Cost Behavior ANS PDF

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Cost Behavior ANS...

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College of Business Business Administration Progr Program am Principles of Manageri Managerial al Accounting (0502230 (0502230)) 2020/2021_II

LO3 (Cost Behavior) Bargain Rental Car offers rental cars in an off-airport location near a major tourist destination in California. Management would like to better understand the variable and fixed portions of it car washing costs. The company operates its own car wash facility in which each rental car that is returned is thoroughly cleaned before being released for rental to another customer. Management believes that the variable portion of its car washing costs relates to the number of rental returns. Accordingly, the following data have been compiled: Month Rental Returns Car Wash Costs January 2,380 $10,825 February 2,421 $11,865 March 2,586 $11,332 April 2,725 $12,422 May 2,968 $13,850 June 3,281 $14,419 July 3,353 $14,935 August 3,489 $15,738 September 3,057 $13,563 October 2,876 $11,889 November 2,735 $12,683 December 2,983 $13,796 Required: 1- Using the high-low method, estimate the fixed cost of Car Wash per month and the variable cost of Car Wash per Rental Returns. Round off the fixed cost to the nearest whole dollar and the variable cost to the nearest whole cent. 2- If it is estimated that 4,000 Rental Returns will be run in next month, what is the expected total Car Wash? 3- Prepare a scattergraph plot. (Place car wash costs on the vertical axis and rental returns on the horizontal axis.) 4- Using least-squares regression, estimate the variable cost per rental return and the monthly fixed cost incurred to wash cars. The total fixed cost should be estimated to the nearest dollar and the variable cost per rental return to the nearest cent. Comment on your answer

Answer: 1. Y

(=)

a

(+)

b

X

High

$15,738

(=)

a

(+)

b

3,489

Low

$10,825

(=)

a

(+)

b

2,380

4.430117

1109

Change (∆)

4913

High

15738

(=)

281.321

(+)

4.430117

3489

Low

10825

(=)

281.321

(+)

4.430117

2380

2. Y

(=)

a

(+)

b

X

18001.7899

(=)

281.321

(+)

4.430117

4000

3. & 4

The scattergraph plot and least-squares regression estimates of fixed and variable costs using Microsoft Excel are shown below:

The intercept provides the estimate of the fixed cost element, $1,378 per month, and the slope provides the estimate of the variable cost element,

$4.04 per rental return. Expressed as an equation in the form Y = a + bX, the relation between car wash costs and rental returns is Y = $1,378 + $4.04X where X is the number of rental returns. Note that the R2 is approximately 0.90, which is quite high, and indicates a strong linear relationship between car wash costs and rental returns....