Question

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Davis Stores sells clothing in 15 stores located around the southwestern United States. The managers at Davis are considering expanding by opening new stores and are interested in estimating costs in potential new locations. They believe that costs are driven in large part by store volume measured by revenue. The following data were collected from last year’s operations (revenues and costs in thousands of dollars).

Store	Revenues	Costs
101	$4,230	$4,409
102	2,357	3,154
103	5,933	5,376
104	4,242	4,323
105	3,109	4,066
106	4,283	3,774
107	7,024	5,224
108	1,974	3,024
109	6,066	5,208
110	3,618	3,349
111	4,146	4,504
112	5,015	3,460
113	3,682	2,946
114	5,337	4,915
115	2,774	3,181

Required

a. Use the high-low method to estimate the fixed and variable portions of store costs based on revenues.

b. Managers estimate that one of the proposed stores will have revenues of $3.8 million. What are the estimated monthly overhead costs, assuming no inflation?

c. Managers are also considering a “mega-store” with revenues of $23 million. What are the estimated monthly overhead costs, assuming no inflation?

Answer 1