Question

The chief executive officer of Indira Investment Cc has appointed you because he requires certain information considering that you are currently a studying Accounting at UNAM. The CEO has high expectations of you. He has asked you to prepare next year’s budget. You are currently busy analysing the company’s telephone costs of the 9 months of 2017, in order to arrive at a cost function that you can use.
The company provided you with the following information:
Month
Total cost (N$)
Total number of minutes
January
260.00
762.00
February
430.00
1338.00
March
338.00
956.00
April
310.00
900.00
Page 13 of 14
May
260.00
485.00
June
387.00
1255.00
July
354.00
1110.00
August
208.00
555.00
September
400.00
1269.00
REQUIRED;
3.1 Prepare a cost formula (cost function) by using the high-low-method. (6)
3.2 Using the cost function in (3.1), calculate what the cost would be if 900 minutes were used. (3)
3.3 Prepare a cost formula (cost function) by using the Least Square method (Simple regression analysis). Show all calculations. (12)
3.4 By using your cost function from (3.3), calculate what the expected cost would be if 900 minutes were used. (3)
3.5 Discuss the differences between the High Low Method and the Least Square Method, also explain why there are differences between your actual data for April and your answer in (3.2) and (3.4). (

Answer 1

3.1)
		Total cost (N$)	Total number of minutes
High Month	February	$430.00	1338
Low Month	August	$208.00	555
Difference		$222.00	783.00
Variable cost per min = $222/783 min.	$0.28
Variable cost for Feb = $0.28 x 1338	$379.36
Total fixed costs = Total mixed cost - Total variable cost
Total fixed costs = $430 - $379.36	$50.64
Cost Function
y = a + bx
where: y = total cost; a = total fixed costs; b = variable cost per level of activity (or units); x = level of activity (or number of units).
Total Cost = $50.64 + $0.28 x
3.2)
Total Cost = $50.64 + $0.28 x 900 min.	$305.82
3.3)
y = a + bx
a is the y-intercept of the line and it equals the approximate fixed cost at any level of activity. Whereas b is the slope of the line and it equals the average variable cost per unit of activity.
intercept = a = intercept (y values,x values)	$109.32
Slope = b = Slope(y values, X values)	$0.23
Y = cost
X = Min.
3.4)
Y = $109.32 + 900 x $0.23	$314.05
3.5)
The high-low method is based on only the highest and lowest data points. Regression analysis provides an estimate of the cost equation based on all data pointsThe two methods yielded very different results, especially in their estimates of fixed cost.The regression analysis usually provides more reliable estimates of the cost.
The actual value is different from both the methods because of estimated data values like high and low method considered only two high and low data valueswhile regression considered all data points.