Question

Scatter Diagrams and High-Low Cost Estimation Assume the local Pearle Vision has the following information on the number of sales orders received and order-processing costs. Month Sales Orders Order-Processing Costs 3,000 $ 82,700 1,500 50,375 4,400 120,700 2,800 81,900 2,300 69,775 1,200 43,100 2,000 62,500 Required (a.) Use information from the high- and low-volume months to develop a cost-estimating equation for monthly order-processing costs. x + $ (b.) Plot the data on a scatter diagram. Using the information from representative high-and low-volume months, develop a cost estimating equation for monthly production costs. If needed, an Excel worksheet is provided in the following link in order to create the scatter diagram: Scatter_Diagram x + $ Check

Answer 1

a)
Month	Sales Order	Order-Processing Costs
1	3000	$  82,700.00
2	1500	$  50,375.00
3	4400	$120,700.00	High
4	2800	$  81,900.00
5	2300	$  69,775.00
6	1200	$  43,100.00	Low
7	2000	$  62,500.00
Variable Cost per unit = (difference in cost/difference in activity)
Variable Cost per unit = ($120,700 - $43,100)/(4400 - 1200)	24.25	Per Unit
Fixed Cost = Total cost + variable Cost
Fixed Cost = $120700- ($24.25 VC x 4400 sales order)	$14,000.00		106700
cost-estimating equation			$14,000.00
Total Cost = Fixed Cost + Variable cost per unit x  sales order (units)
Total Cost = $14000 + $24.25 x  sales order (units)
b)
Intercept = Fixed Cost	$14,202.42
Slope = Variable Cost per unit	$       23.93
Total Cost = $14202.42 + $23.93 x  sales order (units)

Order-Processing Costs $140,000.00 $120,000.00 $100,000.00 $80,000.00 $60,000.00 $40,000 $20,000 0 1000 2000 3000 4000 5000