ALABAMA CORPORATION

Month

Electricity

Costs

Occupancy

Days

January

$ 920,000

45,000

February

600,000

25,000

March

500,000

20,000

April

1,100,000

90,000

May

1,140,000

95,000

June

620,000

30,000

July

880,000

38,000

August

910,000

48,000

September

1,060,000

78,000

October

960,000

51,000

November

1,400,000

96,000

December

980,000

54,000

........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 theprevious 12 months:

REQUIRED:

1.Classify the electricity costs by behavior. WHYis this the case?

ASSUMEfor questions 2-9thatthe companywishes to use the High-Low method tofurtheranalyze these costsand break them into variable and fixed components:

2.WHY is it necessary to separate mixed costs into variable and fixedcomponents?3.Conceptually, what does the high-low method look to accomplish? What are the advantages and disadvantages of using this method?4.WHY do you think the company is attempting to use occupancy days as a predictor of electricity costs?5.What would be thevariable cost rate? (thatis, the variable cost per occupancy day)6.How much of the electricity cost would be considered fixed?7.Based on the above, what is theCOST FUNCTIONthat they would use to predict monthly electricity costs?8.What if28,000occupancy days are predicted forthe upcoming month- how much electricity cost would be estimated?9.What if100,000occupancy days are predicted forthe upcoming month-NOWhow much electricity cost would be estimated?10.Say you wanted to use theScattergraphmethod.... How would you do this? Explain with words only.11.Seeking more accuracy in your projections, you performedaRegressionAnalysison this data using Excel.Your regression statistics showed the following:

Coefficients

y-intercept?445,639

x variable?8.54

NOW what is thecostfunctionfor electricity costs suggested by the regression output?

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

13.Which is more accurate, the high-low,scattergraphor regression? WHY?

14.What are the advantages and disadvantages of high-low and regression methods?

Arial 12 BI U a AV BV AV EV GOALS AND OBJECTIVES To understand what a variable cost is and how it behaves. To understand what a fixed cost is and how it behaves To understand what a mixed or semi-variable cost is, and how it behaves To understand the most common ways of separating mixed costs and WHY we need to do this? 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: Electricity Month Occupancy Costs Days January S 920,000 45,000 February 600,000 25,000 March 500,000 20,000 April 1,100,000 90,000 May 1,140,000 95,000 June 620,000 30,000 July 880,000 38,000 August 910,000 48,000 September 1,060,000 78,000 October 960,000 51,000 November 1,400,000 96,000 December 980,000 54,000 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: 2. WHY is it necessary to separate mixed costs into variable and fixed components? 3. Conceptually, what does the high-low method look to accomplish? What are the advantages and disadvantages of using this method? . WHY do you think the company is attempting to use occupancy days as a predictor of electricity costs? 5. What would be the variable cost rate? (that is, the variable cost per occupancy day) 6. How much of the electricity cost would be considered fixed? the COST FUNCTION that th