Assignment (Module 9): Coefficient of Correlation

1. The Insurance Institute for Highway Safety has listed the following ratings based on
collision and comprehensive claims for nine makes of midsize four-door cars from 2014-
2016 model years. Higher numbers reflect higher claims in the collision and
comprehensive categories of coverage. Describe the direction and degree of relationship;
and at a .05 alpha, is there significant relationship between collision claim rating and
comprehensive claim rating?

Claims Collision Comprehensive X*Y 𝑋2 𝑌2

Claim Rating Claim rating
(X) (Y)
10,057 12,769 7,921
1 113 89
9,828 11,664 8,282
2 108 91
11,408 15,376 8,464
3 124 92
14,148 17,161 11,664
4 131 108
13,824 16,384 11,664
5 128 108
6,660 8,100 5,476
6 90 74
7,821 9,801 6,241
7 99 79
9,116 11,236 7,396
8 106 86
11,368 13,456 9,604
9 116 98
Total 1015 825 94,230 115,947 76,711

Ho: There is no significant relationship between collision claim rating and comprehensive claim
rating. Ha: There is significant relationship between collision claim rating and comprehensive
claim rating.
Level of significance = 0.05/2 = 0.025
Degree of freedom = 9 – 2 = 7
Critical r = ± 0.666
Decision rule: Reject the null hypothesis if r > 0.666 or < -0.666; otherwise, do not reject the null
hypothesis.

9 ሺ94,230ሻ − ሺ1,015ሻ ∗ ሺ825ሻ

= 𝟎. 𝟗𝟑𝟖𝟏
ඥ9 ሺ115,947ሻ − ሺ1,015ሻ2 ∗ 9 ሺ76,711ሻ − ሺ825ሻ2

r 2 = ሺ0.9381ሻ2 = 0.8800 or 𝟖𝟖%

Conclusion: Reject the null hypothesis, 0.9381> 0.666, which means there is significant
relationship between collision claims rating and comprehensive claim rating.
Recommendation: The computation above reveals that the collision claim rating and
comprehensive claim rating have a significant relationship. The collision claim rating is higher
than the comprehensive claim rating, as illustrated in the graph above. Nonetheless, all
automobiles should be thoroughly inspected by the Insurance Institute for Highway Safety in
order for them to be ensuring the safety of all consumers who use those automobiles Which can
assist in the reduction of accidents that result in deaths or injuries.

1. A mail-order catalog business that sells personal computer supplies, software, and
hardware maintains a centralized warehouse for the distribution of products ordered.
Management is currently examining the process distribution from the warehouse and is
interested in studying the factors that affect warehouse distribution costs. Currently, a
small handling fee is added to the order, regardless of the amount. The table below shows
the data (distribution costs in thousands of dollars and number of orders) collected for the
past 12 months. Describe the direction and degree of relationship of the two variables;
and at a .01 alpha, is there significant relationship between distribution costs and number
of orders?

Number of X*Y 𝑋2 𝑌2
Month Distribution costs
orders

212,594.25 2,803.70 16,120,225

1 52.95 4015

2 71.66 3806 272,737.96 5,135.16 14,485,636

 454,344.22 7,323.94 28,185,481
3 85.58 5309

4 63.69 4262 271,446.78 4,056.42 18,164,644

312,791.76 5,301.30 18,455,616

5 72.81 4296

6 68.44 4097 280,398.68 4,684.03 16,785,409

168,553.98 2,752.05 10,323,369

7 52.46 3213
340,332.93 5,008.39 23,126,481
8 70.77 4809

9 82.03 5237 429,591.11 6,728.92 27,426,169

352,013.48 5,533.87 22,391,824

10 74.39 4732

11 70.84 4413 312,616.92 5,018.31 19,474,569

12 54.08 2921 157,967.68 2,924.65 8,532,241

Total 819.70 51,110 3,565,389.75 57,270.73 223,471,664

Ho: There is no significant relationship between distribution costs and number of orders. Ha:
There is significant relationship between distribution costs and number of orders.
Level of significance = 0.01/2 = 0.005
Degree of freedom = 12 – 2 = 10
Critical r = ± 0.708
Decision rule: Reject the null hypothesis if r > 0.576 or < -0.576; otherwise, do not reject the null
hypothesis.

12 ሺ3,565,389.75 ሻ − ሺ819.70ሻ ∗ ሺ51,110ሻ

= 𝟎. 𝟖𝟔𝟐𝟐
ඥ12 ሺ57,270.73 ሻ − ሺ819.70ሻ2 ∗ 12 ሺ223,471,664ሻ − ሺ51,110ሻ2

r 2 = ሺ0.8622ሻ2 = 0.7434 or 𝟕𝟒. 𝟑𝟒%

Conclusion: Reject the null hypothesis, 0.8622 > 0.708, which means there is significant
relationship between distribution costs and number of orders.
Recommendation: The computation above indicates that there is a significant relationship
between distribution costs and order volume. The quantity of orders per month is influenced by
distribution costs. As a result, management should pay the appropriate handling fee. They don't
want to lose money in their business. They should also ensure that the goods they sell is of high
quality to avoid client complaints, make sure everything is working properly. Increasing the
quantity of orders is also a goal as well as the profit they made.