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Cost estimation; high-low; regression: wholesaler Qs

Accounting

Cost estimation; high-low; regression: wholesaler

Qs. 1. Pipe Dream Suppliers is a wholesaler of a large variety of pipes and other plumbing needs. The company’s accountant Bobbi Esbend, has recently completed a cost study of the firm’s shipping department in which she used the weight of supplies loaded or unloaded at the company’s loading dock to quantify the department’s activity. Bobbi compiled the following data.

Month

Supplies loaded or unloaded (kg)

Shipping department costs

January

5400

$35100

February

4800

33900

March

3900

33750

April

3000

30600

May

6600

33300

June

7200

37650

July

6000

36000

August

5400

34200

September

7800

36360

October

3300

33150

November

3600

34050

December

4200

34050

Required:

2. estimate the shipping department’s cost behavior using the high-low method. Use an equation to express the results of this estimation method.

3. using the equation estimated in requirement 2, predict the shipping department’s cost for a month when loads totaling 4500 kilograms are moved.

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Solution 2:

Shipping department cost per Kg = (Cost at high level - Cost at low level) / (High level activity - Low level activity)

= ($36,360 - $30,600) / (7800 - 3000)

= $1.20 Per Kg

Fixed costs = $36,360 - (7800*$1.20) = $27,000

Cost equation: Y = $27,000 + $1.20 X

Solution 3:

Expected cost at 4500 Kg = $27,000 + $1.20*4500 = $32,400