NOTE that the data that you must use to get the cost function parameters for Par

Question

NOTE that the data that you must use to get the cost function parameters for Part A are completely different than the data you must use for Part B.  However, for both parts, you must make predictions for the same month.  Also, be sure to read each question very carefully.

Lorenzo operates a brushless car wash. Incoming cars are put on an automatic, continuously moving conveyor belt. A car is washed as the conveyor belt carries it from the start station to the finish station. After the car moves off the conveyor belt, workers dry it and clean and vacuum the inside. Workers are managed by a single supervisor.

Lorenzo's accountant wants to estimate total costs in December, when 8,950 cars are expected to be washed. She uses two different methods to estimate total December costs, account analysis and high-low, with number of cars washed as the independent variable for both methods.

For the account analysis method, she developed cost function parameter estimates by analyzing actual costs in February, when 10,100 cars were washed. The following are February total costs and her variable cost estimates:

Total Cost

Variable Portion

$2,020

$2,020

$6,060

$6,060

$26,760

$24,240

$12,940

$10,100

$3,400

$0

For the high-low method, she developed cost function parameter estimates by using the actual costs in July and August, when 8,900 and 11,000 cars were washed, respectively. The following are total costs for these two months:

July

August

$4,450

$5,500

$1,780

$2,200

$26,130

$31,800

$11,400

$13,500

$3,400

$3,400

REQUIRED [ROUND PER-UNIT COSTS TO TWO DECIMAL PLACES AND TOTAL COSTS TO THE NEAREST DOLLAR.]

Part A
1. Using account analysis, what is the accountant's estimate of total fixed costs for December?    

2. Using account analysis, what is the accountant's estimate of variable costs per unit for December?   

Part B
1. Using the high-low method, what is the accountant's estimate of total fixed costs for December?    

2. Using the high-low method, what is the accountant's estimate of total variable costs for December?   

  Cost Item

Total Cost

Variable Portion

  Soap, cloths, and supplies

$2,020

$2,020

  Water

$6,060

$6,060

  Car wash labor

$26,760

$24,240

  Power for conveyor

$12,940

$10,100

  Supervisor and cashier

$3,400

$0

Explanation / Answer

Part A:

1. December fixed cost = $8760

2. December variable cost = $4.2 * 8950 = $37590

Part B:

1. December fixed cost = $8000

2. December variable cost = $4.4 * 8950 = $39380

Items: Variable cost per unit Fixed Costs Soap, cloths, and supplies 0.20 0 Water 0.60 0 Car wash labor 2.40 2520 Power for conveyor 1.00 2840 Supervisor and cashier 0 3400 $4.20 $8760

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