Chapter 2 Managerial Accounting and Cost Concepts
Graded Assignment
Due Sunday, 19 February Beginning of Class Meeting Time
Local Harvest, a cooperative of organic family-owned farms outside of Dubai, has recently started a fresh produce club. By growing organic produce the farms hope promote good health. To be able to buy the organic food, families pay a seasonal membership of $50. The family has the right to buy produce each week, but does not have to. If they want to buy produce in a week they pay $40 for the produce that week. 800 families joined the club to be able to buy the organic products. The number of orders from families each week varies.
The following data has been collected for first 10 week growing season of the club. The club only has one 10 week growing season a year. The first column is the number of families that ordered each week and paid the $40. The second column is the total cost of the club to produce the organic products.
|
Week
|
Number of Orders Per Week: Season One
|
Weekly Total Costs Season One
|
|
1
|
351
|
$18,795
|
|
2
|
385
|
21,597
|
|
3
|
410
|
22,800
|
|
4
|
453
|
22,600
|
|
5
|
425
|
21,900
|
|
6
|
486
|
24,600
|
|
7
|
455
|
23,900
|
|
8
|
467
|
22,900
|
|
9
|
525
|
25,305
|
|
10
|
510
|
24,500
|
|
Total
|
4,467
|
$228,897
|
The manager of the club wants to know what cost behavior is for the club. She is not sure of how much of her costs are variable or fixed. She also would like to know her profit for the current year's 10-week growing season. She is estimating that for next year 900 families will be members of the club. She would like to know the average number of weekly orders she would need to make a profit of zer0 ($0); the average number of weekly orders where the club would not have a profit or a loss.
REQUIRED:
1. Plot the relationship between Number of Orders per Week and the Weekly Total Costs.
2. Estimate the cost equation using the High-Low Method, and draw this line on your graph.
3. The club manager used her computer to determine the following regression equation:
Total weekly costs = $8,631 + ($31.92 X Number of Weekly Orders)
- Draw the regression line on your graph.
- Use your graph to evaluate the regression line using the criteria or economic plausibility, goodness of fit, and significance of the independent variable.
- Is the cost function estimated using the high-low method a close approximation of the cost function estimated using the regression method? Explain briefly.
4. Did the club make a profit for the 10 weeks?
5. If there are 900 members in the club, how many orders would the club need to have each week to make a profit of zero next year.