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Cost estimation; high-low; regression: wholesaler Qs
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.
Expert Solution
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
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