1028 Estimating a cost function highlow method Lacy Dallas i

10-28 Estimating a cost function, high-low method. Lacy Dallas is examining customer-service costs in the southern region of Camilla Products. Camilla Products has more than 200 separate electrical products that are sold with a 6-month guarantee of full repair or replacement with a new product. When a product is returned by a customer, a service report is prepared. This service report includes details of the problem and the time and cost of resolving the problem. Weekly data for the most recent 8-week period are as follows Customer-Service Department Costs $13,300 20,500 12,000 18,500 14,900 21,600 16,500 21,300 Number of Service Reports 185 285 120 360 275 440 350 315 Week 1. Plot the relationship between customer-service costs and number of service reports. Is the relationship economically plausible?

Solution

1 High low cost method Cost at 440 reports 21600 Cost at 120 reports 12000 Highest reports 440 Lowest reports 120 Variable cost per unit = (21600-12000)/(440-120) = 30 Per report Fixed cost = 21600 - (440*30) 8400 2 equation Y = A + BX , Y = 8400 + 30 per report