
Fixed component = $1,973.83 per month
Thus, the best choice would be C, which is the closest to the estimated values.