Question

Davis Stores sells clothing in 15 stores located around the southwestern United States. The managers at Davis are considering expanding by opening new stores and are interested in estimating costs in potential new locations. They believe that costs are driven in large part by store volume measured by revenue. The following data were collected from last year’s operations (revenues and costs in thousands of dollars).

Store	Revenues	Costs
101	$4,200	$4,364
102	2,327	3,094
103	5,888	5,331
104	4,182	4,248
105	3,064	3,976
106	4,223	3,669
107	6,994	5,179
108	1,929	2,874
109	5,916	5,088
110	3,528	3,259
111	4,086	4,429
112	4,940	3,400
113	3,652	2,856
114	5,217	4,855
115	2,624	3,136

Required A

Use the high-low method to estimate the fixed and variable portions of store costs based on revenues. (Round variable cost percentage answer to 1 decimal place. Enter fixed cost answer in thousands of dollars.)

Required B

Managers estimate that one of the proposed stores will have revenues of $3.5 million. What are the estimated monthly overhead costs, assuming no inflation? (Do not round variable cost percentage for your calculations. Round your intermediate calculations to the nearest whole dollar. Enter your answer in thousands of dollars.)

Required CManagers are also considering a “mega-store” with revenues of $20 million. What are the estimated monthly overhead costs, assuming no inflation? (Do not round variable cost percentage for your calculations. Round your intermediate calculations to the nearest whole dollar. Enter your answer in thousands of dollars.)

Prepare a scattergraph based on the store cost and revenue data.

Required D:

1. Click on a point to the right of the graph.
2. Click within the graph to place the point.
3. To enter exact coordinates, click on the point and then click on the processing wheel symbol and then enter the exact coordinates in the dialog box that pops up.

4. Click OK.

Answer 1

Required A
Use the high-low method to estimate the fixed and variable portions of store costs based on revenues. (Round variable cost percentage answer to 1 decimal place. Enter fixed cost answer in thousands of dollars.)
	Revenues	Costs
Highest Activity (Store 107)	6,994	5,179
Lowest Activity (Store 108)	1,929	2,874
Difference	5,065	2,305
Variable cost = 2305/5065	45.51%
Fixed cost =  Total costs – Variable costs
Fixed cost = 5179 - (6994 x 45.51%)	$        1,996	thousands
Store costs = $1,996.14  + (45.51% × Revenue)
Required B
Managers estimate that one of the proposed stores will have revenues of $3.5 million. What are the estimated monthly overhead costs, assuming no inflation? (Do not round variable cost percentage for your calculations. Round your intermediate calculations to the nearest whole dollar. Enter your answer in thousands of dollars.)
Store costs = $1,996.14  + (45.51% × 3500)	$        3,589	Thousands
Required C
Managers are also considering a “mega-store” with revenues of $20 million. What are the estimated monthly overhead costs, assuming no inflation? (Do not round variable cost percentage for your calculations. Round your intermediate calculations to the nearest whole dollar. Enter your answer in thousands of dollars.)
Store costs = $1,996.14  + (45.51% × 20,000)	$      11,098	thousands