Kim Chen owner of Tulip Time operates a local chain of flora

Kim Chen, owner of Tulip Time, operates a local chain of floral shops. Each shop has its own delivery van. Instead of charging a flat delivery fee, Chen wants to set the delivery fee based on the distance driven to deliver the flowers. Chen wants to separate the fixed and variable portions of her van operating costs so that she has a better idea how delivery distance affects these costs. She has the following data from the past seven months: ? (Click the icon to view the data.) Read the tequirements Requirement 1. Determine the company\'s cost equation (use the output from the Excel regression).(Round the amounss to two decimal paces.) Requirement 2. Determine the R-square (use the output from the Excel regression) The R-square is 0.874387 What does Tulp Time\'s R-square indicate? The R-square indicates that the oost equation explains 87.4% ofthe vara ility in the data. In other words, it feel confident using this cost equation to predict total costs at other volumes should be used with caution. Tuip Time may or may not within the same relevant range Requirement 3. Predict van operating costs at a volume of 14,500 miles assuming the compary would use the cost equation from the Excel rearession regardess of its R-square. Should the companv relv on this cost estimate? Why or whv not? (Round vour answer to the Enter any number in the edit fields and then continue to the next question.

Solution

Using the High low cost method,

Variable cost = Y₂ - Y₁ / X₂ - X₁

Where,

y₂ is the total cost at highest level of activity = 5680
y₁ is the total cost at lowest level of activity = 4880
x₂ are the number of Miles Driven at highest level of activity = 17300
x₁ are the number of Miles Driven at lowest level of activity = 14100

Variable cost = (5680 - 4880) / (17300 - 14100)

= 0.25

Fixed cost = Total cost -  Total variable cost

Total Fixed Cost = y₂ ? bx₂

= 5680 - 0.25 * 17300

= 1355

Cost equation =

Y = $ 0.25X + 1355

Req 2= Data not given

Req 3

Cost at 14500 miles using cost equation

= 0.25 * 14500 + 1355

= $4980