igh-Low Method, Method of Least Squares, Correlation Big Mike’s, a large hardwar
ID: 2611604 • Letter: I
Question
igh-Low Method, Method of Least Squares, Correlation
Big Mike’s, a large hardware store, has gathered data on its overhead activities and associated costs for the past 10 months. Nizam Sanjay, a member of the controller’s department, believes that overhead activities and costs should be classified into groups that have the same driver. He has decided that unloading incoming goods, counting goods, and inspecting goods can be grouped together as a more general receiving activity, since these three activities are all driven by the number of receiving orders. The 10 months of data shown below have been gathered for the receiving activity.
Required:
1. Choose the correct scatter graph that represents the data provided above.
The correct answer is
2. Select two points (1 and 8) that make the best fit, and compute a cost formula for receiving costs. Round intermediate calculations to the nearest cent. Round the intercept to the nearest dollar and round the slope to the nearest cent.
3. Using the high-low method, prepare a cost formula for the receiving activity. Round the intercept to the nearest dollar and round the slope to the nearest cent.
4. Using the method of least squares, prepare a cost formula for the receiving activity. Round the intercept to the nearest dollar and round the slope to the nearest cent.
What is the coefficient of determination? Round your answer to two decimal places.
Adjusted R2 =
Explanation / Answer
Answer
1.
The answer is C as Graph C represents the correct data.
Graph a, b and d cannot be right as in Graph b there is no no. of received between 1500 and 2000 which is not true and in Graph d there is less than 500 received order which is not true either. Graph a cannot be true as we know that when we received 1600 orders the cost is more than 16k but on graph it is wrongly represented Graph a is also not right.
So correct Option is C
2.
.
Orders received
Cost
1
1000
12,170
8
1490
14,800
Difference
490
2,630
Variable cost = Difference in Cost / Difference in Orders
= 2,630 / 490
Variable cost = $5.367 per order received
Fixed Cost = Total Cost – Variable cost
Let’s take 1 month, Total Cost = $12,170, Order Received = 1000
Fixed Cost = $12,170– (1000 orders * $5.367 per patient)
Fixed Cost = $6,803
Y = $6,803 + $5.367X
Y= Total Cost
X= No. of Orders received
3.
High-Low Method
As we can see that in 9th month the orders received is highest and In 4th Month the orders received is Least.
Month
Orders Received
Cost
9th
1800
17,940
4th
900
9,930
Difference
900
8,010
Variable cost = Difference in Cost / Difference in order received
= 8010 / 900
Variable cost = $8.9 per patient admitted
Fixed Cost = Total Cost – Variable cost
Lets take 9th month, Total Cost = $17,940, Order received = 1800
Fixed Cost = $17,940 – (1800 Patients * $8.9 per patient)
Fixed Cost = $1,920
Y = $1,920 + $8.9X
Y= Total Cost
X= No. of Orders received
4.
x
y
X2
xy
1,000
12,170
1,000,000
12,170,000
1,340
12,940
1,795,600
17,339,600
1,150
13,750
1,322,500
15,812,500
900
9,930
810,000
8,937,000
1,350
15,070
1,822,500
20,344,500
1,400
14,145
1,960,000
19,803,000
1,600
16,640
2,560,000
26,624,000
1,490
14,800
2,220,100
22,052,000
1,800
17,940
3,240,000
32,292,000
1,700
15,000
2,890,000
25,500,000
13,730
142,385
19,620,700
200,874,600
N= 10
?x = 13,730
?y = 142,385
?x2 = 19,620,700
?xy = 200,874,600
Unit Variable cost (b) = (n.?xy – ?x.?y) / [n?x2 – (?x)2]
= (10 * 200,874,600 - 13,730 * 142,385) / [10 * 19,620,700 – (13,730)2]
Variable cost (b) = $6.99236 per order
Fixed Cost (a) = (?y – b?x) / n
= (142,385 - $6.99236 * 13,730) / 10
Fixed Cost = $23,839.016
Y = $23,893 + $6.99X
Y= Total Cost
X= No. of Orders received
5.
Coefficient =
= 53799950 / 59381997.36
Coefficient = 0.91
Orders received
Cost
1
1000
12,170
8
1490
14,800
Difference
490
2,630
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