Week 4 Solutions

# Week 4 Solutions - Week 4 Solutions Exercise 11-16 Question...

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Week 4 Solutions Exercise 11-16 Question: Cost behavior… Solution: a. Cost and net income estimate: Sales \$980,000 Cost of goods sold \$45,000 .46 \$980,000 495,800 Store salaries 65,000 .055 980,000 118,900 Store utilities 26,000 .015 980,000 40,700 Store maintenance 14,000 .08 980,000 92,400 Advertising 36,000 .01 980,000 45,800 Corporate overhead 75,000 .025 980,000 99,500 Net income \$ 86,900 b. Categorize costs: Cost of goods sold : Primarily variable with a fairly high ‘‘r'' squared value. Store salaries : Clearly a mixed costs with major components of fixed and variable cost. The ‘‘r'' squared suggests a fairly strong linear relationship between the two variables. Store utilities : Primarily a fixed cost with some variable component. The .34 ‘‘r'' squared suggests there is a lot of unexplained variance. Store maintenance : This is mostly a fixed cost. The 96.5 percent unexplained variance indicates that there is very little linear relationship between sales and this cost. Advertising : This cost also appears to be mostly variable with very little linear relationship between the two variables. Corporate overhead : This corporate cost that is allocated to the store is fundamentally fixed. It has over 95 percent of unexplained variance. c. We just used the cost behavior model as described by the regression data. Only two of the costs, however, had a strong coefficient of determination. The ‘‘r'' squared for the other cost categories were weak to almost zero. This indicates that the regression data for

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