Recent maintenance costs of Divers Corporation are listed below: Management believes that maintenance cost is a mixed cost that depends on machine-hours.Using the least-squares regression method, the estimate of the fixed component of maintenance cost per month is closest to:

Question

Recent maintenance costs of Divers Corporation are listed below:  Management believes that maintenance cost is a mixed cost that depends on machine-hours.Using the least-squares regression method, the estimate of the fixed component of maintenance cost per month is closest to:

Quizplus · Accepted Answer

Using the least-squares regression method, the formula for the mixed cost is y = a + bx, where y is the maintenance cost, x is the machine-hours, a is the fixed cost, and b is the variable cost per machine-hour.

Using the data provided in the graph, we can calculate b:

b = (nΣ(xy) - ΣxΣy) / (nΣ(x^2) - (Σx)^2) where n is the number of data points

b = ((7*188818)-(1462*893))/((7*59530)-1462^2) = 0.027

The variable cost per machine-hour is $0.027. To find the fixed cost, we can substitute the values of b and the mean of x and y into the formula:

y = a + bx
3860 = a + (0.027 * 123000)
a = 2806

Therefore, the estimate of the fixed component of maintenance cost per month is $2,806. Option B is the closest answer.

Recent Maintenance Costs of Divers Corporation Are Listed Below