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Scatter Diagrams and High-Low Cost Estimation From April 1 through October 31, Will County Highway Department...

Scatter Diagrams and High-Low Cost Estimation
From April 1 through October 31, Will County Highway Department hires temporary employees to mow and clean the right-of-way along county roads. The County Road Commissioner has asked you to help her in determining the variable labor cost of mowing and cleaning a mile of road. The following information is available regarding current-year operations:

Month	Miles Mowed and Cleaned	Labor Costs
April	350	$14,400
May	300	13,500
June	400	16,200
July	250	9,900
August	375	15,300
September	200	9,000
October	100	8,640

a. Use the information from the high- and low-volume months to develop a cost-estimating equation for monthly labor costs.

Monthly labor costs

Answer

b. Plot the data on a scatter diagram. Using the information from representative high- and low volume months, use the high-low method to develop a cost-estimating equation for monthly labor costs.

Monthly labor costs

Answer

d. Adjust the equation developed in requirement (b) to incorporate the effect of an anticipated 7 percent increase in wages.

Monthly labor costs

Answer

Solutions

Expert Solution

SOLUTION:

a) High Low Method :

Variable Cost = (Highest Activity Cost−Lowest Activity Cost)/(Highest Activity Units-Lowest Activity Units)

Highest Activity Units = 400 Miles

Highest Activity Cost = $ 16,200

Lowest Activity Units = 100 Miles

Lowest Activity Cost = $ 8640

Variable Cost = ($16,200 - $8640)/(400-100)

= 7560/300

Variable Cost Per Mile = $ 25.2 per Mile.

Fixed Cost = Highest Activity Cost − (Variable Cost * Highest activity Units)

Fixed Cost = $ 16,200 - ($25.2*400)

= $ 16,200 - $ 10,080

Fixed Cost = $ 6,120

b) Scatter Diagram :

Equation (y = mx+c ) = Labour Cost = $25.2*(Miles) + Fixed Cost

Eg: Labour Cost at 400 Miles = ($25.2 * 400) + 4800

Labour Cost = $14,880

c) If the wage rate increases by 7%,

Variable cost Per Mile = $25.2 + (25.2*7%)

Revised Variable cost per Mile = $ 25.2 + 1.764 = $ 26.964

Cost Equation will be : Labour Cost = $26.964 * (Miles) + Fixed Cost

Labour Cost = $26.964 * (Miles) + $ 4,800

ekkarill92 answered 10 months ago

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