Deck 6: Activity Analysis, Cost Behavior, and Cost Estimation

Question 1

Describe the importance of cost behavior patterns in planning, control, and decision making.

Answer 1

Cost Behavior
The cost behavior is the examining of the behavior of cost whether the cost varies with variation in production or remains constant. In other words, the cost behavior is measured in terms of what is the nature of the cost. It may be the fixed cost, variable cost, or semi variable cost.
The cost estimation helps in the analysis of the cost behavior that further helps in the cost prediction for cost unit for given specification.
Planning made keeping in mind the information generated by analysis of the cost behavior would be more accurate. Budgets and estimates prepared on the basis of this information would be more reliable.
Control over various activities and cost to be incurred is efficient by keeping in mind the nature of cost. More planning and controlling activities are required where majority of the costs are allocated.
Further, distinction made between the fixed and variable cost would be important in various decisions making. Decisions such as buy or produce, continuity of product, shut down decision, profitability of product, break-even analysis etc. are based on the cost classified by analysis of the cost behavior.
Thus, the cost behavior is important in planning, controlling, and decision making.

Question 2

Define the following terms, and explain the relationship between them: ( a ) cost estimation, ( b ) cost behavior, and ( c ) cost prediction.

Answer 2

(a) Cost Estimation
Cost estimation is the process of estimating cost of the unit produced or service provided on the basis of standards set for the production activity or service activity. Cost estimation helps in the analysis of the cost behavior.
(b) Cost Behavior
The cost behavior is the examining of the behavior of cost whether the cost varies with variation in production or remains constant. In other words, the cost behavior is measured in terms of what is the nature of cost. It may be the fixed cost, variable cost, or semi variable cost.
(c) Cost Prediction
Cost prediction is a process to determine costs or computing costs on the basis of specification of the cost unit to be produced or service unit to be provided in advance before actual production or service starts.
Relationship
Cost estimation helps in the analysis of the cost behavior that further helps in the cost prediction for cost unit for given specification.

Question 3

Suggest an appropriate activity base (or cost driver) for each of the following organizations: ( a ) hotel, ( b ) hospital, ( c ) computer manufacturer, ( d ) computer sales store, ( e ) computer repair service, and ( f ) public accounting firm.

Answer 3

The following cost driver for the cost unit may be used for respective industries.

Question 4

Draw a simple graph of each of the following types of cost behavior patterns: ( a ) variable, ( b ) step-variable, ( c ) fixed, ( d ) step-fixed, ( e ) semivariable, and ( f ) curvilinear.

Question 5

Explain the impact of an increase in the level of activity (or cost driver) on ( a ) total fixed cost and ( b ) fixed cost per unit of activity.

Question 6

Explain why a manufacturer's cost of supervising production might be a step-fixed cost.

Question 7

Explain the impact of an increase in the level of activity (or cost driver) on ( a ) total variable cost and ( b ) variable cost per unit.

Question 8

Using graphs, show how a semivariable (or mixed) cost behavior pattern can be used to approximate ( a ) a stepvariable cost and ( b ) a curvilinear cost.

Question 9

Indicate which of the following descriptions is most likely to describe each cost listed below.

Question 10

A cost analyst showed the company president a graph that portrayed the firm's utility cost as semivariable. The president criticized the graph by saying, "This fixed-cost component doesn't look right to me. If we shut down the plant for six months, we wouldn't incur half of these costs." How should the cost analyst respond?

Question 11

What is meant by a learning curve? Explain its role in cost estimation.

Question 12

Suggest an appropriate independent variable to use in predicting the costs of the following tasks.
a. Handling materials at a loading dock.
b. Registering vehicles at a county motor vehicle office.
c. Picking oranges.
d. Inspecting computer components in an electronics firm.

Question 13

What is an outlier? List some possible causes of outliers. How should outliers be handled in cost estimation?

Question 14

Explain the cost estimation problem caused by allocated and discretionary costs.

Question 15

Describe the visual-fit method of cost estimation. What are the main strengths and weaknesses of this method?

Question 16

What is the chief drawback of the high-low method of cost estimation? What problem could an outlier cause if the high-low method were used?

Question 17

Explain the meaning of the term least squares in the least-squares regression method of cost estimation.

