Question

1. SHATTA MOVEMENT Ltd produces a single product. The company’s directors want to explore new markets, and they require an accurate analysis of the firm’s cost structure for both forecasting and pricing purposes. An attempt to provide this analysis from the aggregation of individual costs has produced a poor correspondence between actual and predicted costs. You are an accountant employed by SHATTA MOVEMENT Ltd, and you have been asked to provide a statistical approach to the problem. The financial director has given you the following data:

Period	Output (units)	Average unit cost (GHS)
July	9,000	12.8
August	14,000	13
September	11,000	11.4
October	8,000	12
1November	6,000	13
December	12,000	11.7

You obtain the following further information:

• The costs from which the averages have been computed consist of the firm’s entire costs for the relevant month.
• Fixed costs can be assumed to be unaffected by seasonal factors except for harmattan heating. In July and August a supplementary heating system was employed; this cost GHS 10,000 per month to operate.

Required:

Estimate SHATTA MOVEMENT Ltd.’s normal fixed and variable cost of production using linear regression.

Answer 1

Period	Output (units) (a)	Avg. Unit cost (b)	Total cost c=a*b	Heating system cost (d)	Total Cost excluding heating system cost e=c-d
July	9000	12.8	115200	10000	105200
August	14000	13	182000	10000	172000
September	11000	11.4	125400		125400
October	8000	12	96000		96000
November	6000	13	78000		78000
December	12000	11.7	140400		140400

To conduct linear regresssion analysis take ouptut units and total cost excluding heating system cost values.

Output Unit	Total Cost excluding Heating system
9000	105200
14000	172000
11000	125400
8000	96000
6000	78000
12000	140400

I have done linear regression using excel and picture of that result is attached with this solution.

Variable cost per unit = 11.55

Fixed cost = 4023.81