Multiple regression (continuation of 10-42). After further discussion, Julie and Rhett wonder if…

Multiple regression (continuation of 10-42). After further discussion, Julie and Rhett wonder if they should view both the number of procedures and number of patient-hours as cost drivers in a multiple regression estimation in order to best understand Apollo’s medical supplies costs.


1. Conduct a multiple regression to estimate the regression equation for medical supplies costs using both number of procedures and number of patient-hours as independent variables. You should obtain the following result:

2. Evaluate the multiple regression output using the criteria of economic plausibility goodness of fit, significance of independent variables, and specification of estimation assumptions.

3. What potential issues could arise in multiple regression analysis that are not present in simple regression models? Is there evidence of such difficulties in the multiple regression presented in this problem? Explain.

4. Which of the regression models from Problems 10-42 and 10-43 would you recommend Julie Chen use? Explain.

Problems 10-42

Regression; choosing among models. Apollo Hospital specializes in outpatient surgeries for relatively minor procedures. Apollo is a non-profit institution and places great emphasis on controlling costs in order to provide services to the community in an efficient manner.
Apollo’s CFO, Julie Chen, has been concerned of late about the hospital’s consumption of medical supplies. To better understand the behavior of this cost, Julie consults with Rhett Bratt, the person responsible for Apollo’s cost system. After some discussion, Julie and Rhett conclude that there are two potential cost drivers for the hospital’s medical supplies costs. The first driver is the total number of procedures performed. The second is the number of patient-hours generated by Apollo. Julie and Rhett view the latter as a potentially better cost driver because the hospital does perform a variety of procedures, some more complex than others.
Rhett provides the following data relating to the past year to Julie.


1. Estimate the regression equation for (a) medical supplies costs and number of procedures and (b) medical supplies costs and number of patient-hours. You should obtain the following results:

2. On different graphs plot the data and the regression lines for each of the following cost functions:

a. Medical supplies costs = a + (b  Number of procedures)

b. Medical supplies costs = a + (b  Number of patient-hours)

3. Evaluate the regression models for “Number of procedures” and “Number of patient-hours” as the cost driver according to the format of Exhibit 10-18 (page 406).

4. Based on your analysis, which cost driver should Julie Chen adopt for Apollo Hospital? Explain your answer.

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