HW 5 - Chapter 5 - Part 1 Analyzing Mixed Costs Exercise 5A-2 Least-Squares Regression Bargain Rental Car offers rental cars in an off-airport location near a major tourist destination in California. Management would like to better understand the variable and fixed portions of it car washing costs. The company operates its own car wash facility in which each rental car that is returned is thoroughly cleaned before being released for rental to another customer. Management believes that the variable portion of its car washing costs relates to the number of rental returns. Accordingly, the following data have been compiled: Month January February March April May June July August September October November December Rental Returns 2,380 2,421 2,586 2,725 2,968 3,281 3,353 3,489 3,057 2,876 2,735 2,983 Car Wash Costs $ 10,825 $ 11,865 $ 11,332 $ 12,422 $ 13,850 $ 14,419 $ 14,935 $ 15,738 $ 13,563 $ 11,889 $ 12,683 $ 13,796 Required: 1. Prepare a scattergraph plot. (Place car wash costs on the vertical axis and rental returns on the horizontal axis.) 2. Using least-squares regression, estimate the variable cost per rental return and the monthly fixed cost incurred to wash cars. (Round Fixed cost to the nearest whole dollar amount and the Variable cost per unit to 2 decimal places.) 6 Exercise 5A-4 High-Low Method; Seattergraph Analysis 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: Units Total Shipping Month Shipped Expense January $ 1,800 February $ 2,300 March $ 1,700 April $ 2,000 May $ 2,300 June $ 2,700 July $ 1,200 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 5910.71 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? Exercise 5-3 Prepare a Profit Graph Jaffre Enterprises distributes a single product whose selling price is $16 per unit and whose variable expense is $11 per unit. The company's fixed expense is $16,000 per month. (Hint: Starts your calculations at 100 units, then 200 units, then 300 units ... until 4,000 units sold) Required: 1. Prepare a cost-volume-profit graph for the company up to a sales level of 4,000 units. 2. Estimate the company's break-even point in unit sales using your profit graph
