Exercise 6A-5 Least-Squares Regression [LO6-11][The following information applies to the questions displayed below.] George Caloz & Frères, located in Grenchen, Switzerland, makes luxury custom watches in small lots. One of the company’s products, a platinum diving watch, goes through an etching process. The company has recorded etching costs as follows over the last six weeks: WeekUnitsTotal Etching Cost1 4 $18 2 3 17 3 8 25 4 6 20 5 7 24 6 2 16 30 $120 For planning purposes, management would like to know the variable etching cost per unit and the total fixed etching cost per week. Exercise 6A-5 Part 33. If the company processes five units next week, what would be the expected total etching cost?

George Caloz & Freres

The High - Low method can be used to solve:

The Highest Units and cost = 8 at $25

The Lowest Units and cost = 2 at $16

The difference  = 6 units at $9

a) Variable cost = $9/6 = $1.5 per unit

b) Fixed cost at Highest unit produced, is then:

8 x $1.5 + Fixed cost = $25

Fixed cost = $25 = $12 (8 x $1.5) = $13

Check:

At lowest units of production, fixed cost:

Fixed cost = $16 - $3(2x $1.5) = $13

c) If the company processes 5 units next week, the expected total etching costs will be $20.50 (5x $1.5 + $13)

Explanation:

a) Arrangement of the cost data:

Week   Units Total Etching Cost

1            4        $18

2           3        $17

3           8        $25

4           6        $20

5           7        $24

6           2       $16

           30      $120

b) The High - Low can be used to work out the variable and fixed elements of cost.   This method extracts the differences in units and cost to determine the variable cost per unit and the fixed cost.

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