TABLE 12-1 A Large National Bank Charges Local Companies for Using Their

question 38

Multiple Choice

TABLE 12-1
A large national bank charges local companies for using their services. A bank official reported the results of a regression analysis designed to predict the bank's charges (Y) measured in dollars per month for services rendered to local companies. One independent variable used to predict service charges to a company is the company's sales revenue (X) measured in millions of dollars. Data for 21 companies who use the bank's services were used to fit the model:
Y1 - β0 + β1X1 + εi
The results of the simple linear regression are provided below.
Y = -2,700 + 20 X, SYX = 65, two-tail p-value = 0.034 (for testing β1)
-Referring to Table 12-1, interpret the estimate of σ, the standard deviation of the random error term (standard error of the estimate) in the model.

• A) About 95% of the observed service charges fall within $65 of the least squares line.
• B) About 95% of the observed service charges equal their corresponding predicted values.
• C) About 95% of the observed service charges fall within $130 of the least squares line.
• D) For every $1 million increase in sales revenue, we expect a service charge to increase $65.

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Definitions:

Target Cost

The desired cost of a product as determined by its expected selling price minus desired profit, aimed to ensure competitiveness and profitability.

Preventive Maintenance

Maintenance activities carried out regularly on equipment to prevent unexpected failures.

Performance Capabilities

The ability of a company or product to function effectively, often measured against predetermined standards or competitor offerings.

Value-Based Pricing

A pricing strategy where prices are set primarily based on the perceived value to the customer rather than based on the cost of the product or historical prices.