Question

Pane of Glass Inc. produces custom glasswork for high-end homes and buildings. The following cost data relate to the company’s labour costs.

	Units Produced	Labour Cost
July	400	$15,000
August	300	13,000
September	320	13,200
October	350	13,800
November	420	16,000
December	410	14,800

Required:

1. Using the high-low method, estimate the cost formula (write it in y=mx+b format).
   1. Using your answer from part a.) above, assuming in the following month the company expects to make 250 units, what will be the company’s estimated labour cost.
2. Using the scattergraph method, estimate the cost formula.
3. Using the least squares regression method, estimate the cost formula.
4. Are there any factors other than the number of units produced that may contribute to a variation in labour cost?

Answer 1

SOLUTION:

a: Estimate cost formula using the high-low method:

Variable cost = Change in cost ÷ Change in activity

= ($16,000 − $13,000) / (420 units – 300 units)

= 3000 / 120

                    = $25 per unit

Fixed Cost      = Total cost − (Variable cost per unit × Number of units)

                        = $16,000 – ($25 × 420)

                        = $5500

Cost formula: y = $25x + $5500 where y is total cost and x is number of units

Labour cost in following month when number of units shipped is 250

            Shipping cost = ($25 × Number of units) + $5500

                                    = ($25 × $250) + $5500

= 6250 + 5500

                                    = $11,750

b. Using the scatter graph method, estimate the cost formula:

Cost formula: y = $22.147x + $6,179.6 where y is total cost and x is number of units

d. Are there any factors other than the number of units produced that may contribute to a variation in labour cost?

Yes, there are factors other than the number of units that may contribute to variation in labour cost. For example the weight of the units, mode of transportation and priority in units delivery also influence labour costs.