Question 18

Use an equation to express a least-squares regression line. Interpret each term in the equation.

Question 19

Distinguish between simple regression and multiple regression.

Question 20

List several possible cost drivers that could be used by a cruise line such as Carnival.

Question 21

Briefly describe two methods that can be used to evaluate a particular least-squares regression line.

Question 22

Draw a graph of the cost behavior for each of the following costs incurred by the Mountain Summit Hospital. The hospital measures monthly activity in patient days. Label both axes and the cost line in each graph.
1. The cost of food varies in proportion to the number of patient days of activity. In January, the hospital provided 3,000 patient days of care, and food costs amounted to $24,000.
2. The cost of salaries and fringe benefits for the administrative staff totals $12,000 per month.
3. The hospital's laboratory costs include two components: ( a ) $40,000 per month for compensation of personnel and depreciation on equipment and ( b ) $10 per patient day for chemicals and other materials used in performing the tests.
4. The cost of utilities depends on how many wards the hospital needs to use during a particular month. During months with activity under 2,000 patient days of care, two wards are used, resulting in utility costs of $10,000. During months with greater than 2,000 patient days of care, three wards are used, and utility costs total $15,000.
5. Many of the hospital's nurses are part-time employees. As a result, the hours of nursing care provided can be easily adjusted to the amount required at any particular time. The cost of wages and fringe benefits for nurses is approximately $2,500 for each block of 200 patient days of care provided during a month. For example, nursing costs total $2,500 for 1 to 200 patient days, $5,000 for 201 to 400 patient days, $7,500 for 401 to 600 patient days, and so forth.

Question 23

The behavior of the annual maintenance and repair cost in the Bus Transportation Department of the Summerset Public School District is shown by the solid line in the following graph. The dashed line depicts a semivariable-cost approximation of the department's repair and maintenance cost.

Required:
1. What is the actual (curvilinear) and estimated (semivariable) cost shown by the graph for each of the following activity levels?

2. How good an approximation does the semivariable-cost pattern provide if the department's relevant range is 40,000 to 60,000 miles per month? What if the relevant range is 20,000 to 90,000 miles per month?

Question 24

WMEJ is an independent television station run by a major state university. The station's broadcast hours vary during the year depending on whether the university is in session. The station's production-crew and supervisory costs are as follows for July and September.

Required:
1. Compute the cost per broadcast hour during July and September for each of these cost items.
2. What will be the total amount incurred for each of these costs during December, when the station's activity will be 420 broadcast hours?
3. What will be the cost per broadcast hour in December for each of the cost items?

Question 25

Jonathan Macintosh is a highly successful Pennsylvania orchardman who has formed his own company to produce and package applesauce. Apples can be stored for several months in cold storage, so applesauce production is relatively uniform throughout the year. The recently hired controller for the firm is about to apply the high-low method in estimating the company's energy cost behavior. The following costs were incurred during the past 12 months:

Required:
1. Use the high-low method to estimate the company's energy cost behavior and express it in equation form.
2. Predict the energy cost for a month in which 26,000 pints of applesauce are produced.

Question 26

Refer to the data in the preceding exercise.
Required:
1. Draw a scatter diagram and graph the company's energy cost behavior using the visual-fit method.
2. Predict the energy cost for a month in which 26,000 pints of applesauce are produced.
3. What peculiarity is apparent from the scatter diagram? What should the cost analyst do?

Question 27

Visit the website of one of the following companies, or a different company of your choosing.

Required: Read about the company's products and operations. Then list five costs that the company would incur and explain what type of cost behavior you believe would be appropriate for each of these cost items.

Question 28

Chillicothe Meat Company produces one of the best sausage products in southern Ohio. The company's controller used the account-classification method to compile the following information.
a. Depreciation schedules revealed that monthly depreciation on buildings and equipment is $19,000.
b. Inspection of several invoices from meat packers indicated that meat costs the company $1.10 per pound of sausage produced.
c. Wage records showed that compensation for production employees costs $.70 per pound of sausage produced.
d. Payroll records showed that supervisory salaries total $10,000 per month.
e. Utility bills revealed that the company incurs utility costs of $4,000 per month plus $.20 per pound of sausage produced.
Required:
1. Classify each cost item as variable, fixed, or semivariable.
2. Write a cost formula to express the cost behavior of the firm's production costs. (Use the formula Y = a + bX, where Y denotes production cost and X denotes quantity of sausage produced.)

