The Business School at Eastern College is accumulating data as a first step in t

ID: 2422859 • Letter: T

Question

The Business School at Eastern College is accumulating data as a first step in the preparation of next year's budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the past thirteen months are shown below:

The controller's office has analyzed the data and has given you the results from the regression analysis:

If the controller uses the high-low method to estimate costs, the cost equation for administrative salaries is:

Administrative Credit Month Costs Hours July $ 128,833 275 August 82,577 157 September 225,379 1,373 October 216,751 981 November 257,819 1,335 December 184,169 1,089 January 219,563 1,308 February 245,177 1,372 March 209,540 1,000 April 192,038 1,134 May 249,776 1,382 June 170,431 465 July 128,062 262 Total $ 2,510,115 12,133 Average 193,086 933

Explanation / Answer

Cost of equation for administrative salaries -

y = a + bx where a = Total fixed cost, b = Variable cost per unit

a = y2 - bx2 = y1 - bx1 & b = y2 - y1 / x2 - x1 where y1 = Total cost at lowest level of activity, y2 = Total cost at highest level of activity, x1 = Lowest level of activity, x2 = Highest level of activity

x1 = 157, y1 = $82577, x2 = 1382, y2 = $257819

b = (257819 - 82577) / (1382 - 157) = 175242 / 1225 = 143

a = 257819 - (143 * 1382) = 82577 - (143 * 157) = 60193

y = a + bx

y = $60193 + 143x

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The Business School at Eastern College is accumulating data as a first step in t

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The Business School at Eastern College is accumulating data as a first step in t

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