QUESTION B: Cost behavior (12 marks)

1.A cost analyst collected the following information for the Machining Department:

ObservationMachine-hoursTotal Operating Costs

July8,000$60,000

August9,20066,000

September7,60061,000

October8,80064,000

November9,00065,000

Required:

i.Determine the estimated cost function with machine-hours as the cost driver using the high-low method. (4 marks)

ii.If December's estimated machine-hours total 8,400, what is the estimated cost of the Machining Department? (2 marks)

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2.Newton Company used linear regression analysis to obtain the following output:

Payroll Department Cost

Explained by Number of Employees

Constant$5,800

Standard error of Y estimate630

r20.8924

Number of observations20

X coefficient$1.902

Standard error of coefficient0.0966

Required:

i.What is the total fixed cost?

ii.What is the variable cost per employee?

iii.Prepare the linear cost function.

iv.Comment on the explanatory power of the number of employees in relation to payroll department cost.

.

QUESTION C: Economic Order Quantity

Problem 19-26 page 803

1.a.Complete the following table. (5 marks)

Scenario

1

2

3

4

5

Annual demand (packages

234,000

234,000

234,000

234,000

234,000

Cost per purchase order

$81

$81

$81

$81

$81

Carrying cost per package per year

$11.70

$11.70

$11.70

$11.70

$11.70

Quantity (packages) per purchase order

900

1,500

1,800

2,100

2,700

Number of purchase orders per year

Annual relevant order costs

Annual relevant carrying costs

Annual total relevant costs of ordering and carrying inventory

a.Calculate the EOQ using the EOQ formula.

2.Mona Lisa is about to introduce a web-based ordering system for its customers. Liv Carrol estimates that Koala Blue's ordering costs will be reduced to $49 per purchase. Calculate the new EOQ and the new annual relevant costs of ordering and carrying inventory.

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3.Liv Carrol estimates that Koala Blue will incur a cost of $2,000 to train its two purchasing assistants to use the new Mona Lisa system. Help Liv Carrol present a case to upper management showing that Koala Blue will be able to recoup its training costs within the first year of adoption.