Question: Method of Least Squares Refer to the information for Farnsworth Company for the first 10 months of data on receiving orders and receiving cost. Now suppose that Tracy has gathered two more months of data:

Month      Receiving Orders      Receiving cost

11               1,200                   $28,000

12                  950                    17,500

Required: 1. Run two regressions using a computer spreadsheet program such as Excel. First, use the method of least squares on the first 10 months of data. Then, use the method of least squares on all 12 months of data. Write down the results for the intercept, slope, and R2 for each regression. Compare the results.

2. Conceptual Connection: Prepare a scattergraph using all 12 months of data. Do any points appear to be outliers? Suppose Tracy has learned that the factory suffered severe storm damage during Month 11 that required extensive repairs to the receiving area-including major repairs on a forklift. These expenses, included in Month 11 receiving costs, are not expected to recur. What step might Tracy, using her judgment, take to amend the results from the method of least squares?

3. Conceptual Connection: Re-run the method of least squares, using all the data except for Month 11. (You should now have 11 months of data.) Prepare a cost formula for receiving based on these results, and calculate the predicted receiving cost for a month with 1,450 receiving orders. Discuss the results from this regression versus those from the regression for 12 months of data.