Waveney DIY Centers (WDC) operates a few dozen stores in the eastern United States. The stores are popular with home remodelers, contractors, and do-it-yourself customers. The managers at Waveney are interested in understanding what drives costs as well as getting better cost estimates when planning new stores. The area manager for the Southeast Region is interested in new data analysis approaches to management and offered to run a test using data from the 14 stores in the region.

The initial thoughts of the managers and the financial analysts in the region were that two primary factors drove store costs: store area (square footage) and revenue. The following data were collected from the most recent year of operations (revenues and costs in thousands of dollars): 

Required

a. Use the high-low method to estimate the fixed and variable portions of store costs based on store revenues.

b. The managers in the region are interested in opening a new store with expected revenues of $19 million. Assuming the data and cost estimates from the current stores are appropriate for the new store (SE-15), what are the estimated store costs for store SE-15?

c. Managers are also considering a “mega-store” with revenues of $30 million. Based on the results from the high-low analysis in requirement (a), what are the estimated store costs for the mega store?

d. Are you more or less confident in the estimate obtained in requirement (c) relative to the estimate in requirement (b), or are you equally confident in both? Explain?

Transcribed Image Text:

A 1 2 3 SE-01 4 SE-02 5 SE-03 Store 6 SE-04 7 SE-05 8 SE-06 9 SE-07 10 SE-08 11 SE-09 12 SE-10 13 SE-11 14 SE-12 15 SE-13. 16 SE-14 17 B Revenues $ ($000) 20,545 15,482 25,721 19,389 19,666 17,756 24,505 12,701 23,081 15,830 20,358 17,120 13,674 22,904 C Area (Square Feet) 69,147 51,417 83,331 67,374 58,509 67,374 95,748 46,098 78,012 62,055 65,601 72,693 62,055 74,466 $ D Costs ($000) 15,799 12,495 19,210 15,079 15,112 14,099 18,691 10,747 17,453 12,864 15,633 13,797 11,570 17,294