Use a spreadsheet program, or special purpose statistical software to do this problem. Use the data in application question A6, and:

A. First, use only the first eight observations. Compute the regression line that best fits the data. What is your estimate of:

a. Fixed costs?

b. Variable costs?

B. What is the R2 statistic for your regression line. Is this indicative of a good fit to the data?
C. Now, use all nine observations. Compute the regression line that best fits the data. What is your estimate of:

a. Fixed costs?

b. Variable costs?

D. Does your estimate of fixed costs seem economically realistic?
E. The data for the first eight observations were actually generated using an equation that total cost = 200 of fixed costs plus variable costs of $3 per level of input, plus or minus a random variation. Do you feel the regression line for the first eight observations (part

a) gives a reasonable estimate of this relation? Explain.
F. The ninth observation was created to have a large upward cost variance. Comment on how this affected the regression line and your estimates of fixed and variable costs.
G. What steps might you take to avoid distorted results from regression analyses?