Question 1 - High-low method Java Joe has been in business for one year and has collected the following cost data for utilities. Joe asks you to help him determine a cost equation to estimate monthly utility costs. Electricity Bill January February March April May kWh Used 2,400 2,800 3,660 2,700 3,920 4,160 3,480 3,980 4,200 4,100 3,960 4,220 Telephone Minutes Used 2,200 $184.00 2,120 $182.40 2,480 $189.60 1,960 $179.20 2,800 $196.00 2,880 $197.60 2,340 $186.80 2,620 $192.40 2,560 $191.20 2,380 $187.60 2,100 $182.00 2,700 $97.00 Bill $720.00 $840.00 $1,098.00 $810.00 $1,176.00 $1,248.00 $1,044.00 $1,194.00 $1,260.00 $1,230.00 $1,188.00 $1,266.00 June July August September October November December Water Gallons Used Bill 61,120 $120.00 53,400 $120.00 62.900 $120.00 59,930 $120.00 61,136 $120.00 51,080 $120.00 65,380 $120.00 62,444 $120.00 67,080 $120.00 63,940 $120.00 57,200 $120.00 68,200 $120.00 Required: Explain to Joe whether each of the preceding costs is variable, fixed, or mixed and why. Using the high-low method, determine the cost equation for each cost. Combine the cost equations you determined in (b) to obtain a monthly utility cost equation for Java Joe's. Joe expects to use 3,600 kilowatt hours of electricity, make 2,400 minutes of telephone calls, and use 60,000 gallons of water next month. Help Joe estimate the total utility cost for next month. Question 2 - Selecting a cost driver Iggy Hospital is a small animal hospital that specializes in minor surgeries. Timmy Snyder, Iggy's CEO, Is concerned about the hospital's consumption of medical supplies. Timmy asks Tommy Poon, Iggy's CFO, to better understand the behavior of this cost. Tommy believes that there are two potential cost drivers for the hospital's medical supplies costs - the total number of procedures performed and the number of patient-hours generated by Iggy. Tommy has collected the following data. Number of Procedures 32 Number of Patient-Hours 200 410 160 400 340 320 Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9 Week 10 Week 11 Week 12 Week 13 Week 14 Week 15 Medical Supplies Cost $10,600 $23,000 $8,400 $23,800 $19,300 $18,000 $21,000 $25,000 $13,500 $16,500 $9,200 $22,200 $7,800 $12,700 $22,500 350 420 180 270 150 370 130 240 380 Required: (a) Prepare a scatterplot using the number of procedures performed. Use Excel to fit a straight line through the data points. Write down the cost equation. Prepare a scatterplot using the number of patient-hours. Use Excel to fit a straight line through the data points. Write down the cost equation. Evaluate the regression models you obtained in (a) and (b). Determine whether number of procedures performed or number of patient-hours is a better cost driver for predicting medical supplies costs. Explain. Timmy expects that the hospital will perform 45 procedures and generate 480 patient-hours in week 16. Using the cost driver you chose in (c), help Timmy estimate the medical supplies costs for week 16. Question 3 - Activity-based costing Abby, Barry, and Chris have decided to share an apartment in Playa Vista for the coming school year. The rent will be $3,000 per month. There are two bedrooms in the apartment. Barry and Chris will share a bedroom and Abby will have her own. They estimate that groceries will cost $600 per month and that Barry and Chris will each eat 20 pounds of grocerles and Abby will eat 10 pounds. Internet access will cost $60 per month. Abby uses the Internet 10 hours day and Barry uses the Internet 5 hours a day. Chris does not use the internet at all. Required: (a) Barry suggests that they share the costs equally. Calculate the total cost that each person would pay if they share the costs equally. Chris doesn't like Barry's Idea and suggests that each cost be allocated to each person based on their consumption of the activity. List the activity measure for each cost. Calculate the total cost that each person would pay based on their consumption of the activities
