BEC 2 Forecasting and Projection

Question 1

What is linear regression?

Answer 1

Linear regression is a method for studying the relationship between 2 or more variable. Linear regression is used to predict the value of a dependent variable (e.g. total cost (y) corresponding to given value of the independent variables (e.g. fixed costs (A), variable cost per unit (B), and production expression in units (x))

Simple regression involves only one independent variable.

Multiple regression involves more than one independent variable.

Question 2

Explain the coefficient of correlation.

Answer 2

The coefficient of correlation (r) measures the strength of the linear relationship between the independent variable (x) and the dependent variable (y)

The range is from -1.00 to 1.00 with -1.00 indicating perfect inverse correlation, 1.00 indicating perfect positive correlation, and 0.00 indicating no correlation.

Question 3

Explain the coefficient of determination.

Answer 3

The coefficient of determination (R^2) is the proportion of the total variation in the dependent variable (y_ explained by the independent variable (x).

The range lies between zero and one, with a higher R^2 representing a better fit for a regression line.

Question 4

Explain the concept of a learning curve.

Answer 4

Learning curve analysis is based on the premise that as workers become more familar with a specific task, the per-unit labor hours will decline an experience is gained and production becomes more efficient.

The calculation begins with the first unit/batch. As cumulative production doubles (from one unit to two units, to four units, to eight units, ect), cumulative average time per unit falls to fixed percentage (the learning curve rate) of the previous average time.

Question 5

Describe the high-low method and how it is applied.

Answer 5

The high-low method is a technique that is used to estimate the fixed and variable portions of total costs.

To apply the high-low method:

1. Divide the difference between the high and low dollar total costs by the difference in high and low volumes to obtain the variable cost per unit.
2. Use either the high volume or the low volume to calculate the variable costs by multiplying the volume times the variable cost per units.
3. Subtract the total calculated variable cost from total costs to obtain fixed costs.