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Unformatted text preview: Problem 1: Cost Estimation, HighLow You own a chain of 30 hotels. You are examining the costs of your company’s reservation center. About half of all your customers make reservations through your 1800GETROOM call center. The other half use your web site or are walkin guests. You obtained the following weekly data: Call Center Number of Week Costs Reservations 1 $ 168,450 8,810 2 206,240 9,760 3 191,410 1,420 4 184,520 11,160 5 178,430 9,740 6 209,900 High ! 11,560 7 188,310 10,210 8 211,290 10,280 9 187,670 10,530 10 182,320 Low ! 8,510 Required : a. Using the highlow method, estimate the cost function. Evaluate the cost equation. Interpret. Week 3 is an outlier. The high and low observations are highlighted. The slope is ($209,900 ! 182,320)/(11,560 ! 8,510) = $27,580/3,050 = $9.04/reservation $209,900 = a + $9.04 " 11,560. a = $105,367 Cost = $105,367 + $9.04 " Reservations b. In a week in which there are 9,500 reservations, what is your estimate of call center costs? Cost = $105,367 + $9.04 " Reservations = $105,367 + $9.04 " 9,500 = $191,272 c. What is the average cost per reservation? How does this compare to the marginal cost? Why are they different? Average Cost = Total Cost/Quantity = $191,272/9,500 = $20.13 The average cost is much greater than the marginal cost because the fixed costs are spread over 9,500 reservations. As this number increases, the average cost will approach the marginal cost. d. If you anticipate handling 1,500 reservations, what would you estimate? This cannot be reliably estimated. It is beyond the relevant range on which we have data. EXTRA CREDIT : Plot the data and use the visual fit method to estimate the cost function. Compare with your results from using the highlow method. (See me for graph paper.) See next page. The dashed line represents the estimation using the highlow method (note that it runs through the high and low points of the cost driver. Looking at the data, I would estimate the cost equation with a line very similar to that estimated by the highlow method. My estimate of the slope (marginal cost) would be a bit higher, resulting in a slightly lower intercept. Student ID: ___________________ Page 7 of 10 Outlier Problem 2: Cost Estimation, Account Analysis Wanting to compare your previous cost estimate to an alternative method, you gather the following data from last year’s expenditures....
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 Fall '06
 GIVANR
 QBE, Maria Hernandez

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