A manufacturer produces custom metal blanks that are used by its customers for computer-aided machining. The customer sends a design via computer, and the manufacturer comes up with an estimated cost per unit, which is then used to determine a price for the customer. The data for the analysis were sampled from the accounting records of 195 orders that were filled during the previous three months.
(a) Fit the multiple regression of Average Cost on Material Cost and Labor Hours. Both explanatory variables are per unit produced. Do both explanatory variables improve the ft of the model that uses the other?
(b) The estimated slope for labor hours per unit is much larger than the slope for material cost per unit. Does this difference mean that labor costs form a larger proportion of production costs than material costs?
(c) Find the variance inflation factors for both explanatory variables. Interpret the value that you obtain.
(d) Suppose that you formulated this regression using total cost of each production run rather than average cost per unit. Would collinearity have been a problem in this model? Explain.