Freight Miles Month Operating Costs Maintenance Costs $ 942 $ 974 January February 1,710 1,008 776 2,655 March 1,218 686 2,705 April May 4,220 1,380 694 1,484 588 4,660 June 1,548 422 4,455 July August 1,568 352 4,435 1,972 420 4,990 1,190 2,490 September 564 October 1,302 788 2,610 November 962 762 2,240 December 772 1,028 1,490 Coefficient Variable Standard Error t-Value $445.76 $112.97 Constant 3.95 $ 0.03 Independent variable: No. of freight miles 2 = 0.86; Durbin-Watson statistic $ 0.26 7.83 2.18 %3D
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Interpreting regression results. Spirit Freightways is a leader in transporting agricultural products in the western provinces of Canada. Reese Brown, a financial analyst at Spirit Freightways, is studying the behavior of transportation costs for budgeting purposes. Transportation costs at Spirit are of two types: (a) operating costs (such as labor and fuel) and (b) maintenance costs (primarily overhaul of vehicles). Brown gathers monthly data on each type of cost, as well as the total freight miles traveled by Spirit vehicles in each month. The data collected are shown below (all in thousands):
Conduct a regression using the monthly data of operating costs on freight miles. You should obtain the following result:
Regression: Operating costs = a + (b X Number of freight miles)
- Plot the data and regression line for the above estimation. Evaluate the regression using the criteria of economic plausibility, goodness of fit, and slope of the regression line.
- Brown expects Spirit to generate, on average, 3,600 freight miles each month next year. How much in operating costs should Brown budget for next year?
- Name three variables, other than freight miles, that Brown might expect to be important cost drivers for Spirit’s operating costs.
- Brown next conducts a regression using the monthly data of maintenance costs on freight miles. Verify that she obtained the following result:
Regression: Maintenance costs = a + (b X Number of freight miles)
- Provide a reasoned explanation for the observed sign on the cost driver variable in the maintenance cost regression. What alternative data or alternative regression specifications would you like to use to better capture the above relationship?
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