Part 1: Westfield owns and provides management services for several shopping centers. After five years with the company, James Heller was recently promoted to the position of manager of one of Westfield's smaller malls on the outskirts of a downtown area. When he accepted the assignment, James was told that he would hold the position for only a couple of years because that mall would likely be torn down to make way for a new sports stadium. James was also told that if he did well in this assignment, he would be in line for heading one of the company's new 200-store operations that were currently in the planning stage. While reviewing the mall's financial records for the past few years, James observed that last year's oil consumption was up by 8%, even though the number of heating degree days was down by 4%. Somewhat curious, James uncovered the following information: The mall is heated by forced-air oil heat. The furnace is five years old and has been well maintained. Fuel oil is kept in four 5,000-gallon underground oil tanks. The oil tanks were installed 25 years ago. Replacing the tanks would cost $80,000. If pollution was found, cleanup costs could go as high as $2,000,000, depending on how much oil had leaked into the ground and how far it had spread. Replacing the tanks would add more congestion to the mall's parking situation. Required What should James do? Explain Part 2: Market Street Soup Company produces ten varieties of soup in large vats, several thousand gallons at a time. The soup is distributed to several categories of customers. Some soup is packaged in large containers and sold to college and university food services. Some is packaged in half-gallon or small containers and sold through wholesale distributors to grocery stores. Finally, some is packaged in a variety of individual servings and sold directly to the public from trucks owned and operated by Market Street Soup Company. Management has always assumed that costs fluctuated with the volume of soup, and cost-estimating equations have been based on the following cost function: Estimated costs Fixed costs + Variable costs per gallon Production in gallons Lately, however, this equation has not been a very accurate predictor of total costs. At the same time, management has noticed that the volumes and varieties of soup sold through the three distinct distribution channels have fluctuated from month to month. Required: a. What relevant major assumption is inherent in the cost-estimating equation currently used by Market Street Soup Company? b. Why might Market Street Soup Company wish to develop a cost-estimating equation that recognizes the hierarchy of activity costs? Explain. c. Develop the general form of a more accurate cost-estimating equation for Market Street Soup Company. Clearly label and explain all elements of the equation, and provide specific examples of costs for each element 40 Part 3: Kendrick Anderson Furniture Maker, LLC creates custom tables in Atlanta. Assume that the following represents monthly information on production volume and manufacturing costs since the company started operations Total Living Room Dining Room Manufacturing Total Tables Tables Tables Costs Produced Produced Produced June Year 1 $71,000 110 25 85 July. 57.500 90 45 45 August 79,724 130 15 115 September 64250 95 36 59 October 57,300 76 24 52 November 60,900 92 48 44 December 62.700 105 24 81 January Year 2 70,130 110 50 60 February 68,400 102 20 82 March 57,400 81 25 56 April 105,790 142 102 May 74.750 125 22 103 June 74,290 115 15 100 July 66,500 106 18 88 August 49,888 85 28 57 September 72,668 116 55 61 October 71,700 120 81 39 November 74.200 120 30 90 December 54.900 72 18 54 Required a. Use the high-low method to develop a cost-estimating equation for total manufacturing costs. Interpret the meaning of the "fixed" costs and comment on the results. b. Use the chart feature of a spreadsheet to develop a scatter graph of total manufacturing costs and total units produced. Use the graph to identify any unusual observations. c. Excluding any unusual observations, use the high-low method to develop a cost-estimating equation for total manufacturing costs. Comment on the results, comparing them with the results in requirement (a). d. Use simple regression analysis to develop a cost-estimating equation for total manufacturing costs. What advantages does simple regression analysis have in comparison with the high-low method of cost estimation? Why must analysts carefully evaluate the data used in simple regression analysis? e. A customer has offered to purchase 50 dining room tables for $452 per table Management has asked your advice regarding the desirability of accepting the offer. What advice do you have for management? Additional analysis is required
