Question

Some accounting firms give the client an option to pay a fee when the tax return is completed that guarantees tax advices and support from the accountant if the client were audited. A large accounting firm is trying to determine what fee to charge for next​year's returns. In previous​ years, the actual mean cost to the firm for attending a client audit session was $690. To determine if this cost has​ changed, the firm randomly samples 35 client audit fees. The sample mean audit cost was $700 with a standard deviation of $65.

Required:
a. Develop a 90% confidence interval estimate for the mean audit cost.
b. Based on your confidence​ interval, what do you think of the claim that the mean cost has​ changed?

1. The interval does not contain the historical data mean $690, which supports claim the mean cost has changed.
2. The interval contains historical data mean $690, which supports the claim the mean cost has changed.
3. The interval does not contains historical data mean $690, which does not support the claim it has changed.
4. The interval contains historical data mean $690, which does not support the claim the mean cost has changed.

Answer 1

a) $700+/-$18.07

Therefore,the 90% confidence interval (a,b)

= ($681.93, $718.07)

b) 4. The interval contains historical data mean $690, which does not support the claim the mean cost has changed.

Explanation:

Confidence interval can be defined as a range of values so defined that there is a specified probability that the value of a parameter lies within it.

The confidence interval of a statistical data can be written as.

x+/-zr/√n

Given that;

Mean x = $700

Standard deviation r = $65

Number of samples n = 35

Confidence interval = 90%

z(at 90% confidence) = 1.645

a. Develop a 90% confidence interval estimate for the mean audit cost.

Substituting the values we have;

$700+/-1.645($65/√35)

$700+/-1.645($10.98700531147)

$700+/-$18.07362373736

$700+/-$18.07

Therefore,the 90% confidence interval (a,b) = ($681.93, $718.07)

b) Since, $690 is contained between the 90% confidence interval of ($681.93, $718.07). It implies that the mean cost has not changed.

4. The interval contains historical data mean $690, which does not support the claim the mean cost has changed.