Question

Use the following data to answer the next two (2) problems***

MONTH	ACTIVITY	COST
January	450	16,250
February	700	18,600
March	750	19,200
April	525	16,750
May	800	20,000
June	675	18,000
July	650	17,500
August	400	16,000
September	425	16,025
October	600	17,475

1.Using the High-Low method, what is the estimate of fixed costs?

2. The results of a least squares regression are as follows:

Intercept: $2,250

Slope: 1.84

Coefficient of correlation .86

Standard error 640

What is the predictive model (the cost formula)?

Answer 1

Answer

1) Calculation of Estimated fixed Cost using High-Low method:

Fixed Cost = Highest Activity Cost – (Variable Cost Per Units x Highest Activity Units)

Variable Cost Per Units = (Highest Activity Cost – Lowest Activity Cost) / (Highest Activity Units – Lowest Activity Units)

= (20000-16000) / (800-400)

= 4000 / 400

= 10 per unit

Fixed Cost = Highest Activity Cost – (Variable Cost Per Units x Highest Activity Units)

= 20000 - (10 x 800)

= 20000-8000

Fixed Cost = 12000

2) least squares regression Formula:

Y = a+bx

Where,

Y = Total Cost

a = Intercept

b = slope

x = level of activity

Y = $2250 + 1.84x

Predictive model :

• Predictive modeling is the process of using known results to create, process, and validate a model that can be used to make future predictions.
• Two of the most widely used predictive modeling techniques are regression and neural networks.
• Companies can use predictive modeling to forecast events, customer behavior, as well as financial, economic, and market risks.