Cost Behaviour (TB Problem 3.

32)

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11
Cost Behaviour (TB Problem 3.32)
Cost item
Cost of electricity at a university. For low student enrolments, electricity costs increase with enrolment, but at a
decreasing rate. For high student enrolments, electricity costs increase at an increasing rate.
Charges for international telephone calls, which are based on the number of minutes per month. The charge is $
per minute, up to 600 minutes. Additional minutes (above 600) are free.
Cost of outsourcing pathology testing by a hospital. The hospital pays an independent lab a fee of $10 000 p
month plus $5 for each test performed.

Salary costs of the shift supervisors at a courier company. Each shift is eight hours. The depot operates with one
or three shift supervisors simultaneously, at various times of the year, depending on the volume of delivery work.

Cost of 24-hour security services at a factory, provided by an external security company.

Wages of waiters in a restaurant. Waiters are part-time workers who are scheduled to work in three hour blocks.

Cost of electricity during peak-demand periods is based on the following schedule:

Up to 10 000 kilowatt-hours (kWh): $0.90 per kWh
Above 10 000 kilowatt-hours: $1.12 per kWh
Cost of sheet metal used to manufacture automobiles, priced by weight (per kilogram, or part thereof).
Cost of chartering a private aeroplane. The cost is $410 per hour for the first three hours of a flight. Then the cos
drops to $305 per hour.
Under a licensing agreement with an Indonesian import/export company, your firm has begun shipping machine
to several countries. The terms of the agreement call for an annual licensing fee of $100 000 to be paid to the
Indonesian import company if total exports are under $4 000 000. For sales in excess of $4 000 000, an addition
licensing fee of 7 per cent of sales is due.
Tariffs paid by a wine exporter. On one Pacific island, a tariff must be paid by the wine exporter for every case of
brought into that country. The tariff schedule is the following
0 to 6000 cases per year: $11 per case
6001 to 12 000 cases per year: $14 per case
Above 12 000 cases per year: $19 per case
Graph
H

L
Cost Estimation Example
Regression Output (1 cost driver)
Month Electricity Machine Hours Batches
Jan 61,020 25,504 2,866 Regression Statistics
Feb 76,917 30,907 2,919 Multiple R
Mar 75,313 30,309 4,157 R Square
Apr 54,200 20,000 3,099 Adjusted R Square
May 68,067 28,325 4,293 Standard Error
Jun 63,269 25,322 4,348 Observations
Jul 59,918 24,518 2,967
Aug 69,890 29,707 4,711 ANOVA
Sep 72,000 45,000 1,293
Oct 75,802 32,159 5,046 Regression
Nov 63,019 25,862 2,205 Residual
Dec 74,293 31,356 4,647 Total

High-Low Method
VC = 72,000 - 54,200 Intercept
45,000 - 20,000 Machine Hours

VC = 0.7120 Cost Function (Regression)

Electricity = 43,293.4148 + (0.8430 x M
FC = 72,000 - (0.7120 x 45,000)

FC = 39,960.00 Regression Output (2 cost drivers)

Electricity = 39,960 + (0.712 x Machine Hours) Regression Statistics

Multiple R
R Square
Adjusted R Square
Standard Error
Observations

ANOVA

Regression
Residual
Total

Intercept
Machine Hours
Batches

Cost Function (Regression)

Electricity = 27,576.2781 + (0.988 x M
Output (1 cost driver)

gression Statistics
0.698
0.487
0.436
5565.3
12

df SS MS F Significance F
1 294540335.3734 294540335.37 9.5096 0.0116
10 309729181.3897 30972918.139
11 604269516.7631

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
43293.4148 8110.6279 5.3379 0.0003 25221.8 61365.0 25221.8
0.8430 0.2734 3.0838 0.0116 0.2339 1.4521 0.2339

on (Regression)
43,293.4148 + (0.8430 x Machine Hours)

Output (2 cost drivers)

gression Statistics
0.853
0.728
0.668
4272.2
12

df SS MS F Significance F
2 440007799.2024 220003899.6 12.0541 0.0028
9 164261717.5607 18251301.951
11 604269516.7631

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
27576.2781 8352.071 3.302 0.009 8682.6 46470.0 8682.6
0.9880 0.216 4.573 0.001 0.499 1.477 0.499
3.2431 1.149 2.823 0.020 0.644 5.842 0.644

on (Regression)
27,576.2781 + (0.988 x Machine Hours) + (3.2431 * Batches)
Upper 95.0%
61365.0
1.4521

Upper 95.0%
46470.0
1.477
5.842
Lecture Demo 1

Month Labour Hours Labour Cost Regression Analysis

Jan 760 $16,000
Feb 600 $13,500 Regression Statistics
Mar 500 $13,500 Multiple R 0.846
Apr 680 $15,000 R Square 0.716
May 740 $16,400 Adjusted R Square 0.687
Jun 780 $17,200 Standard Error 913.370
Jul 760 $16,800 Observations 12
Aug 500 $12,500
Sep 600 $15,000 ANOVA
Oct 680 $14,000 df
Nov 700 $13,400 Regression 1
Dec 800 $17,000 Residual 10
Total 11

Coefficients
Intercept 6039.2405
X Variable 1 13.3122

High-Low VC = 17000 - (13500+12500 / 2)

800 - 500

VC = 13.33

FC = 17000 - 13.3333 (800) or 130000 - 13.3333 (500)

FC = 6333.33

Labour Cost = 6333.3333 + (13.3333 x Labour Hours)

Labour Cost = 6333 + (13.3333 x 720)

15933.33

Regression Labour Cost = 6039.2405 + (13.3122 x Labour Hours)

Labour Cost = 6039.2405 + (13.3122 x 720)

15624.05
 SS MS F Significance F
21000052.7 21000052.7 25.173 0.001
8342447.3 834244.7
29342500

Std Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
1810.287 3.336 0.008 2005.670 10072.811 2005.670 10072.811
2.653 5.017 0.001 7.400 19.224 7.400 19.224
Lecture Demo Q2

There are two relevant ranges in this question, between 0 to 1500, and 1500+
Cost estimation can only be conducted accurately within a single relevant range.

Range 1:
High 1400 8000
Low 600 6000
Difference 800 2000

VC Range 1 $2.50

Range 2:
High 2000 9600
Low 1750 9000
Difference 250 600

VC Range 1 $2.40

Therefore there is a $0.10 economics of scale advantage