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10 Linear Regression Analysis Notes

Linear regression analysis establishes the equation of a straight line relationship between dependent and independent variables using data points. The equation is y = a + bx, where a is the y-intercept and b is the slope. The values of a and b can be calculated from the sums of x, y, xy, and x^2 using the given formulas. Once determined, the linear equation can be used to forecast future dependent variable values based on independent variable estimates. An example calculates the linear equation relating electricity units used to total electricity charge for a business.

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14 views

10 Linear Regression Analysis Notes

Linear regression analysis establishes the equation of a straight line relationship between dependent and independent variables using data points. The equation is y = a + bx, where a is the y-intercept and b is the slope. The values of a and b can be calculated from the sums of x, y, xy, and x^2 using the given formulas. Once determined, the linear equation can be used to forecast future dependent variable values based on independent variable estimates. An example calculates the linear equation relating electricity units used to total electricity charge for a business.

Uploaded by

getcultured69
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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MA - Budgeting

Linear Regression Analysis

Linear regression analysis is a statistical technique used to establish the equation of a straight line, or a linear
function.

The equation of a straight line can be written as follows:

𝑦 = 𝑎 + 𝑏𝑥

y - dependent variable;
x - independent variable;
a - point at which the straight line crosses the y axis;
b - gradient of a straight line.

Once a set of data is plotted on a graph, and a line of best fit is drawn through the points on the scatter diagram,
then the equation of this straight line can be established using the following equations:

𝛴𝑦 𝛴𝑥 𝑛𝛴𝑥𝑦 − 𝛴𝑥𝛴𝑦
𝑎 = −𝑏 𝑏 =
𝑛 𝑛 𝑛𝛴𝑥 2 − (𝛴𝑥)2

Note: 𝛴(sigma) is a sign used to mean ‘the sum of’.

Once a and b are determined, it is possible to forecast future costs and revenues by establishing the linear
function. We can use this equation in order to determine a value of dependent variable (y), when a value of
independent variable (x) is given (estimated or budgeted).

Note: Under this method the value of a forecasted dependent variable is the same as the value that is calculated
by extrapolating a scatter diagram of the same data.

Example 1:

The following information relates to the number of electricity units consumed by a business and the total
electricity charge:
Month Electricity units used Total electricity charge ($)
x y

1 120 14.00

2 140 15.00

3 90 12.50

4 110 13.50

Establish the equation of the linear function.

Solution:

Month Electricity units used Total electricity charge ($) xy x2


x y

1 120 14.00 1,680 14,400

2 140 15.00 2,100 19,600

3 90 12.50 1,125 8,100

4 110 13.50 1,485 12,100

Total 460 55.00 6,390 54,200

𝛴𝑦= $55

𝛴𝑥= 460

𝛴𝑥𝑦= 6,390

𝛴𝑥2 = 54,200

𝑛𝛴𝑥𝑦 − 𝛴𝑥𝛴𝑦
𝑏 =
𝑛𝛴𝑥 2 − (𝛴𝑥)2

4 ✕ 6,390 − 55 ✕ 460
𝑏 =
4 ✕ 54,200 − (460)2

𝑏 = $0.05

𝛴𝑦 𝛴𝑥
𝑎 = −𝑏
𝑛 𝑛

$55 460
𝑎 = − 0.05
4 4
𝑎 = $8

y = $8 + 0.05x

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