Analyzing Mixed Costs Using Scattergraph, High-Low, and Least-Squares Regression Methods
Garfield Company manufactures a popular brand of dog repellant known as DogGone It, which it sells in gallon-size bottles with a spray attachment. The majority of Garfield’s business comes from orders placed by homeowners who are trying to keep neighborhood dogs out of their yards. Gar- field’s operating information for the first six months of the year follows:
Month | Number of Bottles Sold | Operating Cost |
January | 1,000 | $10,500 |
February | 1,400 | 15,740 |
March | 1,750 | 15,800 |
April | 2,400 | 19,675 |
May | 3,480 | 27,245 |
June | 3,625 | 34,755 |
Required:
1. Prepare a scattergraph of Garfield’s operating cost and draw the line you believe best fits the data. Identify any potential outliers and explain your treatment of them.
2. Based on this graph, estimate Garfield’s total fixed costs per month.
3. Using the high-low method, calculate Garfield’s total fixed operating costs and variable operating cost per bottle.
4. Perform a least-squares regression analysis on Garfield’s data.
5. Determine how well this regression analysis explains the data.
6. Using the regression output, create a linear cost equation (Y = A + BX) for estimating Garfield’s operating costs.
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