Estimating Machine Repair Costs (LO3)

In an attempt to determine the best basis for predicting machine repair costs, the production supervisor accumulated daily information on these costs and production over a one-month period. Applying simple regression analysis to the data, she obtained the following estimating equation:

Y = $800 — $2.601X :
where Y = total daily machine repair costs X = daily production in units Because of the negative relationship between repair costs and production, she was somewhat skeptical of the results, even though the R-squared was a respectable 0.765.
Required

a. What is the most likely explanation of the negative variable costs?

b. Suggest an alternative procedure for estimating machine repair costs that might prove more useful.

 (p. 74)