As a new manager of a shipping company you have been studying the company\'s fin

Question

As a new manager of a shipping company you have been studying the company's financial data. You would like to determine how the company's costs behave in order to make accurate predictions for next year. Here is information from the last 6 months Month January February March April May June Number of Shipments Tota Costs of Shipments (S) 451 515 435 552 482 581 8,884.70 10,506.00 8,787.00 10,156.80 9,061.60 11,039.00 Using the information provided extimate the cost function for the data using the high-low method NOTE: Round your answer to the nearest PENNY both DURING your work (interim numbers) and when you enter your solution. For instance, if your answer is $22.7483871, enter 22.75. If your answer is $22.7449562, enter 22.74. If your answer is $32,532 enter 32532.00 The cost function would be: Total Shipping Costs- S(X) +$ In order to predict annual costs the cost function would be: Total Shipping Costs S(X) +$ The president has asked you if you can use the cost function to predict costs at the following number of shipments per month: 651 Can you use your cost function to predict costs at that level of activity? O Yes, the cost function would do a good job of predicting costs at that level of activity. O No, the cost function would not do a good job of predicting costs at that level of activity.

Explanation / Answer

At High Level: Total Cost $ 11039 and Number of shipments: 581 At Low level: Total cost $ 8787 and Number of Shipment: 435 Variable cost per shipment: Change in cost/ Change in shipments = (11039-8787)/ (581-435) = $ 15.43 per shipment Fixed Cost: Total cost at 581 shipment: 11039 Less: variable cost (581 shipments@15.43) 8965 Fixed Cost: 2074 Cost of Function, Llet C=Cost and X = Number of Shipments Cost function, C = 2074 + 15.43X No, the cost function would not do good job of predicting the cost at that level of activity. This is because that level of activity falls outside the relevant range of activity for cost behaviour to hold good.

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