Hendricks has run the produce club for the first 10-week season. Before becoming a farmer, Harvey had been a business major in college, and he remembers a few things about cost analysis. In planning for next year, he wants to know how many orders will be needed each week for the club to break even, but first he must estimate the club's fixed and variable costs. He has collected the following data over the club's first 10 weeks of operation:
week number of orders per week weekly total costs
1 351 $18795
2 385 21597
3 410 22800
4 453 22600
5 425 21900
6 486 24600
7 455 23900
8 467 22900
9 525 25305
10 510 24500
1. Plot the relationship between number of orders per week and weekly total costs.
2. Estimate the cost equation using the high-low method, and draw this line on your graph.
3. Harvey uses his computer to calculate the following regression formula:
Total weekly costs = $8,631 + ($31.92 X Number of weekly orders)
Draw the regression line on your graph. Use your graph to evaluate the regression line using the criteria of economic plausibility, goodness of fit, and significance of the independent variable. ls the cost function estimated using the high-low method a close approximation of the cost function estimated using the regression method? Explain briefly.
4. Did Fresh Harvest break even this season? Remember that each ofthe families paid a seasonal membership fee of $50.
5. Assume that 900 families join the club next year, and that prices and costs do not change. How many orders, on average, must Fresh Harvest receive each week to break even?