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C 14-30 Estimating Machine Repair Costs

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 $2.60X

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.