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(solution) Interpreting regression results. Spirit Freightways is a leader


Interpreting regression results. Spirit Freightways is a leader in transporting agricultural products in the western provinces of Canada. Reese Brown, a financial analyst at Spirit Freightways, is studying the behavior of transportation costs for budgeting purposes. Transportation costs at Spirit are of two types: (a) operating costs (such as labor and fuel) and (b) maintenance costs (primarily overhaul of vehicles).

Brown gathers monthly data on each type of cost, as well as the total freight miles traveled by Spirit vehicles in each month. The data collected are shown below (all in thousands):

  Month

Operating Costs

Maintenance Costs

Freight Miles

January

$ 942

$ 974

1,710

February

 1,008

 776

2,655

March

 1,218

 686

2,705

April

 1,380

 694

4,220

May

 1,484

 588

4,660

June

 1,548

 422

4,455

July

 1,568

 352

4,435

August

 1,972

 420

4,990

September

 1,190

 564

2,490

October

 1,302

 788

2,610

November

  962

 762

2,240

December

  772

1,028 

1,490


Required


  • 1.Conduct a regression using the monthly data of operating costs on freight miles. You should obtain the following result:Regression:Operating costs =a+ (b× Number of freight miles)

    Variable

    Coefficient

    Standard Error

    t-Value

    Constant

    $445.76

    $112.97

    3.95

    Independent variable: No. of freight miles

    $  0.26

    $  0.03

    7.83

    r2 = 0.86; Durbin-Watson statistic = 2.18

     

     

     

  • 2.Plot the data and regression line for the above estimation. Evaluate the regression using the criteria of economic plausibility, goodness of fit, and slope of the regression line.
  • 3.Brown expects Spirit to generate, on average, 3,600 freight miles each month next year. How much in operating costs should Brown budget for next year?
  • 4.Name three variables, other than freight miles, that Brown might expect to be important cost drivers for Spirit?s operating costs.
  • 5.Brown next conducts a regression using the monthly data of maintenance costs on freight miles. Verify that she obtained the following result:Regression:Maintenance costs =a+ (b× Number of freight miles)

    Variable

    Coefficient

    Standard Error

    t -Value

    Constant

    $1,170.57

    $91.07

    12.85

    Independent variable: No. of freight miles

    $  ?0.15

    $ 0.03

    ?5.83

    r2 = 0.77; Durbin-Watson statistic = 1.94

     

     

     

  • 6.Provide a reasoned explanation for the observed sign on the cost driver variable in the maintenance cost regression. What alternative data or alternative regression specifications would you like to use to better capture the above relationship?

 


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