The Deli City Sandwich Shop tries to maintain a constant mark-up on costs. Consequently, the owner felt that the shop's cost/expense function could be stated in terms relative to sales. The cost function was determined by fitting a regression line to monthly sales and monthly total expense figures. The 18 pairs of data were taken directly from the shop's general ledger. The fitted equation was:
Total expenses = 2,400 per month + 0.60 x Sales

Required:

a. Identify the dependent variable and the independent variable (including its units of measurement) of the fitted regression equation.
b. Provide economic interpretation, units of measurement, and one example of each of the following regression estimates for a typical sandwich shop:
(i) $2,400 per month
(ii) 0.60
c. What is your best estimate of shop's monthly break-even sales?
d. If the shop plans for after-tax monthly profits of $600, what level of sales will be necessary to achieve this target? Assume a tax rate of 40%.

Question

The Deli City Sandwich Shop tries to maintain a constant mark-up on costs. Consequently, the owner felt that the shop's cost/expense function could be stated in terms relative to sales. The cost function was determined by fitting a regression line to monthly sales and monthly total expense figures. The 18 pairs of data were taken directly from the shop's general ledger. The fitted equation was:
Total expenses = 2,400 per month + 0.60 x Sales

Required:

a. Identify the dependent variable and the independent variable (including its units of measurement) of the fitted regression equation.
b. Provide economic interpretation, units of measurement, and one example of each of the following regression estimates for a typical sandwich shop:
(i) $2,400 per month
(ii) 0.60
c. What is your best estimate of shop's monthly break-even sales?
d. If the shop plans for after-tax monthly profits of $600, what level of sales will be necessary to achieve this target? Assume a tax rate of 40%.

Quizplus · Accepted Answer

The Answer of The Deli City Sandwich Shop tries to maintain a constant mark-up on costs. Consequently, the owner felt that the shop's cost/expense function could be stated in terms relative to sales. The cost function was determined by fitting a regression line to monthly sales and monthly total expense figures. The 18 pairs of data were taken directly from the shop's general ledger. The fitted equation was:
Total expenses = 2,400 per month + 0.60 x Sales

Required:

a. Identify the dependent variable and the independent variable (including its units of measurement) of the fitted regression equation.
b. Provide economic interpretation, units of measurement, and one example of each of the following regression estimates for a typical sandwich shop:
(i) $2,400 per month
(ii) 0.60
c. What is your best estimate of shop's monthly break-even sales?
d. If the shop plans for after-tax monthly profits of $600, what level of sales will be necessary to achieve this target? Assume a tax rate of 40%.

The Deli City Sandwich Shop Tries to Maintain a Constant