Although only open for one year, Pizzeria Paradise has established a reputation as serving excellent deep-dish pizza and recently own a "Best of City" award. Management is interested in using the data from the first year of operations to estimate the firm's cost structure. To this end, they have provided you with the following data for the first 4 quarters of operations:
Quarter # of Pizzas Sold Total Cost
First 25,000 $115,000
Second 30,000 $150,000
Third 35,000 $175,000
Fourth 40,000 $190,000
a. Use the high-low method to estimate Pizzeria Paradise's quarterly cost equation (i.e., use the high-low method to estimate Pizzeria Paradise's quarterly fixed costs and variable cost per pizza?
b. How would you interpret the estimate of fixed costs if it were below zero?
c. Use the cost equation you developed in part (a) to predict Pizzeria Paradise's total quarterly costs for a volume of 50,000 pizzas. How confident are you in your estimate of total quarterly costs?