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 101 102 103 104 105 106 107 188 Revenues $4,180 2,307 5,858 4,142 3,034 4,183 6,974 1,899 5.816 3,468 4,046 4,899 3,632 5,137 2.524 Costs $4,334 3,054 5,301 4,198 3.916 3,599 5,149 2,774 5,888 3,199 4,379 3,360 2,796 4,815 3.106 109 110 111 112 113 114 115 Exercise 5-42 (Algo) Methods of Estimating Costs: High-Low (LO 5-4) Required a. Use the high-low method to estimate the fixed and variable portions of store costs based on revenues. b. Managers estimate that one of the proposed stores will have revenues of $3.3 million. What are the estimated monthly overhead costs, assuming no inflation? c. Managers are also considering a "mega-store' with revenues of $18 million. What are the estimated monthly overhead costs, assuming no inflation?

Answer 1

a) Using High-Low Method: Particulars Revenues Costs High $6,974,000 $5,149,000 Low $1,899,000 $2,774,000 Difference $5,075,000 $2,375,000 ($6974000-$1899000) ($5149000 - $2774000) Variable costs per dollar revenue 46.798% (= Difference in costs / Difference in revenue = $2375000 / $5075000 = 46.798%] At revenue of $6974000 million, Costs $5,149,000 Less: Variable costs ($3,263,695) Fixed costs $1,885,305 [$6974000 x 46.798%] At revenue of $1899000 million, Costs $2,774,000 Less: Variable costs ($888,695) Fixed costs $1,885,305 [$1899000 x 46.798%]

b) Variable costs per dollar revenue Estimated sales dollar Total variable costs Add: Fixed costs Total costs estimated 46.798% [As calculated] $3,300,000 $1,544,335 [3300000 x 46.798% --> Ref: Part-(a)] $1,885,305 [Ref: Part-(a)] $3,429,640 c) Variable costs per dollar revenue Estimated sales dollar Total variable costs Add: Fixed costs Total costs estimated 46.798% [As calculated] $18,000,000 $8,423,645 [18000000 x 46.798% -->Ref: Part-(a)] $1,885,305 [Ref: Part-a)] $10,308,950