Question 29

Rio Bus Tours has incurred the following bus maintenance costs during the recent tourist season. (The real is Brazil's national monetary unit. On the day this exercise was written, the real was equivalent in value to.269 U.S. dollar.)

Required:
1. Use the high-low method to estimate the variable cost per tour mile traveled and the fixed cost per month.
2. Develop a formula to express the cost behavior exhibited by the company's maintenance cost.
3. Predict the level of maintenance cost that would be incurred during a month when 22,000 tour miles are driven. (Remember to express your answer in terms of the real. )
4. Build a spreadsheet: Construct an Excel spreadsheet to solve all of the preceding requirements. Show how the solution will change if the following information changes: in March there were 21,000 miles traveled and the cost was 12,430 real.

Question 30

The State Department of Taxation processes and audits income-tax returns for state residents. The state tax commissioner has recently begun a program of work measurement to help in estimating the costs of running the department. The independent variable used in the program is the number of returns processed.

In addition, the department incurs $10,000 of fixed costs each month that are associated with the process of auditing returns.
Required: Draw a graph depicting the monthly costs of auditing state tax returns. Label the horizontal axis "Tax returns audited."

Question 31

Weathereye, Inc. manufactures weather satellites. The final assembly and testing of the satellites is a largely manual operation involving dozens of highly trained electronics technicians. The following learning curve has been estimated for the firm's newest satellite model, which is about to enter production.

Required:
1. What will be the average labor time required to assemble and test each satellite when the company has produced four satellites? Eight satellites?
2. What will be the total labor time required to assemble and test all satellites produced if the firm manufactures only four satellites? Eight satellites?
3. How can the learning curve be used in the company's budgeting process? In setting cost standards?

Question 32

Recent monthly costs of providing on-board flight service incurred by Great Plains Airlines are shown in the following table.

Required:
1. Build a spreadsheet: Construct an Excel spreadsheet and use the Excel commands to perform a least-squares regression. Estimate the cost behavior of the airline's on-board flight service. Express the cost behavior in equation form.
2. Use Excel to calculate and interpret the R 2 value for the regression.

Question 33

Gator Beach Marts, a chain of convenience grocery stores in the Fort Lauderdale area, has store hours that fluctuate from month to month as the tourist trade in the community varies. The utility costs for one of the company's stores are listed below for the past six months.

Required:
1. Use the high-low method to estimate the cost behavior for the store's utility costs. Express the cost behavior in formula form ( Y = a + bX ). What is the variable utility cost per hour of operation?
2. Draw a scatter diagram of the store's utility costs. Visually fit a cost line to the plotted data. Estimate the variable utility cost per hour of operation.
3. Build a spreadsheet: Construct an Excel spreadsheet and use the Excel commands to perform a least-squares regression. Estimate the cost behavior for the store's utility cost. Express the cost behavior in formula form. What is the variable utility cost per hour of operation?
4. During July, the store will be open 300 hours. Predict the store's total utility cost for July using each of the cost-estimation methods employed in requirements (1), (2), and (3).
5. Use your Excel sheet from requirement (3) to calculate and interpret the R 2 value for the regression.

Question 34

For each of the cost items described below, choose the graph (see below) that best represents it.
1. The salary costs of the shift supervisors at a truck depot. Each shift is eight hours. The depot operates with one, two, or three shifts at various times of the year.
2. The salaries of the security personnel at a factory. The security guards are on duty around the clock.
3. The wages of table-service personnel in a restaurant. The employees are part-time workers, who can be called upon for as little as two hours at a time.
4. The cost of electricity during peak-demand periods is based on the following schedule.

