Problem 1

John & Heather Tutoring, Inc. is an online tutoring service provider that is particularly popular with college students. The company is interested in estimating the fixed and variable components of its tutoring services costs. John and Heather believe that these costs are driven by the number of hours of tutoring services provided.

The following information was gathered for the last six months of business:

Month Number of Hours Tutoring costs

January 27,000 $ 325,000

February 41,000 $420,000

March 30,000 $360,000

April 31,000 $373,000

May 34,000 $378,000

June 15,000 $230,000

Required: Show all work.

1. Compute the average tutoring cost per hour for the six-month period (i.e., Total costs/Total hours). (Round the average tutoring cost per hour to two decimal points.)

2) Use the high-low method to estimate the total fixed cost and the variable cost per hour. (Round the variable cost per hour to two decimal points.) Provide an equation to express the results of this estimation method.

3) Construct an Excel spreadsheet to perform a least-squares regression to estimate the tutoring company's cost behavior. Attach the spreadsheet to the examination file. Provide an equation to express the results of this estimation method.

4) Use your Excel spreadsheet to compute the R2 value for the regression. Interpret the R2 value - that is, what does R2 mean?

5) Name one advantage and one disadvantage of each method to analyze mixed costs: - average cost - the high-low method. - least-squares regression (or Scattergraph) method.

6) Predict the tutoring company's costs for a month when 53,000 tutoring hours are provided to customer. Use each of your methods to make the prediction.

a) Average cost b) High -Low c) Regression

Which prediction would you prefer to use and why?