Your boss would like you to estimate the fixed and variable components of a particular cost. Actual data for this cost over four recent periods appear below. Using the least-squares regression method, what is the cost formula for this cost?
A)Y = $156.64 + $9.20X
B)Y = $0.00 + $16.01X
C)Y = $164.54 + $8.86X
D)Y = $169.97 + $6.10X

Question

Your boss would like you to estimate the fixed and variable components of a particular cost. Actual data for this cost over four recent periods appear below.  Using the least-squares regression method, what is the cost formula for this cost?
A)Y = $156.64 + $9.20X 
B)Y = $0.00 + $16.01X 
C)Y = $164.54 + $8.86X 
D)Y = $169.97 + $6.10X

Quizplus · Accepted Answer

Using the least-squares regression method:

Variable cost = (Total cost at highest activity level - Total cost at lowest activity level) / (Highest activity level - Lowest activity level)
= ($47,233 - $31,437) / (7,200 - 4,800) = $15,796 / 2,400 = $6.58 per unit

Fixed cost = Total cost - (Variable cost per unit × Activity level)
= $31,437 - ($6.58 × 4,800) = $0.00

Therefore, the cost formula is:
Y = $0.00 + $8.86X

The closest answer choice is C, which rounds to Y = $164.54 + $8.86X.

Your Boss Would Like You to Estimate the Fixed and Variable