SEPARATING FIXED AND VARIABLE COSTS, SERVICE SETTING
Louise McDermott, controller for the Galvin plant of Veromar Inc., wanted to deter- mine the cost behavior of moving materials throughout the plant. She accumulated the following data on the number of moves (from 100 to 800 in increments of 100) and the total cost of moving materials at those levels of moves:
|
Number of Moves
|
Total Cost ($)
|
|
100
|
3,000
|
|
200
|
4,650
|
|
300
|
3,400
|
|
400
|
8,500
|
|
500
|
10,000
|
|
600
|
12,600
|
|
700
|
13,600
|
|
800
|
14,560
|
Required:
1. Prepare a scattergraph based on these data. Use cost for the vertical axis and number of moves for the horizontal. Based on an examination of the scattergraph, does there appear to be a linear relationship between the total cost of moving materials and the number of moves?
2. Compute the cost formula for moving materials by using the high-low method. Calculate the predicted cost for a month with 550 moves by using the high-low formula.
3. Compute the cost formula for moving materials using the method of least squares. Using the regression cost formula, what is the predicted cost for a month with 550 moves? What does the coefficient of determination tell you about the cost formula computed by regression?
4. Evaluate the cost formula using the least squares coefficients. Could it be improved? Try dropping the third data point (300, $3,400), and rerun the regression.