Chapter 2A, Problem 2A.2E

1.

To determine

Introduction:

Variable costs and Fixed costs:

Variable costs are those that increase or decrease with the general volume of work. Some of the examples of variable costs are sales commissions, labor costs, raw material costs, etc. Fixed costs are those costs that remain fixed irrespective of the volume of work. Some of the examples of fixed costs are office rent, administrative expenses, depreciation, etc.

Least square regression method:

The least-square regression method uses the regression line to classify the total cost into variable and fixed cost and thus minimizing the sum of squares of the errors and hence we can get the best line of fit with minimum variances. The least-square regression can be expressed as Y = a + bx

Where Y is Total cost

A is the total fixed cost

B is the variable cost

X is the activity level

To prepare: a scatter plot graph.

2.

To determine

Introduction:

Variable costs are those that increase or decrease with the general volume of work. Some of the examples of variable costs are sales commissions, labor costs, raw material costs, etc. Fixed costs are those costs that remain fixed irrespective of the volume of work. Some of the examples of fixed costs are office rent, administrative expenses, depreciation, etc.

Least square regression method:

The least-square regression method uses the regression line to classify the total cost into variable and fixed cost and thus minimizing the sum of squares of the errors and hence we can get the best line of fit with minimum variances. The least-square regression can be expressed as Y = a + bx

Where Y is Total cost

A is the total fixed cost

B is the variable cost

X is the activity level

To calculate: the variable cost per rental return and the monthly fixed washing cars using least square regression method.