EXERCISE 5A-4 High-Low Method; Scattergraph Analysis LO5-10

Archer Company is a wholesaler of custom-built air-conditioning units for commercial buildings.

It gathered the following monthly data relating to units shipped and total shipping expense:

Month-January units shipped -3 units shipped Total Shipping Expense-1800

month-February units shipped-6. Total Shipping Expense-2300

month-March. units shipped-4. Total Shipping Expense-1700

month-April. units shipped-5. Total Shipping Expense-2000

month-May. units shipped-7. Total Shipping Expense-2300

month-June. units shipped-8. Total Shipping Expense-2700

month-July. units shipped-2. Total Shipping Expense-1200

Required:

1.

Prepare a scattergraph using the data given above. Plot cost on the vertical axis and activity

on the horizontal axis. Is there an approximately linear relationship between shipping expense

and the number of units shipped?

2.

Using the high-low method, estimate the cost formula for shipping expense. Draw a straight

line through the high and low data points shown in the scattergraph that you prepared in

requirement (1). Make sure your line intersects the Y-axis.

3.

Comment on the accuracy of your high-low estimates assuming a least-squares regression

analysis estimated the total fixed costs to be $910.71 per month and the variable cost to be

$217.86 per unit. How would the straight line that you drew in requirement 2 differ from a

straight line that minimizes the sum of the squared errors?

4.What factors, other than the number of units shipped, are likely to affect the company's

shipping expense? Explain.