QUESTION THREE

Odino chemicals limited are aware that its power costs are semi variable cost and over the last six months these costs have shown the following relationship with a standard measure of output.

Month

Output (standard units)

Total power costs 000

1

12

6.2

2

18

8.0

3

19

8.6

4

20

10.4

5

24

10.2

6

30

12.4

Required

Using the method of least squares, determine an appropriate linear relationship between total power costs and output

If total power costs are related to both output and time (as measured by the number of the month) the following least squares regression equation is obtained

Power costs = 4.42 + (0.82) output + (0.10) month

Where the regression coefficients (i.e. 0.82 and 0.10) have t values 2.64 and 0.60 respectively and coefficient of multiple correlation amounts to 0.976

Compare the relative merits of this fitted relationship with one you determine in (a). Explain (without doing any further analysis) how you might use the data to forecast total power costs in seven months.