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Business Maths Lecture 02
Business Maths Lecture 02
Business Mathematics
Page 1
Lecture Notes 2
Business Mathematics
SCATTER DIAGRAM Scatter diagram is where information about two variables that are considered to be related in some way can be plotted. In plotting such variables, we need to consider which one is independent variable (X) and which one is dependent variable (Y).
The least square method, like the high -low method is used to predict linear relationship between two variables but unlike the high-low method, it uses all past data to calculate the line of best fit.
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Lecture Notes 2
Business Mathematics
Total cost
X x x x x x x x x x
x x
Level of Activity
a = y - bx n b= n
b must be calculated first as it is needed to calculate a n= the number of pairs of x, y values (i.e. the number of points on the scatter graph) = Sum of, i.e. add all the numbers under one column to obtain the total under such column.
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Business Mathematics
The relationship derived from linear regression will only be of use in prediction if there is a strong linear correlation (relationship) between the variables (the line is a good fit)
CORRELATION COEFFICIENT (R) Correlation coefficient (r) is used to measure the strength of correlation or the strength of the relationship between two variables. Peasons correlation coefficient is also known as Product moment Correlation coefficient, (r) is completed as:
n xy x y R= (n x2 (x)2)(n y2 (y)2)
Perfect - ve cc
strong - ve cc
weak - ve cc
no cc
weak + ve cc
strong + ve cc
perfect + ve cc
-1
+1
Note - ve cc = negative correlation + ve cc = positive correlation (this implies that the two variables are inversely related) (this implies that the two variables are directly related)
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Lecture Notes 2
ILLUSTRATION Cost Predictions
Business Mathematics
The following table shows the number of units of a good produced and the total cost incurred for the first halve of the year from January to June. Months January February March April May June (I) (II) (III) Units Produced 10 13 12 16 11 15 Total cost 200 228 219 260 212 247
Calculate the regression line for y on x Find the correlation coefficient Use the high-low method, to derive the line of best fit
SOLUTION Cost Predictions (a) Using regression line y on x, To determine X = independent variable, and Y = dependent variable, Since total cost depends on the number of units produced, total cost = y; and number of units = x Months Jan Units (X) 10 Total cost (Y) 200 XY 10 x 200 = 2,000 Feb March April May June Total () 13 12 16 11 15 X = 77 228 219 260 212 247 Y = XY = X2 Y2 X2 10 x 10 = 200 Y2 200 x 200 = 40,000
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Lecture Notes 2
Using the regression formula above; The variable cost (b) = b = nxyxy n x2 ( x)2 b = 6 (17,789) (77) (1,366) 6 (1,015) (77)2 b = (1552/161) = 9.64
Business Mathematics
Using b= 9.64, and substituting into a, we obtain a = [(1,366) / 6] [9.64 (77)] / 6 = 103.95
R = 1552/1556) = 0.997
(c) Using high-low method to derive the line of best fit Variable cost per unit = (260 200) / (16 10) = 10 per unit TC = FC + VC (X) Where X = number of units: Using: Total cost (TC) = 260; Variable cost per unit (VC) = 10 and X = 16
To obtain total fixed cost (FC), 260 = FC + 10 (16) FC = 260 -160 = 100
Using high-low method to derive the line of best fit, TC = 100 + 10X
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