Assume the Pauls Custom Print

Shop

has the following information on the number of sales orders

received and order-processing costs.

Month

Sales Orders

Order-Processing Costs

Jan

450

$6,000

Feb

225

4,200

Mar

690

9,750

Apr

420

5,850

May

345

4,800

Jun

150

3,000

Jul

300

4,500

Plot the data on a scatter diagram. Using the information from representative high- and low- volume

months, and develop a cost-estimating equation for monthly production costs.

Answer:

0

100

200

300

400

500

600

700

800

0

2,000

4,000

6,000

8,000

10,000

12,000

Sales Orders

Order-Porcessing Costs

Variable costs = ($9,750 $3,000) / (690 150) = $12.50 per sales order

Fixed costs = $9,750 ($12.50 x 690) = $1,125

or

$3,000 ($12.50 x 150) = $1,125

Monthly order processing costs = $1,125 + $12.50X, where X = sales orders

As an experienced manager, do you believe this is the BEST estimation for this

business? Why?