A.

ALABAMA CORPORATION

........ makes and sells chairs. They are looking for ways to better predict the electricity costs. They have gathered the following information regarding occupancy days and electricity costs for the previous 12 months:

REQUIRED:

1. Classify the electricity costs by behavior. WHY is this the case?

ASSUME for questions 2-9 that the company wishes to use the High-Low method to further analyze these costs and break them into variable and fixed components:

1. WHY is it necessary to separate mixed costs into variable and fixed components?
2. Conceptually, what does the high-low method look to accomplish? What are the advantages and disadvantages of using this method?
3. WHY do you think the company is attempting to use occupancy days as a predictor of electricity costs?
4. What would be the variable cost rate? (that is, the variable cost per occupancy day)
5. How much of the electricity cost would be considered fixed?
6. Based on the above, what is the COST FUNCTION that they would use to predict monthly electricity costs?
7. What if 28,000 occupancy days are predicted for the upcoming month - how much electricity cost would be estimated?
8. What if 100,000 occupancy days are predicted for the upcoming month - NOW how much electricity cost would be estimated?
9. Say you wanted to use the Scatter graph method.... How would you do this? Explain with words only.
10. Seeking more accuracy in your projections, you performed a Regression Analysis on this data using Excel. Your regression statistics showed the following:

Coefficients

y-intercept 445,639

x variable 8.54

NOW what is the cost function for electricity costs suggested by the regression output?

1. If 28,000 machine hours were estimated for the month, what would be your estimate for electricity costs?

1. Which is more accurate, the high-low, scatter graph or regression? WHY?
2. What are the advantages and disadvantages of high-low and regression methods?

B.

ARIZONA CORPORATION: 3-2(b)

Arizona Corporation is interested in estimating fixed and variable manufacturing costs using data from October, a typical month. Total production for the month is estimated at 1,200 units.

Based on judgment, previous experience and some analysis of what things are in the manufacturing Costs account, they have classified each manufacturing cost as fixed, variable, or part fixed and part variable, as follows:

Cost		Amount	Behavior
Material		$ 50,400		Variable
Direct labor	19,200		Variable
Depreciation	9,000		Fixed
Phone		300		Fixed
Other utilities	4,200	20%	Fixed
Supervisory salaries	25,200	75%	Fixed
Equipment repair	7,500	20%	Fixed
Indirect materials	540		Variable
Factory maintenance	3,000	80%	Fixed
Total		$ 119,340

Required:

1. What is meant by the term "account analysis" as it relates to analyzing mixed costs?
2. Use the information above to do "account analysis" and estimate fixed cost per month and variable costs per unit produced.
3. What would be the cost function that the company would use to estimate the manufacturing costs?
4. If the company made an additional 300 units, what would be the incremental cost of making those extra units?
5. Does this sound like a good way to do it?What would be the advantages and disadvantages of approaching the cost estimation in this manner? When would it be advisable to use this method?