Central Machinery Ltd. is preparing its budget for the year ending 30 June 2004. For the fuel expens

Central Machinery Ltd. is preparing its budget for the year ending 30 June 2004. For the fuel expenses consumption it is decided to estimate an equation of the form, y = a + bx, where y is the total expense at an activity level x, a is the fixed expense and b is the rate of variable cost. The following information relate to the year ended 30 June 2003:MonthMachine hoursFuel Oil expenseMonthMachine hoursFuel oil expense2003(Sh. ‘000’)(Sh. ‘000’)2004(Sh. ‘000’)(Sh. ‘000’)JulyAugustSeptemberOctoberNovemberDecember343034394232640620620590500530JanuaryFebruaryMarchAprilMayJune262631354348500500530550580680The annual total and monthly average figures for the year ended 30 June 2003 were as follows:Machine hoursFuel oil expense(‘000’)(Sh. ‘000’)Annual totalMonthly average420356,840570 Required:(i) Using the high-low method, estimate and interpret the fixed and variable cost elements of the fuel oil expense. (5 marks)(ii) Using the results in (i) above, predict the fuel oil expense for November 2004 if experience indicates that 41,000 machine hours will be used. (2 marks)(iii) Briefly explain any two limitations of High-low method of cost estimation that may be overcome by using simple linear regression analysis. (4 marks)(iv) By using simple linear regression analysis it is established that the co-efficient of determination arising from the data is approximately 0.25. Interpret the significance of this fact. (3 marks)

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