Do you remember this function: y = a + bx It can be used to predict costs in different areas of organizations. In the beginning, let us took about what is mean the above letters. a = Fixed costs. x = Units to be produced. b = Variable costs.
And it has been established based on past information, where the company can use the high and low methods to compute. But remember that this function can cover a certain range such as production from 100 unit to 1,000 units only. Can not be more or less than this range. A clear example of this case is when the company try to predict the costs of the electricity where this cost contains variable costs as well as fixed costs at the same time, mean it is a mixed cost Let me explain what is mean mixed costs in electricity bills. It is mean that there are fixed costs that came in the bills even if there are a consuming of the electricity or not, also there are variable costs based on how much kilowatts consumed in the production process. and also the electricity bills came with different slices it is mean when the company consume more it will be charged more. So if the company decided to produce 1,500 and used the function that has been established based on a range from 100 units to 1,000 units they mostly are getting wrong predictions of what the costs can be. In this case, the regression analysis function needs to be adjusted to reflect the new data.
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