Required: Please round all answers to the nearest penny. A. Using the high/low m
ID: 3239037 • Letter: R
Question
Required:
Please round all answers to the nearest penny.
A. Using the high/low method, determine the estimated total vehicle costs if the company expects to drive 9,000 miles in June.
B. Using the regression output, determine the estimated total vehicle costs if the company expects to drive 9,000 miles in June.
C. Why are the answers to A & B different? Why would a manager choose one equation over another?
Copy of
Goofy Moving Company documented the miles driven and total moving van costs for the past five months as follows:
Number of miles
Total vehicle costs
January
3,000
4,800
February
4,800
6,500
March
3,750
6,100
April
2,250
4,000
May
3,000
6,000
In order to budget total vehicle costs for the upcoming summer months, Reliable wishes to estimate total vehicle costs.
Regression output:
PLEASE SHOW ALL WORK
Multiple R 0.945118787 R Square 0.893249521 Adjusted R Square 0.857666028 Standard Error 330.4090747 Observations 5 ANOVA df SS MS F Significance F Regression 1 2740489.53 2740489.53 25.10291836 0.015305995 Residual 3 327510.47 109170.1567 Total 4 3068000 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 2649.464867 603.2802742 4.391764459 0.021872547 729.5577876 4569.371947 729.5577876 4569.371947 X Variable 1 0.798510935 0.159374473 5.010281266 0.015305995 0.291310233 1.305711637 0.291310233 1.305711637Explanation / Answer
A.
Step 1: Select the activity with the highest and lowest amounts (miles is the activity). Choose 4800 and 2,250 miles (February and April).
Step 2: Select the costs adjacent to those activities: 6,500 and 4,000. Note that the cost amounts adjacent to these activity levels will be used, even though these cost amounts are not the highest and lowest 'costs.' Activity level rules.
Step 3: Determine the slope (the variable cost per unit):
[6,500 - 4,000]/[4,800 - 2,250] = $0.98 per unit
Note that the activity levels and costs used are those of the two months chosen in step 1.
Step 4: Plug the variable cost from step 3 and the activity (miles) and total cost from either the high or the low point into the total cost equation, to solve for fixed costs (FC):
6,500 = 0.98 * 4,800 + FC
=> FC = 6,500 - 0.98 * 4,800 = 1796
So, the cost equation is Total Costs = 0.98(Number of miles) + 1796
Estimated total vehicle costs for 9,000 miles in June = 0.98*(9000) + 1796 = 10,616
B.
From the regression output, the equation is,
Total Costs = 0.798510935(Number of miles) + 2649.464867
Estimated total vehicle costs for 9,000 miles in June = 0.798510935*(9000) + 2649.464867 = 9836.063
C.
The output from A and B are different beacuse if costs are relatively unstable, high-low method could produce inaccurate results. Because the high-low method uses only two points to calculate a cost estimate, monthly variation in costs is not captured in the estimate, even if the points are representative of normal cost behavior. If managers plot the activity level vs. cost and see high variability, they have a decision to make. If timeliness is more important than accuracy, then the high-low method is probably good enough. However, if accuracy is tantamount, then regression method should be adopted. Least-squares regression takes into consideration all of the data, and may be more accurate than high-low estimates.
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