Question

Caiman distribution Partners is the Brazilian distribution company of a U.S. consumer products firm. Inflation in Brazil has made bidding and budgeting difficult for marketing managers trying to penetrate some of the country's rural regions. The company expects to distribute 450,000 cases of products in Brazil next month. The controller has classified operating costs (excluding costs of the distributed product) as follows:

Account	Operating Cost			Behavior
Supplies	$	1,729,000		All variable
Supervision		214,000		$	166,000	Fixed
Truck expense		1,340,000		$	182,000	Fixed
Building leases		868,000		$	545,000	Fixed
Utilities		224,000		$	111,000	Fixed
Warehouse labor		863,000		$	133,000	Fixed
Equipment leases		763,000		$	587,000	Fixed
Data processing equipment		927,000		All fixed
Other		836,000		$	343,000	Fixed
Total	$	7,764,000

Although overhead costs were related to revenues throughout the company, the experience in Brazil suggested to the managers that they should incorporate information from a published index of Brazilian prices in the distribution sector to forecast overhead in a manner more likely to capture the economics of the business.

Following instructions from the corporate offices, the controller's office in Brazil collected the following information for monthly operations from last year:

Month	Cases	Price Index	Operating Costs
1	255,000	122	$5,699,175
2	323,000	116	5,806,674
3	256,000	125	5,849,941
4	444,000	117	5,927,653
5	328,000	118	5,939,171
6	394,000	124	6,043,400
7	474,000	137	5,918,531
8	488,000	138	6,133,904
9	326,000	139	6,126,166
10	434,000	128	6,186,661
11	420,000	126	6,208,835
12	489,000	129	6,362,291

These data are considered representative for both past and future operations in Brazil.

b. Use the high-low method to compute an estimate of operating costs assuming that 450,000 cases will be shipped next month. (Round variable cost to 5 decimal places. Round intermediate calculations and final answer to nearest whole dollar amount.)

Estimate of operating cost

c-1. Enter the regression coefficients. (Round "Cases" to 5 decimal places.)

Intercept
Cases

c-2. Compute the estimation of operating costs assuming that 450,000 cases will be shipped next month by using the results of a simple regression of operating costs on cases shipped. (Round variable costs per unit to 5 decimal places. Round the intercept and final answer to the nearest whole dollar amount.)

Estimate of operating cost

Answer 1

Part (b)

Use the high-low method to compute an estimate of operating costs assuming that 450,000 cases will be shipped next month.

Highest volume = 489,000 cases in month 12; cost = $ 6,362,291

Lowest volume = 255,000 cases in month 1; cost = $ 5,699,175

Variable cost per unit = ($ 6,362,291 - $5,699,175) / (489,000 - 255,000) = $  2.83383 / case

Fixed cost = Total cost - variable cost per unit x nos. of units = $ 6,362,291 - 2.83383 x 489,000 = $  4,976,549

An estimate of operating costs assuming that 450,000 cases will be shipped next month = Fixed cost + variable cost per unit x nos. of units = 4,976,549 + 2.83383 x 450,000 = $  6,251,772

Part (c) - 1

Your answer	Coefficients
Intercept	5,427,808
Cases	1.52639

Regression output is shown below:

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.6786012
R Square	0.4604995
Adjusted R Square	0.4065495
Standard Error	148360.72
Observations	12
ANOVA
	df	SS	MS	F	Significance F
Regression	1	1.87878E+11	1.87878E+11	8.535665322	0.015259
Residual	10	2.20109E+11	22010904260
Total	11	4.07987E+11
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	5427807.8	206121.5366	26.33304546	1.43743E-10	4968540	5887075	4968540	5887075
X Variable 1	1.5263892	0.522452245	2.921586097	0.01525898	0.362293	2.690485	0.362293	2.690485

Part (c) - 2

Estimate of operating cost =  5,427,808 +  1.52639 x 450,000 = $  6,114,683