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Method of Least Squares, Developing and Using the Cost Formula

The method of least squares was used to develop a cost equation to predict the cost of receiving purchased parts at a video game manufacturer. Ninety-six data points from monthly data were used for the regression. The following computer output was received:

Intercept	161,000
Slope	215

The cost driver used was number of parts inspected.

Required:

1. What is the cost formula?

Total cost of receiving = $fill in the blank 1 + ( $fill in the blank 2

Fixed cost per monthNumber of parts inspectedVariable rate

)

2. Using the cost formula from Requirement 1, identify each of the following: independent variable, dependent variable, Variable rate per professional hour, and fixed cost per month.

Independent variable	$210$147,400Number of parts inspectedTotal cost of receiving
Dependent variable	$210$147,400Number of parts inspectedTotal cost of receiving
Variable rate per professional hour	$215$161,000Number of parts inspectedTotal cost of receiving	per part inspected
Fixed cost per month	$215$161,000Number of parts inspectedTotal cost of receiving

3. Using the cost formula, predict the cost of receiving for a month in which 6,800 parts are inspected.

Total cost of receiving = $fill in the blank 8