Chapter 14 C14-30

Estimating Machine Repair Costs

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

Y = $800 - $2.60X

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

QUESTION 1

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