Question

Required information [The following information applies to the questions displayed below. 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): Employees $5,031 Store 101 102 103 104 105 106 5,935 4,172 3,155 Revenues $3,118 3,306 4,583 4,232 6,560 2,147 5,041 2,372 5,672 2,583 3,296 3,274 4,283 4,449 3,737 2,219 3,514 5,758 2,468 2,597 5,151 3,867 4,905 2,008 2,769 Wwwww WWW 109 112 Required a. Use the high-low method to estimate the fixed and variable portions of store costs based on employees. (Do not round your intermediate calculations. Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places. Enter your answer in thousands of dollars.) Variable cost (per employee) Fixed cost

Answer 1

Solution:

Variable cost per employee = (Cost at highest employee level - Cost at lowest employee level) / (Highest Level employee - Lowest employee level)

= ($5935 - $2008) / (57- 24) = $3927 / 33

= $119 per employee

Fixed Cost = Total cost - variable cost

= $5935 - ($119*57) = $5935 - $6783

= - $848