Case 9: Cost Estimation

E&E Controls is a multi-national manufacturer of materials

handling, accessory, and control equipment. During the past year,
E&E has had the following cost experience following introduction of
a new fluid control device:

E&E Constrols, Ltd.

Output Cost 1 ($) Cost 2 ($) Cost 3 ($)

0 17,000 11,000 -
100 10,000 7,000 1,000
200 8,000 13,000 2,000
500 20,000 10,000 6,000
900 14,000 12,000 10,000
1,000 8,000 19,000 11,000
1,200 15,000 16,000 13,000
1,300 14,000 15,000 15,000
1,400 6,000 16,000 18,000
1,500 18,000 23,000 19,000
1,700 8,000 21,000 22,000
1,900 16,000 25,000 24,000

A. Calculate the mean (average observation), median (middle

observation), range, and standard deviation for output and each
cost category variable.

B. Describe each cost category as fixed or variable based upon the

following simple linear cost function regression results where
COST is the dependent Y variable and OUTPUT is the independent
X variable.
 The first simple regression equation is

COST1 = $13,123-$0.30OUTPUT.

STD. t-
PREDICTOR COEFFICIENT DEV. RATIO p
Constant 13123 2635 4.98 0.000
2.28
OUTPUT -0.297 5 -0.13 0.899
S.E.E. = $4,871
R-squared = 0.2%
Adjusted R-squared = 0.0%
F-statistic = 0.02 (p = 0.899)      

The second simple regression equation is

COST2 = $8,455+$7.40OUTPUT.

t-
COEFFICIEN STD. RATI
PREDICTOR T DEV. O p
0.00
Constant 8455 1550 5.45 0
1.34 0.00
OUTPUT 7.397 5 5.50 0
S.E.E. = $2,866
R-squared = 75.2%
Adjusted R-squared = 72.7%
F-statistic = 30.26 (p = 0.000)      
 The third simple regression equation is

COST3 = $662+12.7OUTPUT

t-
COEFFICIEN STD. RATI
PREDICTOR T DEV. O p
0.20
Constant -661.5 488.4 -1.35 5
0.423 0.00
OUTPUT 12.7298 6 30.05 0
S.E.E. = $902.8
R-squared = 98.9%
Adjusted R-squared = 98.8%
F-statistic = 903.1 (p = 0.000)      

C. Are the quadratic and cubic cost functions likely to improve upon
the level of fit provided by the linear cost function? Is it likely that
such models would reduce the overall level of cost explanation?

D. What other independent X variables might the analyst like to

include in such a cost analysis?