Okay, let's try a second example.

Here's a scatter plot of observations.

Again, costs are on the vertical or the y axis,

and the number of units are on the horizontal or the x axis.

Take a few minutes, give it a try and then come back,

and we'll see how you did.

I'll meet you at the light board again.

Okay, back again at our light board.

How did this one work out?

Your second turn, I bet things went well.

Let's see what you were able to come up with from this scatter plot.

Now remember, the first thing we're going to

do is we're going to take our straight edge and we're going to

draw a line through the observations to try to capture that relationship.

So I have my straight edge,

let's see, I'll put it somewhere.

This looks like it might go through the observations pretty well.

All right, now notice we have a couple of outliers in this situation,

and I didn't allow those to have any influence on where I drew

this line because they're not representative of normal circumstances.

So I focused on the rest of the data here and then drew my line there.

As I'm looking at this,

I want to see where that line crosses the y axis,

and at that point in time,

I will have an estimate of the fixed costs.

Looks like we're just under $200000 here.

So we'll call it, I don't know,

195, something like that.

Your line may be slightly higher or slightly lower because again,

we're approximating just based on eyeballing these things and using a straight edge.

So you would be somewhere in that neighborhood,

but you don't have to be exactly at the same point

that that I'm coming up with which is 195.

All right, so that would give me my estimate of the fixed cost,

and then I could pick two points on the line,

and I can pick any two points because what I'm trying to

do here is determine the slope of the line.

So any two points on that line will allow me to do that.

So I'm just going to pick a couple of points and just to

illustrate that we can use any points.

I'm not going to pick one way out here and one way out here.

Let's just, I'm going to pick this one and how about that one.

That will give us a slope,

it will give us the same slope as if I take points this far apart. All right.

So this right here looks like it's

about $420000 at about 4000 units.

And this one here looks like it's at about I would say,

530 at about 6000 units.

So that's approximately the coordinates of those two points that I've picked, okay.

Now, I'm going to calculate the slope of the line from

those two points by taking the change in the total cost of the y values,

and dividing that with a change in the number of units or the x values.

Let's do that,

530000 - 420000 /6000 units - 4000 units.

So for a change in 2000 units,

I'm seeing an increase in cost of $110000.

That is $55.

So the variable cost per unit is about $55,

according to this line that I've drawn here.

Again, your slope, the slope of your line may be slightly different depending

on whether you drew it more a flatter line or a steeper line,

but probably come somewhere in the neighborhood of 50 to 60 dollars per unit is my guess.

Now that I've done that,

I can gather all this information and I can

write the cost function that includes the slope,

the variable cost per unit,

and the y intercept which is a fixed cost per unit.

So our slope is $55 per unit,

and our y intercept,

I believe I approximated that at about $195000 per unit,

somewhere in the neighborhood of $200000 per unit.

So how did you do? I bet, well,

I bet you're in the same ballpark as this right here, so great work.