Unicorn Freightways is a leader in transporting agricultural products in the western provinces of Italy. Rita Bonnie, a financial analyst at Unicorn Freightways, is studying the behavior of transportation costs for budgeting purposes. Transportation costs at Unicorn are of two types: 

(1) Operating costs (such as labor and fuel) and 

(2) Maintenance costs (primarily overhaul of vehicles). Bonnie gathers monthly data on each type of cost, as well as the total freight miles traveled by Unicorn vehicles in each month. The data collected are shown below (all in thousands):

Required

1. Conduct a regression using the monthly data of operating costs on freight miles. You should obtain the following result:

Regression: Operating costs = a + (b * Number of freight miles)

2. Plot the data and regression line for the above estimation. Evaluate the regression using the criteria of economic plausibility, goodness of fit, and slope of the regression line.
3. Bonnie expects Unicorn to generate, on average, 3,600 freight miles each month next year. How much in operating costs should Brown budget for next year?
4. Name three variables, other than freight miles, that Bonnie might expect to be important cost drivers for Unicorn’s operating costs.
5. Bonnie next conducts a regression using the monthly data of maintenance costs on freight miles. Verify that she obtained the following result:

Regression: Maintenance costs = a + (b * Number of freight miles)

6. Provide a reasoned explanation for the observed sign on the cost driver variable in the maintenance cost regression. What alternative data or alternative regression specifications would you like to use to better capture the above relationship?

Transcribed Image Text:

Month January February March April May June July August September October November December Operating Costs 942 1,008 1,218 1,380 1,484 1,548 1,568 1,972 1,190 1,302 962 772 Maintenance Costs 974 776 686 694 588 422 352 420 564 788 762 1,028 Freight Miles 1,710 2,655 2,705 4,220 4,660 4,455 4,435 4,990 2,990 2,610 2,240 1,490