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	$2,323	40	$5,881
102	1,926	25	4,424
103	2,941	28	6,983
104	2,728	37	6,937
105	2,497	49	5,322
106	5,206	50	3,339
107	2,924	44	4,807
108	3,168	40	2,829
109	2,775	28	4,709
110	5,917	57	4,640
111	2,452	32	3,806
112	3,128	28	5,005
113	3,282	37	3,298
114	4,880	42	4,910
115	5,157	54	4,889

b. Use the results of your high-low analysis to estimate the cost for a store with 42 employees. (Do not round your intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answer to the nearest whole number (in thousands of dollars).)

A. Store cost

Answer 1

Variable Cost per unit = (Cost for highest level of activity - Cost for lowest level of Activity)
(Employees for highest level - Employees for lowest level)
= ($5917 - $1926)
(57 - 25)

= $124.71875

Fixed Costs = $124.71875 x 57 - $5917 = $1191.96875

Cost Equation using high low analysis = $124.71875 x + $1191.96875

Cost for 42 employees = $124.71875 x 42 + $1191.96875 = $6430