1 Albatross Pic, the Australian subsidiary of a British packaging company , is preparing its budget for the year to 30th June 1980 . In respect of fuel oil consumption , it is desired to estimate an equation of the form y = a + bx, where y is the total expense at an activity level x, a is the fixed expense and b is the rate of variable cost .

The following data relate to the year to 30th June 1979:

The annual total and monthly average figures for 1978!79 were as follows :

You are required to:

(a ) estimate fixed and variable elements of fuel oil expense from the above data by both of the following methods :
(i) high and low points (4 marks)
(ii) least-squares regression analysis (8 marks)

(b) compare briefly the methods used in

(a) above in relation to the task of estimating fixed and variable elements of a semi-variable cost; (7 marks)

(c) accepting that the coefficient of determination r2 arising from the data given in the question is approximately 0.25 , interpret the significance of this fact.

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Year Month 1978 July Machine hours (000) Fuel oil expense ($) Year Month Machine hours (000) Fuel oil expense ($) 34 August September 34 October November 42 December 38332 640 1979 January 30 620 February 620 March 31 39 590 April 500 May 32 530 June 22344 26 500 26 500 530 35 550 580 48 680