By using simple linear regression analysis it is


Central Machinery Ltd. is preparing its budget for the year ending 30 June 2004.  For the fuel expenses consumption it is decided to estimate an equation of the form, y = a + bx, where y is the total expense at an activity level x, a is the fixed expense and b is the rate of variable cost.

The following information relate to the year ended 30 June 2003:

Month

Machine hours

Fuel Oil expense

Month

Machine hours

Fuel oil expense

2003

(Sh. '000')

(Sh. '000')

2004

(Sh. '000')

(Sh. '000')

July

August

September

October

November

December

34

30

34

39

42

32

640

620

620

590

500

530

January

February

March

April

May

June

26

26

31

35

43

48

500

500

530

550

580

680

The annual total and monthly average figures for the year ended 30 June 2003 were as follows:


Machine hours

Fuel oil expense


('000')

(Sh. '000')

Annual total

Monthly average

420

35

6,840

570

Required:

(i)  Using the high-low method, estimate and interpret the fixed and variable cost elements of the fuel oil expense.

(ii) Using the results in (i) above, predict the fuel oil expense for November 2004 if experience indicates that 41,000 machine hours will be used.

(iii)  Briefly explain any two limitations of High-low method of cost estimation that may be overcome by using simple linear regression analysis.

(iv) By using simple linear regression analysis it is established that the co-efficient of determination arising from the data is approximately 0.25.  Interpret the significance of this fact.

Solution Preview :

Prepared by a verified Expert
Finance Basics: By using simple linear regression analysis it is
Reference No:- TGS01562836

Now Priced at $20 (50% Discount)

Recommended (94%)

Rated (4.6/5)