Analyzing Mixed Cost Using High-Low and Regression, Preparing and Interpreting Contributio...

Analyzing Mixed Cost Using High-Low and Regression, Preparing and Interpreting Contribution Margin Income Statement

Refer to your solutions for Larry’s Sporting Goods in PA5-2.

Required:

           1. Consider the pattern of Larry’s activity and costs throughout the year. Would you consider this to be a seasonal business? Explain your answer and how this information could impact the relative proportion of fixed and variable costs for the store’s business.

            2. Using the cost estimates obtained with the high-low and regression methods, predict the store’s operating costs for the upcoming months based on expected sales levels.

           3. Explain why there are differences between cost predictions based on high-low method and least-squares regression. Which do you think is more accurate? Why?

           4. Using the regression results, prepare contribution margin income statements for January through June. Assume that the average sales price is $18 per jersey.

           5. Based on the regression equation, what is Larry’s expected fixed cost per month? What would Larry expect total annual fixed cost to be?

           6. Suppose that the store’s actual fixed cost last year was $51,000. Explain why this amount varies from the prediction based on the regression results.