Question 2:

Wedding Bells Inc. specializes in the rentals and delivery of large tents, tables, chairs, dance platforms and sound systems that are used for outdoor weddings. The company owner, Susan Bells, recently completed a cost study of the firm's Material-Handling Department in which she used work measurement to quantify the department's activity. The control factor unit used in the work-measurement study was hundreds of kilograms of equipment loaded off or on the company delivery trucks. Susan has compiled the following data:

Month

Unit of Activity in 000's of Kg

Material-Handling Costs

January

1,400

$11,350

February

1,200

11,350

March

1,100

11,050

April

2,600

12,120

May

1,800

11,400

June

2,000

12,000

July

2,400

12,550

August

2,200

11,100

September

1,000

10,200

October

1,300

11,250

November

1,600

11,300

December

1,800

11,700

Required:

1.Estimate the Material-Handling Department's cost behaviour using the high-low method. Use an equation to express the results of this estimation method.

2.Construct an Excel spreadsheet and use the Excel functions to estimate the cost behaviour using the least-of-squares method. Use an equation to express the results of this estimation method. Calculate the R-square value and interpret the results.

3.Using both methods above, predict Wedding Bells' Material-Handling costs for a month when 2,300 units of activity are recorded.

4.Why do the results from the two methods of cost prediction above differ? Which method do you recommend? Why.