Thompson Company's total electricity cost for the past 20 months is $42,000. An activity measure on which to base estimates of electricity cost is needed. The two activity measures being considered are direct labor hours and machine hours. Direct labor hours for the period totaled 180,000, and machine hours totaled 120,000. The direct labor hour differences from average multiplied by the electricity cost differences from its average and summed [∑(xi - )(yi - )] is 5,700. The direct labor hour differences from average squared and summed [∑(xi - )2] is 28,500. The electricity cost differences from average squared and summed [∑(yi - )2] is 1,264. The machine hour differences from average multiplied by the electricity cost differences from its average and summed [∑(xi - )(yi - )] is 7,000. The machine hour differences from average squared and summed [∑(xi - )2] is 50,000.
Required:
(1) Compute the coefficient of correlation, r, and the coefficient of determination, r2, for direct labor hours and electricity cost.
(2) Compute the coefficient of correlation, r, and the coefficient of determination, r2, for machine hours and electricity cost.
(3) Which activity measure should be used for the estimation of fixed and variable electricity cost? Explain.
(4) Compute the variable electricity cost rate and the fixed cost, using the method of least squares.