The price schedule is designed to discourage overuse of electricity during periods of peak demand.
5. The cost of sheet metal used to manufacture automobiles.
6. The cost of utilities at a university. For low student enrollments, utility costs increase with enrollment, but at a decreasing rate. For large student enrollments, utility costs increase at an increasing rate.
7. The cost of online back-up storage at a rate of $2.50 per gigabyte, up to 50 gigabytes, beyond which storage is unlimited, at no additional cost.
8. The cost of the nursing staff in a hospital. The staff always has a minimum of nine nurses on duty. Additional nurses are used depending on the number of patients in the hospital. The hospital administrator estimates that this additional nursing staff costs approximately $195 per patient per day.
9. The cost of chartering a private airplane. The cost is $390 per hour for the first three hours of a flight. Then the charge drops to $280 per hour.
10. Under a licensing agreement with a South American import/export company, your firm has begun shipping machine tools to several countries. The terms of the agreement call for an annual licensing fee of $100,000 to be paid to the South American import company if total exports are under $5,000,000. For sales in excess of $5,000,000, an additional licensing fee of 10 percent of sales is due.
11. Your winery exports wine to several Pacific Rim countries. In one nation, you must pay a tariff for every case of wine brought into the country. The tariff schedule is the following:

Question 35

The following selected data were taken from the accounting records of Metcalf Manufacturing. The company uses direct-labor hours as its cost driver for overhead costs.

March's costs consisted of machine supplies ($102,000), depreciation ($15,000), and plant maintenance ($469,000). These costs exhibit the following respective behavior: variable, fixed, and semivariable.
The manufacturing overhead figures presented in the preceding table do not include Metcalf's supervisory labor cost, which is step-fixed in nature. For volume levels of less than 15,000 hours, supervisory labor amounts to $45,000. The cost is $90,000 from 15,000-29,999 hours and $135,000 when activity reaches 30,000 hours or more.
Required:
1. Determine the machine supplies cost and depreciation for January.
2. Using the high-low method, analyze Metcalf's plant maintenance cost and calculate the monthly fixed portion and the variable cost per direct-labor hour.
3. Assume that present cost behavior patterns continue into the latter half of the year. Estimate the total amount of manufacturing overhead the company can expect in November if 29,500 directlabor hours are worked.
4. Briefly explain the difference between a fixed cost and a step-fixed cost.
5. Assume that a company has a step-fixed cost. Generally speaking, where on a step should the firm attempt to operate if it desires to achieve a maximum return on its investment?

Question 36

Antioch Extraction, which mines ore in Montana, uses a calendar year for both financial-reporting and tax purposes. The following selected costs were incurred in December, the low point of activity, when 1,500 tons of ore were extracted:

Peak activity of 2,600 tons occurred in June, resulting in mining labor/fringe benefit costs of $598,000, royalties of $201,000, and trucking and hauling outlays of $325,000. The trucking and hauling outlays exhibit the following behavior:

Antioch uses the high-low method to analyze costs.
Required:
1. Classify the five costs listed in terms of their behavior: variable, step-variable, committed fixed, discretionary fixed, step-fixed, or semivariable. Show calculations to support your answers for mining labor/fringe benefits and royalties.
2. Calculate the total cost for next February when 1,650 tons are expected to be extracted.
3. Comment on the cost-effectiveness of hauling 1,500 tons with respect to Antioch's trucking/hauling cost behavior. Can the company's effectiveness be improved? How?
4. Distinguish between committed and discretionary fixed costs. If Antioch were to experience severe economic difficulties, which of the two types of fixed costs should management try to cut? Why?
5. Speculate as to why the company's charitable contribution cost arises only in December.

Question 37

Nation's Capital Fitness, Inc. operates a chain of fitness centers in the Washington, D.C., area. The firm's controller is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the firm's equipment maintenance costs must be determined. The accounting staff has suggested the use of an equation, in the form of Y = a + bX , for maintenance costs. Data regarding the maintenance hours and costs for last year are as follows:

Required:
1. Using the high-low method of cost estimation, estimate the behavior of the maintenance costs incurred by Nation's Capital Fitness, Inc. Express the cost behavior pattern in equation form.
2. Using your answer to requirement (1), what is the variable component of the maintenance cost?
3. Compute the predicted maintenance cost at 590 hours of activity.
4. Compute the variable cost per hour and the fixed cost per hour at 600 hours of activity. Explain why the fixed cost per hour could be misleading.
(CMA, adapted)

