High-Low, Scattergraph, Regression Analysis, and Contribution Margin Income Stat

Question

High-Low, Scattergraph, Regression Analysis, and Contribution Margin Income Statement. Eye Care, Inc., provides vision correction surgery for its patients. You are the accountant for Eye Care, and management has asked you to devise a way of accurately estimating company costs for planning and decision-making purposes. You believe that reviewing historical data for costs and number of surgeries is the best starting point. These data are as follows:

You enter these data into a computer regression program and get the following results:

Required:

Use the four steps of the high-low method to estimate total fixed costs per month, and the variable cost per surgery. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.

Use the five steps of the scattergraph method to estimate total fixed costs per month, and the variable cost per surgery. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.

Use the regression output given to develop the cost equation Y = f + vX by filling in the dollar amounts for f and v.

Use the results of the high-low method (a), scattergraph method (b), and regression analysis (c), to estimate costs for 70 surgeries. (You will have three different answers—one for each method.) Which approach do you think is most accurate and why?

Assume Eye Care charges $4,000 for each surgery performed. Use the regression analysis cost information (for 70 surgeries) to prepare a contribution margin income statement. (Hint: You will only have one line item for variable costs and one line item for fixed costs.)

Reporting Period (Month) Total Costs Number of Surgeries January $208,000 54 February 205,000 52 March 217,000 55 April 200,000 50 May 232,000 62 June 230,000 60 July 226,000 57 August 235,000 63 September 252,000 71 October 250,000 70 November 245,000 66 December 244,000 65

Explanation / Answer

Solution :

a) High - low method : At low level, 50 surgeries and $200,000 cost

At high level, 71 surgeries and $252,000 cost

Now compute the variable cost per unit = (Total cost HA - Total cost LA)/(NO. of surgeries HA- No. of surgeries LA)

= ($252000-$200000)/(71-50)

= $2476.190

Total cost per month, Y = $225000 + $2476.190X

b) Scattergraph method : Total Cost per month, Y = $75403 + $320000X

c) Regression Analysis : Total Cost per month, Y = $75403 + $2536.77X

According to the condition, High - low method is most accurate because its easy to apply and give the exact result.

Contribution margin income statement = Total Sales - Total Variable Cost

= ($4000 * 12) - $2476.190

= $48000 - $2476.190 = $45523.81

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