Chapter 6.A, Problem 10P

Least-Squares Regression Method; Scattergraph; Cost Behavior L06−1 1

Professor John Morton bas just been appointed chairperson of the Finance Department at Westland University. In reviewing the departments cost records, Professor Morton has found the following total cost associated with Finance 101 over the last five terms:

Professor Moron knows that there are some variable costs, such as amounts paid to graduate assistants, associated with the course, He would like to have the variable and fixed costs separated for planning purposes.
Required:
1. Prepare a scattergraph plot. (Plot total cost on the vertical axis and number of sections offered on the horizontal axis.)
2. Using the least-squares regression method, estimate the stable cost per section and the total fixed cost per term for Finance 101. Express these estimates in the form Y= a + bx .
3. Assume that because of the small number of sections offered during the Winter Term this war, Professor Morton will have to offer eight sections of Finance 101 during the Fall Term. Compute the expected total cost for Finance 101. Can you see any problem with using the cost formula from (2) above to derive this total cost figure? Explain.