Question 38

The Allegheny School of Music has hired you as a consultant to help in analyzing the behavior of the school's costs. Use the account-classification method of cost estimation to classify each of the following costs as variable, fixed, or semivariable. Before classifying the costs, choose an appropriate measure for the school's activity.
1. Salaries and fringe benefits of the school's full-time teachers.
2. Salaries and fringe benefits of the school's full-time administrative staff.
3. Cost of buying books, sheet music, and other academic materials that are supplied to the students by the school.
4. Repairs on musical instruments. The school employs a full-time repair technician. Repair jobs that are beyond the technician's capability are taken to a local musical-instrument dealer for repairs.
5. Fee charged by a local public accounting firm to audit the school's accounting records.
6. Wages of the school's part-time assistant recital instructors. These employees are hired on a temporary basis. For each student enrolled in the school's music programs, four hours of assistant instructor time are needed per week.
7. Depreciation on the school's musical instruments.
8. Rent for the building in which the school operates.
9. Electricity for the school. The school pays a fixed monthly charge plus $.11 per kilowatt-hour of electricity.

Question 39

Rolling Hills Golf Association is a nonprofit, private organization that operates three 18-hole golf courses north of Philadelphia. The organization's financial director has just analyzed the course maintenance costs incurred by the golf association during recent summers. The courses are maintained by a full-time crew of four people, who are assisted by part-time employees. These employees are typically college students on their summer vacations. The course maintenance costs vary with the number of people using the course. Since a large part of the maintenance work is done by part-time employees, the maintenance crew size can easily be adjusted to reflect current needs. The financial director's analysis revealed that the course maintenance cost includes two components:
1. A fixed component of $12,000 per month (when the courses are open).
2. A step-variable cost component. For each additional 1 to 10 people teeing off in one day, $20 in costs are incurred. Thus, if 101 to 110 people tee off, $220 of additional cost will be incurred. If 111 to 120 people tee off, $240 of additional cost will be incurred.
Required:
1. Draw a graph of Rolling Hills Golf Association's course maintenance costs. Show on the graph the fixed-cost component and the step-variable cost component. Label each clearly.
2. Use a semivariable-cost behavior pattern to approximate the golf association's course maintenance cost behavior. Visually fit the semivariable cost line to your graph.
3. Using your graph, estimate the variable- and fixed-cost components included in your semivariable approximation. Express this approximate cost behavior pattern in equation form.
4. Fill in the following table of cost predictions.

Question 40

( Note: Instructors who wish to cover all three cost-estimation methods with the same data set may assign this problem in conjunction with the next one.) Martha's Vineyard Marine Supply is a wholesaler for a large variety of boating and fishing equipment. The company's controller, Mathew Knight, has recently completed a cost study of the firm's material-handling department in which he used work measurement to quantify the department's activity. The control factor unit used in the work-measurement study was hundreds of pounds of equipment unloaded or loaded at the company's loading dock. Knight compiled the following data.

Required:
1. Draw a scatter diagram of the cost data for the material-handling department.
2. Visually fit a cost line to the scatter diagram.
3. Estimate the variable and fixed components of the department's cost behavior pattern using the visually fit cost line.
4. Using your estimate from requirement (3), specify an equation to express the department's cost behavior.
5. Estimate the material-handling department's cost behavior using the high-low method. Use an equation to express the results of this estimation method.
6. Write a brief memo to the company's president explaining why the cost estimates developed in requirements (4) and (5) differ.
7. Predict the company's material-handling costs for a month when 2,300 units of activity are recorded. Use each of your cost equations to make the prediction. Which prediction would you prefer to use? Why?

Question 41

Refer to the original data in the preceding problem for Martha's Vineyard Marine Supply.
Required:
1. Build a spreadsheet: Construct an Excel spreadsheet and use the Excel commands to perform a least-squares regression. Estimate the variable- and fixed-cost components in the company's material-handling department costs.
2. Write the least-squares regression equation for the department's costs.
3. Predict the firm's material-handling department's costs for a month when 2,300 units of activity are recorded.
4. Why do the three cost predictions computed in this and the preceding problem differ? Which method do you recommend? Why?
5. Build a spreadsheet: Use your Excel spreadsheet from requirement (1) to compute the R 2 value for the regression. Interpret the R 2 value.

