Using the machine hour and utility cost data for Tri-state industrial (presented in exhibit 3.6 and excluding the may outlier), the following calculations can be made :
The b (variable cost) and a (fixed cost) values for the company’s utility costs are $0.35 and $354.62, respectively. These values are close to, but not exactly the same as, the values computed using the high-low method.
By using these values, predicted costs (values) can be computed for each actual activity level. The line drawn through all of the value will be the line of best fit for the data. Because actual costs do not generally fall directly on the regression line and predicted costs naturally do, these two costs differ at their related activity level. It is acceptable for the regression line not to pass through any of the actual observation points because the line has been determined to mathematically “fit” the data