P-6 High-Low Method. Madrigal Theater Company is interested in estimating fixed
ID: 2435346 • Letter: P
Question
P-6High-Low Method. Madrigal Theater Company is interested in estimating fixed and variables costs. The following data are available:
Month Cost No. of Tickets Sold
January 180000 18000
February 212000 21000
March 232000 25000
April 239000 27000
May 231000 27500
June 208000 21500
July 199000 20000
August 165000 15000
September 212000 22500
October 217000 24000
November 230000 28000
December 255000 30000
Required
a. Use the high-low method to estimate fixed cost per month and variable costs per ticket sold [i.e., estimate a and b in the equation Cost = a+(b*# of tickets) using the high-low method]
b. Madrigal Theater Company is considering an advertising campaign that is expected to increase annual sales by 12,000 tickets. Assume that the ticket selling price is $0. Ignoring the cost of the advertising campaign , what is the expected increase in profit associated with the advertising campaign?
c. (optional) Repeat part a using regression analysis. In the light of the result, how would you answer Part b?
Explanation / Answer
Use the high-low method to estimate fixed cost per month and variable costs per ticket sold [i.e., estimate a and b in the equation Cost = a+(b*# of tickets) using the high-low method] December 255000 30000 August 165000 15000 Difference 90,000 15,000 Variable cost per ticket 90,000 ÷15,000 $6 Cost = Fixed cost + (Variable cost per unit x Number of tickets) 165000 = Fixed cost + (6 x 15000) Fixed cost = 165,000 – 90,000 = 75,000 b. Madrigal Theater Company is considering an advertising campaign that is expected to increase annual sales by 12,000 tickets. Assume that the ticket selling price is $0. Ignoring the cost of the advertising campaign , what is the expected increase in profit associated with the advertising campaign? Since the selling price per ticket is $0, no increase in profit can be worked.
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