Least Squares Regression Method

Learning Outcomes

  • Use the least-squares regression method to create a regression line on a graph of cost data

This method uses all of the data available to separate the fixed and variable portions of a mixed cost. A regression line is fitted into the data using the following formula:

Y= a + bX

Y= Maintenance costs

X= Number of dogs groomed

a= the total fixed cost

b= the variable cost per unit of activity

So using a calculator available HERE.

If you use the data from the dog groomer example you should be able to calculate the following chart:

A graph depicting a regression line with "independent" on the x-axis and "dependent" on the y-axis. The graph is trending in a linear progression.

This method is more accurate, using all of the available data. The table below shows the difference in calculation using the two methods:

Costs High-low Least Squares Regression Method
Variable cost estimate per dog groomed $.080 $.074
Fixed cost estimate per month $340 $362.24

 

Practice Questions

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