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. 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 Living Room Tables Produced Dining Room Tables Produced June Year 1 July.. August September October. November. December. ****** ****** January Year 2. February. March April May. June July August September October. November. December. Total Manufacturing Costs $71,000 57,500 79,724 64,250 57,300 60,900 62,700 70,130 68,400 57,400 105,790 74,750 74,290 66,500 49,888 72,668 71,700 74,200 54,900 Total Tables Produced 110 90 130 95 76 92 105 110 102 81 142 125 115 106 85 116 120 120 72 5558248 4 5005102 22518851 38 18 15 36 24 30 85 45 115 59 52 44 81 60 82 56 40 103 100 88 57 61 39 90 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.