Question

Scatter Diagrams and High-Low Cost Estimation From April 1 through October 31, Coles County Highway Department hires temporary employees to mow and clean the right-of-way along county roads. The County Road Commissioner has asked you to help her in determining the variable labor cost of mowing and cleaning a mile of road. The following information is available regarding current-year operations: Month April May June Miles Mowed Labor and Cleaned Costs 350 $9,600 300 8,800 400 10,400 250 8,000 375 10,000 200 7,200 100 6,200 July August September October a. Use the information from the high- and low-volume months to develop a cost-estimating equation for monthly labor costs. Monthly labor costs = $ 4,800 + S 14 X b. Plot the data on a scatter diagram. Using the information from representative high- and low volume months, use the high-low method to develop a cost- estimating equation for monthly labor costs. Monthly labor costs = $ * + $ * X d. Adjust the equation developed in requirement (b) to incorporate the effect of an anticipated 8 percent increase in wages. Monthly labor costs = $ 0* + $ * X Check

Answer 1

a) High Low Method :

Variable Cost = (Highest Activity Cost−Lowest Activity Cost)/(Highest Activity Units-Lowest Activity Units)

Highest Activity Units = 400 Miles

Highest Activity Cost = $ 10,400

Lowest Activity Units = 100 Miles

Lowest Activity Cost = $ 6200

Variable Cost = ($10,400 - $6200)/(400-100)

Variable Cost Per Mile = $ 14 per Mile.

Fixed Cost = Highest Activity Cost − (Variable Cost * Highest activity Units)​

Fixed Cost = $ 10,400 - ($14*400)

Fixed Cost = $ 4,800

b) Scatter Diagram :

Chart Title $6,000 $5,000 $4,000 $3,000 $2,000 0 50 100 150 300 350 400 450 200 250 Miles .Variable Cost ($14 per Mile) Fixed Cost

Equation (y = mx+c ) = Labour Cost = $14*(Miles) + Fixed Cost

Eg: Labour Cost at 400 Miles = $14 * 400 + 4800

Labour Cost = $10,400

c) If the wage rate increases by 8%, Variable cost Per Mile = ($14 + 8%)

Revised Variable cost per Mile = $ 15.12

Cost Equation will be : Labour Cost = $15.12 * (Miles) + Fixed Cost

  Labour Cost = $15.12 * (Miles) + $ 4,800