Question 42

Shortly after being hired as an analyst with Global American Airlines, Kim Williams was asked to prepare a report that focused on passenger ticketing cost. The airline writes most of its own tickets (largely through reservations personnel), makes little use of travel agents, and has seen an ever-increasing passenger interest in e-ticketing (i.e., electronic reservations and tickets handled over the Internet).
After some discussion, Williams thought it would be beneficial to begin her report with an overview of three different cost estimation tools: scatter diagrams, least-squares regression, and the high-low method. She would then present the results of her analysis of the past year's monthly ticketing cost, which was driven largely by the number of tickets written. These results would be presented in the form of algebraic equations that were derived by the three tools just cited. The equations follow. (C denotes ticketing cost, and PT denotes number of passenger tickets written.)

Williams had analyzed data over the past 12 months and built equations on these data, purposely including the slowest month of the year (February) and the busiest month (November) so that things would "... tend to average out." She observed that November was especially busy because of Thanksgiving, passengers purchasing tickets for upcoming holiday travel in December, and the effects of a strike by Delta Western Airlines, Global American's chief competitor. The lengthy strike resulted in many of Delta Western's passengers being rerouted on Global American flights.
Required:
1. Prepare a bullet-point list suitable for use in Williams's report that describes the features of scatter diagrams, least-squares regression, and the high-low method. Determine which of the three tools will typically produce the most accurate results.
2. Will the three cost estimation tools normally result in different equations? Why?
3. Assuming the use of least-squares regression, explain what the $312,000 and $2.30 figures represent.
4. Assuming the use of a scatter diagram, predict the cost of an upcoming month when Global American expects to write 580,000 tickets.
5. Did Williams err in constructing the equations on data of the past 12 months? Briefly explain.
6. Assume that over the next few years, more of Global American's passengers will take advantage of e-ticketing over the Internet. What will likely happen to the airline's cost structure in terms of variable and fixed cost incurred?

Question 43

The controller of Chittenango Chain Company believes that the identification of the variable and fixed components of the firm's costs will enable the firm to make better planning and control decisions. Among the costs the controller is concerned about is the behavior of indirect-materials cost. She believes there is a correlation between machine hours and the amount of indirect materials used.
A member of the controller's staff has suggested that least-squares regression be used to determine the cost behavior of indirect materials. The regression equation shown below was developed from 40 pairs of observations.

Required:
1. Explain the meaning of "200" and "4" in the regression equation S = $200 + $4 H.
2. Calculate the estimated cost of indirect materials if 900 machine hours are to be used during a month.
3. To determine the validity of the cost estimate computed in requirement (2), what question would you ask the controller about the data used for the regression?
4. The high and low activity levels during the past four years, as measured by machine hours, occurred during April and August, respectively. Data concerning machine hours and indirect-material usage follow.

Determine the cost of indirect materials used during April and August.
5. Use the high-low method to estimate the behavior of the company's indirect-material cost. Express the cost behavior pattern in equation form.
6. Which cost estimate would you recommend to the controller, the regression estimate or the highlow estimate? Why?
(CMA, adapted)

Question 44

Dana Rand owns a catering company that prepares banquets and parties for both individual and business functions throughout the year. Rand's business is seasonal, with a heavy schedule during the summer months and the year-end holidays and a light schedule at other times. During peak periods, there are extra costs; however, even during nonpeak periods Rand must work more to cover her expenses.
One of the major events Rand's customers request is a cocktail party. She offers a standard cocktail party and has developed the following cost structure on a per-person basis.

When bidding on cocktail parties, Rand adds a 15 percent markup to this cost structure as a profit margin. Rand is quite certain about her estimates of the prime costs but is not as comfortable with the overhead estimate. This estimate was based on the actual data for the past 12 months presented in the following table. These data indicate that overhead expenses vary with the direct-labor hours expended. The $14 estimate was determined by dividing total overhead expended for the 12 months ($805,000) by total labor hours (57,600) and rounding to the nearest dollar.

Rand recently attended a meeting of the local chamber of commerce and heard a business consultant discuss regression analysis and its business applications. After the meeting, Rand decided to do a regression analysis of the overhead data she had collected. The following results were obtained.

