Redoor Company operates a chain of shops The companys chief

Redoor Company operates a chain of shops. The company\'s chief executive officer is interested in accumulating some information on the utility costs incurred by the company. You have been asked to nalyze the following twelve months\" data. Month Utility Cost per month Goods per month 75,000 units $5,100 50 6,400 98,000 08,000 7.000 6,200 100 October 90,000 5,600 5,900 Required: A. Using the high low method, construct a cost formula for the total utility cost. To round cakculation to three decimal places. (5 marks) B. Using the method of least squares, your regression analysis prodoced the following results 1,920 Intercept Independent variable.0448 Using the results of regnession, construct a cost formala for the total utility cost To round numbers to four decimal places. (3 marks) The CEO would like to understand what the advantages and disadvantages of the method of least squares and the high-low method. In particular, the CEO would like to know which method would provide the more accurate cost prediction so that it can be used to predict next month\'s overhead costs. Write a short memo to the CEO outlining the advantages and disadvantages regarding the two methods. (2 marks) C.

Solution

Month Utility Cost per month Goods per month January $                                   5,100 75,000 Units Low February                                       5,300 78,000 March                                       5,650 80,000 April                                       6,300 92,000 May                                       6,400 98,000 June                                       6,700 108,000 July                                       7,035 118,000 High August                                       7,000 112,000 September                                       6,200 95,000 October                                       6,100 90,000 November                                       5,600 85,000 December                                       5,900 90,000 A. Using the high low method, Variable cost per unit = (Costhigh - Costlow) ÷ (Unitshigh -Unitslow) (7035-5100)÷(118000-75000) 1935 ÷ 43000 0.045 per unit Fixed Cost = Costhigh - VC x Unitshigh 7035 - 118000 x 0.045 7035 - 5310 $                     1,725 Cost formula: Y = a + bx y = 1725 + 0.045X B. Cost formula: Y = a + bx Y = 1920 + 0.0448X C. Both the method have its own pros and cons like High low method is easy to use and can be calculated using simple calculation but has one disadvantage It ignores all the items of cost so can results in wrong results. Least squares method considers all the items of cost and units so technically more accurate But its difficult to calculate and use. So , CEO should use Least square to arrive at more accurate result.