Question

htlowb age 224 of 734 Contents costs incurred, along with the number of maintenance and repair jobs completed each month The data are shown below: Jobs Month January February March... April...... May June, July August.... September... October.. Repair Costs $22.000 $18.000 $7600 $20,000 $24,000 $22.400 $ 16,000 $ 12,800 $ 13,600 $ 9600 Required: 1. Using Microsoft Excel, prepare a scattergram by plotting jobs performed and repair costs on a graph. Fit a straight line to the plotted points using the "add trendline feature in Microsoft Excel. Do repair costs appear to be related to the number of jobs completed in a month? Explain. Using the high-low method, estimate a cost formula for repair costs. Express the formula in the form Y= a + bX. 3. Now assume the manager wants to predict costs for a month where 600 jobs will be com- pleted. Should you use the formula developed above to predict costs for a 600-job month? Why or why not? PROBLEM 3-15 High-Low Method: Predicting Cost |LO1. LO2]

Answer 1

Part 1

Part 2

High-Low Method	Number of Jobs	Repair costs
High activity level	260	24000
Low activity level	80	9600
Change	180	14400

Variable cost = (cost of highest activity – cost of lowest activity)/(highest activity – lowest activity) = (24000-9600)/(260-80) = $80 per job

Fixed costs = total cost – total variable cost = 24000-(80*260) = $3200

Cost function: Y=a+bX

Therefore,

Y = $3200 + $80X

Part 3

No, the formula developed above should not be used predict cost for a 600-job month as this level of activity does not fall in the relevant range. The maximum end point in the range is 260 jobs while the number of jobs for which manager wants to predict costs is 600. The difference between both is more than half. The fixed and variable costs are expected to increase with a large increase in activity level. Additional costs would be required to increase facilities, more employees would be hired, need of more equipment repairing and so on.