Required:
1. Explain the difference between the overhead rate originally estimated by Dana Rand and the overhead rate developed from the regression method.
2. Using data from the regression analysis, develop the following cost estimates per person for a cocktail party.
a. Variable cost per person
b. Absorption cost per person
Assume that the level of activity remains within the relevant range.
3. Dana Rand has been asked to prepare a bid for a 200-person cocktail party to be given next month. Determine the minimum bid price that Rand should be willing to submit.
4. What other factors should Dana Rand consider in developing the bid price for the cocktail party?
(CMA, adapted)

Question 45

Madison County Airport handles several daily commuter flights and many private flights. The county budget officer has compiled the following data regarding airport costs and activity over the past year.

Required:
1. Draw a scatter diagram of the airport costs shown above.
2. Build a spreadsheet: Construct an Excel spreadsheet and use the Excel commands to perform a least-squares regression. Estimate the variable- and fixed-cost components in the airport's cost behavior pattern.
3. Write the least-squares regression equation for the airport's costs.
4. Predict the airport's costs during a month when 1,600 flights originate at the airport.
5. Using the Excel spreadsheet prepared for requirement (2), compute the coefficient of determination ( R 2 ) for the regression equation. Briefly interpret R 2.

Question 46

Earth and Artistry, Inc. provides commercial landscaping services. Sasha Cairns, the firm's owner, wants to develop cost estimates that she can use to prepare bids on jobs. After analyzing the firm's costs, Cairns has developed the following preliminary cost estimates for each 1,000 square feet of landscaping.

Question 47

( Note: Instructors who wish to cover all three cost-estimation methods with the same data set may assign this case in conjunction with the following case.)
"I don't understand this cost report at all," exclaimed Jeff Mahoney, the newly appointed administrator of Mountainview General Hospital. "Our administrative costs in the new pediatrics clinic are all over the map. One month the report shows $8,300, and the next month it's $16,100. What's going on?"
Mahoney's question was posed to Megan McDonough, the hospital's director of Cost Management. "The main problem is that the clinic has experienced some widely varying patient loads in its first year of operation. There seems to be some confusion in the public's mind about what services we offer in the clinic. When do they come to the clinic? When do they go to the emergency room? That sort of thing. As the patient load has varied, we've frequently changed our clinic administrative staffing."
Mahoney continued to puzzle over the report. "Could you pull some data together, Megan, so we can see how this cost behaves over a range of patient loads?"
"You'll have it this afternoon," McDonough responded. Later that morning, she gathered the following data:

McDonough does not believe the first year's widely fluctuating patient load will be experienced again in the future. She has estimated that the clinic's relevant range of monthly activity in the future will be 600 to 1,200 patients.
Required:
1. Draw a scatter diagram of the clinic's administrative costs during its first year of operation.
2. Visually fit a curvilinear cost line to the plotted data.
3. Mark the clinic's relevant range of activity on the scatter diagram.
4. Visually fit a semivariable-cost line to approximate the curvilinear cost behavior pattern within the clinic's relevant range.
5. Estimate the fixed- and variable-cost components of the visually fit semivariable-cost line.
6. Use an equation to express the semivariable-cost approximation of the clinic's administrative costs.
7. What is your prediction of the clinic's administrative cost during a month when 800 patients visit the clinic? When 300 patients visit? Which one of your visually fit cost lines did you use to make each of these predictions? Why?

Question 48

Refer to the data and accompanying information in the preceding case.
Required:
1. Use the high-low method to estimate the cost behavior for the clinic's administrative costs. Express the cost behavior in formula form ( Y = a + bX ). What is the variable cost per patient?
2. Build a spreadsheet: Construct an Excel spreadsheet and use the Excel commands to perform a least-squares regression and estimate the administrative cost behavior. Express the cost behavior in formula form. What is the variable cost per patient? Compute and interpret the R 2 value for the regression.
3. Write a memo to the hospital administrator comparing the cost estimates using ( a ) least-squares regression, ( b ) the high-low method, and ( c ) the scatter diagram and visually fit semivariablecost line from the preceding case (requirement (4). Make a recommendation as to which estimate should be used, and support your recommendation. Make any other suggestions you feel are appropriate.
4. After receiving the memo comparing the three cost estimates, Mahoney called McDonough to discuss the matter. The following exchange occurred.

That night McDonough called to discuss the matter with her best friend, you. What would you advise her?