Question

Wedding Bells Inc. specializes in the rentals and delivery of large tents, tables, chairs, dance platforms and sound systems that are used for outdoor weddings. The company owner, Susan Bells, recently completed a cost study of the firm’s Material-Handling Department in which she used work measurement to quantify the department’s activity. The control factor unit used in the work-measurement study was hundreds of kilograms of equipment loaded off or on the company delivery trucks. Susan has compiled the following data:

Month	Unit of Activity in 000’s of Kg	Material-Handling Costs
January	1,400	$11,350
February	1,200	11,350
March	1,100	11,050
April	2,600	12,120
May	1,800	11,400
June	2,000	12,000
July	2,400	12,550
August	2,200	11,100
September	1,000	10,200
October	1,300	11,250
November	1,600	11,300
December	1,800	11,700

Required:

1. Estimate the Material-Handling Department’s cost behaviour using the high-low method. Use an equation to express the results of this estimation method.
2. Construct an Excel spreadsheet and use the Excel functions to estimate the cost behaviour using the least-of-squares method. Use an equation to express the results of this estimation method. Calculate the R-square value and interpret the results.
3. Using both methods above, predict Wedding Bells’ Material-Handling costs for a month when 2,300 units of activity are recorded.

Why do the results from the two methods of cost prediction above differ? Which method do you recommend? Why

Answer 1