Question

As the management accountant for Pleasanton Raft Company, Inc., you have been asked to attend a planning session for the next season. The owner, Mara Mason specifically wants to be able to predict her fuel costs each coming week.

Mara typically staffs the desk at the river – answering the phone, checking in customers, and taking payment – while her staff drives the customers and rafts out to the river. Since she is not actively driving the van, it has been her process to maintain a separate bank account specifically for fuel costs, and giving the debit card tied to the account to her staff. That way, staff members can easily fill the tank on the way back from dropping off customers. To limit her risk, Mara wants to keep a low balance in this account, just sufficient to pay fuel costs for the upcoming week. To that end, she currently checks the balance in the account each Monday morning, and transfers in just enough funds to bring the balance to $275.

This past season, Mara had some cash flow issues – there were a couple of occasions this year where the company debit card was declined for insufficient funds at the gas station. This can be a serious problem. If the van runs out of gas, she is not able to transport customers to the river, and she will potentially lose customers. Also, if the charge does go through, she is liable for overdraft fees. Therefore, Mara wants to improve from her current process of refilling that account to $275 at the beginning of each week.

Mara started out by collecting data – on each Monday morning, she recorded the price of gas and the number of reservations for the coming week (see the attached Excel spreadsheet). She would like to use one of these measures to estimate the week’s fuel costs, but she is not sure which one would give her the best estimate. The number of reservations tells her how many customers have reserved boats for the coming week, but some reservations are later cancelled (or no-shows) and many customers show up unannounced for a trip down the river. In addition, the price of gas on Monday morning usually does not stay the same through the entire week. Mara knows that neither of these variables will perfectly predict her fuel costs, but figures that anything would be better than her current process.

DATA:

Pleasanton Raft Company, Inc.
Fuel Cost Data, current year
Week	# of reservations	Gas price (as of Monday morning)	Fuel cost (total cost for the week)
1	3	$2.55	$153.52
2	20	$2.67	$170.79
3	23	$2.64	$249.39
4	10	$2.43	$204.00
5	15	$2.34	$218.31
6	8	$2.64	$170.17
7	24	$2.58	$212.86
8	13	$2.64	$223.35
9	10	$2.33	$160.63
10	1	$2.26	$139.91
11	29	$2.29	$208.70
12	22	$2.75	$244.41
13	41	$2.61	$287.18
14	15	$2.37	$243.92
15	5	$2.31	$198.09
16	30	$2.43	$250.39
17	32	$2.35	$225.19
18	6	$2.21	$286.29
19	35	$2.87	$274.92
20	18	$2.50	$186.28
21	27	$2.58	$211.33
22	27	$2.72	$246.94
23	19	$2.23	$188.97
24	11	$2.25	$177.65
25	7	$2.30	$149.27
26	9	$2.41	$177.60

Fuel COST INFO IS IN THE TABLE - Please let me know what more info do you need? The comments keep saying the same thing but I did provide the info.

Required:

Write a 1-2 page memo, as the accountant of Pleasanton Rafts, addressed to Mara Mason describing your analysis and the outcomes. Make sure you respond to the following items:

1. Of the three cost estimation methods covered in this class (high-low method, scatter diagrams, or least squares regression), which would give the most accurate cost estimates? Explain why that method is more accurate, and how it works.

Answer 1

Cost estiimations are provided as under:

Following Table provides for the Total Costs:

Pleasanton Raft Company, Inc.
Fuel Cost Data, current year
				Variable	Fixed	Total Cost
Week	# of reservations	Gas price (as of Monday morning)	Fuel cost (total cost for the week)	Gas Cost	Fuel Cost
1.00	3.00	2.55	153.52	7.65	153.52	161.17
2.00	20.00	2.67	170.79	53.40	170.79	224.19
3.00	23.00	2.64	249.39	60.72	249.39	310.11
4.00	10.00	2.43	204.00	24.30	204.00	228.30
5.00	15.00	2.34	218.31	35.10	218.31	253.41
6.00	8.00	2.64	170.17	21.12	170.17	191.29
7.00	24.00	2.58	212.86	61.92	212.86	274.78
8.00	13.00	2.64	223.35	34.32	223.35	257.67
9.00	10.00	2.33	160.63	23.30	160.63	183.93
10.00	1.00	2.26	139.91	2.26	139.91	142.17
11.00	29.00	2.29	208.70	66.41	208.70	275.11
12.00	22.00	2.75	244.41	60.50	244.41	304.91
13.00	41.00	2.61	287.18	107.01	287.18	394.19
14.00	15.00	2.37	243.92	35.55	243.92	279.47
15.00	5.00	2.31	198.09	11.55	198.09	209.64
16.00	30.00	2.43	250.39	72.90	250.39	323.29
17.00	32.00	2.35	225.19	75.20	225.19	300.39
18.00	6.00	2.21	286.29	13.26	286.29	299.55
19.00	35.00	2.87	274.92	100.45	274.92	375.37
20.00	18.00	2.50	186.28	45.00	186.28	231.28
21.00	27.00	2.58	211.33	69.66	211.33	280.99
22.00	27.00	2.72	246.94	73.44	246.94	320.38
23.00	19.00	2.23	188.97	42.37	188.97	231.34
24.00	11.00	2.25	177.65	24.75	177.65	202.40
25.00	7.00	2.30	149.27	16.10	149.27	165.37
26.00	9.00	2.41	177.60	21.69	177.60	199.29

High Low Method:

Maximum Cost = 394.19 Minimum Cost = 142.17

Maximum Reservations = 41 Minimum Reservations = 1

Variable Cost per Reservation = (394.19 - 142.17) / (41 - 1) = 6.30

Hence, Fixed Cost = (153.52 - 3 x 6.30 ) = 134.62 (On the basis of Week 1)