The controller of Chittenango Chain Company believes that the identification of the variable and fixed components of the firm's costs will enable the firm to make better planning and control decisions. Among the costs the controller is concerned about is the behavior of indirect-materials cost. The controller believes there is a correlation between machine hours and the amount of indirect materials used.

A member of the controller's staff has suggested that least-squares regression be used to determine the cost behavior of indirect materials. The regression equation shown below was developed from 40 pairs of observations.

S = $ 200 + $ 4 H

where S = Total monthly cost of indirect materials

H = Machine hours per month

Requirements:

1. Explain the meaning of "200" and "4" in the regression equation S = $200 + $4H

2. Calculate the estimated cost of indirect materials if 900 machine hours are to be used during a month.

3. To determine the validity of the cost estimate computed in requirement 2, what question would you ask the controller about the data used for regression? Explain your reason for asking the question thoroughly.