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. During a discussion, one of the managers suggests that number of employees might be better at explaining cost than store revenues. As a result of that suggestion, managers collected the following information from last year’s operations (revenues and costs in thousands of dollars):

Store Costs Employees Revenues

101$ 4,214 39$ 4100

102 2894 29 2227

103 5181 47 5738

104 3998 38 3982

105 3676 33 2914

106 3319 38 4023

107 5029 54 6894

108 2374 26 1779

109 4688 44 5416

110 2959 35 3228

111 4179 37 3886

112 3200 41 4690

113 2556 35 3552

114 4655 42 4817

115 2986 28 2124

a. Use the high-low method to estimate the fixed and variable portions of store costs based on employees. (Do not round your intermediate calculation. Negative amounts should be indicated by a minus sign. Round your answer to the nearest whole number (in thousands of dollars).)

What is the Variable cost (per employee) $

What is Fixed cost $

Answer 1

Solution:

Variable cost per employee = (Cost at high level - Cost at low level) / (High level activity - Low level activity)

= ($5,181 - $2,374) / (47-26) = $133.67 thousand per employee

Fixed costs = $5,181 - (47*$133.666666) = -$1,101.33