Using Regression Results to Construct and Apply a Cost Formu

Using Regression Results to Construct and Apply a Cost Formula Dohini Manufacturing Company had the following 12 months of data on purchasing cost and number of purchase orders. Month Purchasing Cost Number of Purchase Orders January $18,860 370 February 18,065 330 March 19,250 370 April 18,050 410 May 19,345 400 June 19,500 450 July 19,670 460 August 20,940 560 September 19,430 440 October 20,020 500 November 18,800 470 December 19,340 480 The controller for Dohini Manufacturing ran regression on the data, and the coefficients shown by the regression program are: Intercept 15,021 (rounded to the nearest dollar) X variable 1 9.74 (rounded to the nearest cent) Required: 1. Construct the cost formula for the purchasing activity showing the fixed cost and the variable rate. Total purchasing cost = $ 15,021 + ($ 9.74 × Purchase orders) 2. If Dohini Manufacturing Company estimates that next month will have 430 purchase orders, what is the total estimated purchasing cost for that month? (Round your answer to the nearest dollar.) $ 19,209 3. What if Dohini Manufacturing wants to estimate purchasing cost for the coming year and expects 5,340 purchase orders? What will estimated total purchasing cost be? (Round your answer to the nearest dollar.) $ What is the total fixed purchasing cost?

Solution

Answer to Requirement 1:

As per High-Low Method,
Variable Cost per Order = (y2 – y1) / (x2 – x1)
Total Cost at the Highest level of Activity (y2) =$20,940
Total Cost at the Lowest level of Activity (y1) = $18,065
No. of Orders at Highest Level of Activity (x2) = 560 Orders
No. of Orders at Lowest Level of Activity (x2) = 330 Orders

Variable Cost per Order = (20,940 – 18,065) / (560 – 330)
Variable Cost per Order = 2,875 / 230
Variable Cost per Order = $12.50 per Purchase Order

Fixed Cost= Total Cost - Variable Cost
Total Cost = $20,940
Fixed Cost = $20,940 – ($12.50 * 560)
Fixed Cost = $13,940

Total Purchasing Cost = $13,940 + ($12.50 * Purchase Orders)

Answer to Requirement 2:

Total Purchasing Cost = $13,940 + ($12.50 * 430)
Total Purchasing Cost = $13,940 + $5,375
Total Purchasing Cost = $19,315

Answer to Requirement 3:

Calculation of Purchasing Cost for the year, if 5,340 Purchase Orders are received

Total Purchasing Cost = ($13,940 * 12) + ($12.50 * 5,340)
Total Purchasing Cost = $167,280 + $66,750
Total Purchasing Cost = $234,030

The Total Fixed Purchasing Cost will be $167,280 ($13,940 * 12), as $13,940 is cost for a month.