Your Client's Company Wants to Determine the Relationship Between Its

question 371

Multiple Choice

Your client's company wants to determine the relationship between its monthly operating costs and a potential cost driver. The output of regression analysis showed the following information:
Intercept Coefficient = 89,620
X Variable 1 Coefficient = 62.53
R-square = 0.9852
Should your client use this information to predict monthly operating costs?

• A) Yes, because R-square is so high.
• B) No, because R-square is so high.
• C) Yes, because regression analysis can be relied upon.
• D) There is not enough information to make this prediction.

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Definitions:

Vertical Analysis

A technique for analyzing financial statements where every item under the three key account categories (assets, liabilities, and equity) on a balance sheet is shown as a percentage of the total for each category.

Operating Expenses

Costs related to the operation of a business, excluding the cost of goods sold, financing costs, and taxes.

Net Sales

The total income generated from sales by a firm, after reducing it for returns, discounts, and allowances due to damaged or absent goods.

Inventory Turnover

A proportion indicating the frequency at which a company's stock is sold and replenished during a given timeframe.