978-0-07-802542-6 PAGE Problem 2-19 – Sebolt Wire Company Sebolt Wire Company he

Question

978-0-07-802542-6

PAGE Problem 2-19 – Sebolt Wire Company

Sebolt Wire Company heats copper ingots to very high temperatures by placing the ingots in a
large heat coil. The heated ingots are then run through a shaping machine that shapes the soft ingot
into wire. Due to the long heat-up time, the coil is never turned off. When an ingot is placed in
the coil, the temperature is raised to an even higher level, and then the coil is allowed to drop to
the “waiting” temperature between ingots. Management needs to know the variable cost of power

involved in heating an ingot and the fixed cost of power during “waiting” periods. The following
data on ingots processed and power costs are available:
Month
Number
of Ingots
Power
Cost
January . . . . . . . . . . . . . . . . . . 110 $5,500
February. . . . . . . . . . . . . . . . . . 90 $4,500
March . . . . . . . . . . . . . . . . . . . . 80 $4,400
April . . . . . . . . . . . . . . . . . . . . . 100 $5,000
May . . . . . . . . . . . . . . . . . . . . . 130 $6,000
June . . . . . . . . . . . . . . . . . . . . . 120 $5,600
July. . . . . . . . . . . . . . . . . . . . . . 70 $4,000
August . . . . . . . . . . . . . . . . . . . 60 $3,200
September . . . . . . . . . . . . . . . . 50 $3,400
October . . . . . . . . . . . . . . . . . . 40 $2,400

Required:
1. Using the high-low method, estimate a cost formula for power cost. Express the formula in the
form Y 5 a 1 bX.
2. Prepare a scattergraph by plotting ingots processed and power cost on a graph. Draw a straight
line though the two data points that correspond to the high and low levels of activity. Make
sure your line intersects the Y -axis.
3. Comment on the accuracy of your high-low estimates assuming a least-squares regression
analysis estimated the total fixed costs to be $1,185.45 per month and the variable cost to be
$37.82 per ingot. How would the straight line that you drew in requirement 2 differ from a
straight line that minimizes the sum of the squared errors?

Explanation / Answer

Ans 1 High Low method=Maximum Cost-Minimum Cost/Maximum No-Minimum No. of Ignots

Variable Cost =$6000-5600/130-120= $40

Fixed Cost= 6000-($40*130)=6000-5200= $800

y=a+bx

a=Fixed cost

b=variable cost

y=$800+40x Answer 1

Ans 3 y=$1185.45+$37.82x

The difference is that the fixed cost is higher in least square regression and varible cost is lower than normal high low method. Fixed cost is going diagonaaly upwards and variable cost is coming diagonally downward

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