LEAST-SQUARES COST ESTIMATION Use these data:

Unit
SEC A & B WILL START HERE BY SEPT 17 Volume
You need to know first the following: Observations X
a) Equation for straight line: 1 4,000
2 3,000
Y = a + bX 3 2,400
4 4,400
Where: 5 2,000
Y= the value of dependent variable 6 3,600
a= a constant term 7 2,200
b= the slope of the line ∑ 21,600
X= the value of the independent variable
Step 1 ∑XY = a∑X + b∑X2
b) Some formulas: (normal equations) ∑Y = an + b∑X

1st ∑XY = a∑X + b∑X2 Step 2

(eliminate a)
2nd ∑Y = an + b∑X

Where:
∑= "the sum of"
n= number of observations

Step 3
Solve for a
 Total
Costs
Y XY X2
23,000 92,000,000 16,000,000
18,000 54,000,000 9,000,000
16,000 38,400,000 5,760,000
24,000 105,600,000 19,360,000
11,000 22,000,000 4,000,000
23,000 82,800,000 12,960,000
15,000 33,000,000 4,840,000
130,000 427,800,000 71,920,000

∑XY = a∑X + b∑X2 427,800,000 = a 21,600 + b 71,920,00 427,800,000 = a

∑Y = an + b∑X 130,000 = a 7 + b 21,600 130,000 = a

2,994,600,000 =
2,808,000,000 =
186,600,000 =

b=

b=

a7= 130,000 - 5.06 * 21,600

a7= 130,000 - 109,296.00

a7= 20,704.00

a= 20,704.00 / 7

a= 2,957.71 or 2,960
 21,600 + b 71,920,000
7 +b 21,600

151,200 a + 503,440,000 b
151,200 a + 466,560,000 b
- + 36,880,000 b
186,600,000
------------------
36,880,000

5.06