Question

1. ESN Company is determining the cost behaviour of each cost category recorded in dollar. The company believes that sales volume in unit is the primary cost driver for variable costs, and the scale of operation is for fixed costs. The company estimates a simple regression model of the cost with the sales volume as a predictor variable. The manager obtained the following result.
   
                           Estimate          Std. Error        t-value             Pr(>|t|)
   (Intercept)       10.58               0.82                 12.98               0.00
   Volume           0.00                 0.00                 0.49                 0.63
   Adjusted R² = 0.01
   
   Required:
   
   1. Estimated unit variable cost per sales volume in unit:
   2. Estimated fixed cost:
   3. Determine whether the cost item is variable or fixed:

Answer 1

Part 1

Unit variable cost per sales volume in unit = $0 (according to simple regression model Volume is variable cost per unit)

Part 2

Fixed cost = $10.58 (according to simple regression model, intercept indicates fixed cost)

Part 3

The cost item is fixed (as there is no variable cost)