Sebolt Wire Company heats copper ingots to very high temperatures by
placing the ingots in a large heat coil.
P2-19 Sebolt Wire Company heats
copper ingots to very high temperatures by placing the ingots in a large heat
coil. The heated ingots are then run through a shaping machine that shapes the
soft ingot into wire. Due to the long heat-up time, the coil is never turned
off. When an ingot is placed in the coil, the temperature is raised to an even
higher level, and then the coil is allowed to drop to the “waiting” temperature
between ingots. Management needs to know the variable cost of power involved in
heating an ingot and the fixed cost of power during “waiting” periods. The
following data on ingots processed and power costs are available:
Month Number of ingots Power cost
January 110 $5,500
February 90 $4,500
March 80 $4,400
April 100 $5,500
May 130 $6,000
June 120 $5,600
July 70 $4,000
August 60 $3,200
September 50 $3,400
October 40 $2,400
Required:
1. Using the high-low method, estimate a cost formula for power cost.
Express the formula in the form Y = a + bX.
2. Prepare a scattergraph by plotting
ingots processed and power cost on a graph. Draw a straight line though the two
data points that correspond to the high and low levels of activity. Make sure
your line intersects the Y-axis.
3. Comment on the accuracy of your
high-low estimates assuming a least-squares regression analysis estimated the
total fixed costs to be $1,185.45 per month and the variable cost to be $37.82
per ingot. How would the straight line that you drew in requirement 2 differ
from a straight line that minimizes the sum of the squared errors?
TUTORIAL PREVIEW
1. High-low method:
|
Number of Ingots
|
Power Cost
|
|
|
High activity level
|
130
|
$6,000
|
|
Low activity level
|
40
|
2,400
|
|
Change
|
90
|
$3,600
|
