Julie Montelongo Student ID: 003894760 ACCT 606 Winter 2013 Take-home Midterm Question Take-home Part (due

next Wednesday 8PM, type up your answers and label the questions clearly) TJs Cheese Cake Factory, Inc. sells original cheese cake for $15 each. The company provided the following units and total cost data concerning its cake sales for each month during 2011: Cost Units January 55,000 2,500 February 59,000 2,800 March 60,000 3,000 April 64,000 4,200 May 67,000 4,500 June 71,000 5,500 July 74,000 6,500 August 77,000 7,500 September 75,000 7,000 October 68,000 4,500 November 62,000 3,100 December 73,000 6,500 a. Use the linear regression method to estimate fixed and variable costs. Excel has a function that you can use (I have posted these data in excel on BB for your convenience). Print out the regression output and attach to this test. SUMMARY OUTPUT Regression Statistics Multiple R 0.980976 R Square 0.962313 Adjusted R Square 0.958544

Standard Error Observations ANOVA

1448.743 12

df Regression Residual Total 1 10 11

SS 5.36E+08 20988553 5.57E+08

MS F 5.36E+08 255.3431 2098855

Significance F 1.9E-08

Intercept X Variable 1

Coefficients 48126.41 3.94936

Standard Error t Stat 1257.89 38.25965 0.247152 15.97946

P-value 3.55E-12 1.9E-08

Upper Lower Upper Lower 95% 95% 95.0% 95.0% 45323.65 50929.16 45323.65 50929.16 3.39867 4.500049 3.39867 4.500049

Fixed portion of cost is $48,126.41. Variable portion of cost is $3.95 per unit. b. Interpret and evaluate your regression results and write out the cost formula. Cost = $48,126.41 + $3.95(#of units) $48,126.41 from Intercept Coefficient and $3.95 from X Variable 1 Coefficient. c. Estimate total costs in a month when 6,000 cakes are produced and sold. Cost = $48,126.41 + $3.95(#of units) Cost = $48,126.41 + $3.95(6,000) = $48,126.41 + $23,700 = $71, 826.41 d. Estimate total profit in a month when 6,000 cakes are produced and sold.

Sales = Price per unit x units sold Sales = $15 x 6,000 Sales = $90,000 Profit = Sales Cost Profit = $90,000 - $71,826.41 Profit = $18,173.59 e. You are working on the budget for October 2012 and expect 10,000 cakes will be produced and sold. Estimate total costs in a month when 10,000 cakes are produced and sold. Will you use the estimated cost in your budget? Why? Sales = Price per unit x units sold Sales = $15 x 10,000 Sales = $150,000 Cost = $48,126.41 + $3.95(#of units) Cost = $48,126.41 + $3.95(10,000) Cost = $48,126.41 + $39,500 Cost = $87,626.41 I would not use these estimated cost in my budget because 10,000 units is not in the relevant range. The relevant range is only between 2,500 and 7,500 units. The cost behavior above only holds within the relevant range. f. How does linear regression differ from the high-low method in estimating fixed and variable costs? Discuss the pros and cons of each. The linear regression is different from the high-low method because the high-low method uses the costs associated with only the highest and lowest activity levels. The linear regression on the other hand uses all data available. The linear regression is more accurate than the high-low method because it includes all data points, however to calculate the intercept and variable coefficients would be very time consuming unless you use a computer. The high-low method is easy to calculate without a computer but it is not too accurate because it only includes 2 data points and does not take the rest into consideration.