Chapter 5, Problem 57P

Interpretation of Regression Results: Simple Regression

Your company provides a variety of delivery services. Management wants to know the volume of a particular delivery that would generate $10,000 per month in operating profits before taxes. The company charges $20 per delivery.

The controller’s office has estimated overhead costs at $9,000 per month for fixed costs and $12 per delivery for variable costs. You believe that the company should use regression analysis. Your analysis shows the results to be:

Monthly overhead = $26,501 + $10.70 per delivery

Your estimate was based on the following data:

The company controller is somewhat surprised that the cost estimates are so different. You have been asked to recheck your work and see if you can figure out the difference between your results and the controller’s results.

Required

1. a.      Analyze the data and your results and state your reasons for supporting or rejecting your cost equation.
2. b.      Write a report that informs management about the correct volume that will generate $10,000 per month in operating profits before taxes.