A Canadian bank has many branch offices. To help prepare budgets for its branch offices, the bank hired the services of a consulting firm. The consulting firm studied the past behavior of different types of costs at several of the branches and, using regression analysis, developed mathematical models to predict costs at the branch offices. One of the regression models developed was:

The consulting company reported that the coefficient of determination (R?) of the regression equation was 0.

96. The standard error of the regression was reported to be $50. In the report, they explained that a standard error of $50 implied that, with the probability of 0.

95, the actual check processing cost would lie within + $98 of that estimated by the model. The report also included the following information about the 35 branch banks from which the data were gathered to develop the model:

Required:

a. Interpret the terms 5H and 0.01P in the regression model.

b. During a particular month, one of the branch offices used 250 labor-hours to process 120,000 checks and incurred a check processing cost of $2,870. Explain clearly how to use the regression model to determine whether the operations of the check processing department at this branch office should be examined in more detail. (Please note. You are not asked to evaluate this branch’s operations but only to explain how the regression model and associated analysis could be used in determining the need for further examination.)

c. The bank is planning to open a new branch office. Management estimates that the labor-hours per month will average 1,200 and that the checks processed per month will average 650,000. Management plans to use the preceding model for estimating the check processing cost at this new branch. Identify relevant considerations in using the model developed for the 35 branch banks to estimate the costs for the new branch.

Transcribed Image Text:

where CPC = 200 + 5H + 0.01P CPC = Check processing cost per month H P = = Labor-hours per month in the check processing department Number of checks processed per month