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Illustration of Coefficient of Determination
The production manager of XYZ Company is concerned about the apparent fluctuation in efficiency and wants to determine how labour costs (in Sh.) are associated to volume. The following data presents results of the 12 most recent weeks.
r2 = [12(132211) – (430) (3549)]2 [12 (16234) – (430)2] {12 (1104005 – (3549)2} = 0.565About 56.5% of the variations in labour cost can be explained by variations in units produced while about 43.5% of the variation in labour cost is explained by other independent variables and the error term.
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