EXERCISE 5-12 (30 MINUTES)

1. Least-squares regression analysis:

Month Miles Driven

(000) (X) Total Cost

January 4 $3,000

(Y)

February 8 $3,700 March 7 $3,300 April 12 $4,000 May 6 $3,300 June 11 $3,900 July 14 $4,200 August 10 $3,600 September 13 $4,100 October 15 $4,400 Statistical software or a spreadsheet application such as Excel can be used to compute the slope and intercept of the least-squares regression line for the above data. The results are: Intercept (fixed cost per month) ... $2,542 Slope (variable cost per thousand miles)... $120.83 R

²

... 0.96 Therefore, the variable cost of operating the fleet of autos is $120.83 per thousand miles driven or $0.121 per mile (rounded) and the fixed cost is $2,542 per month. Note that the R

²

is 0.96, which means that 96% of the variation in the cost of operating the fleet of autos is explained by the number of miles driven. This is a very high R

²

and indicates a very good fit.