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P3-42 Solution
This problem illustrates the use of least squares method to derive a cost formula that can be used to predict cost of an activity for a month, a quarter and a year.
In preparing cost formula using least squares method, intercept represents fixed cost and slope represents the variable cost rate.
Important Formula:
Cost formula = Fixed cost + Variable rate * Level of activity
Part 1
Step 1
Prepare a cost formula using the least squares method. x = $3,212 + $15.15 * Number of orders received

Part 2
Step 1
Use the cost formula to predict receiving orders of one month at 1,450.
Let x be the cost for the monthly receiving orders of 1,450: x = $3,212 + $15.15 * 1,450 x = $6,600 + $17,400 x = $25,180

Part 3
Step 1
Use the cost formula to predict receiving orders of one quarter at 4,650.
(Hint: the cost formula is based on monthly data and therefore, the fixed cost is for one month only. To compute cost for a quarter, the monthly fixed cost must be converted into quarterly fixed cost.)
Let x be the cost for quarterly receiving orders of 4,650: x = 3 * $3,212 + $15.15 * 4,650 x = $9,636 + $70,448 x = $80,084

Step 2
Use the cost formula to predict receiving orders of the year at 18,000.

(Hint: the cost formula is based on monthly data and therefore, the fixed cost is for one month only. To compute cost for a year, the monthly fixed cost must be converted into annual fixed cost.)
Let x be the cost for annual receiving orders of 18,000: x = 12 * $3,212 + $15.15 * 18,000 x = $79,200 + $216,000 x = $311,244

P3-41
This problem illustrates the use of high-low method to derive a cost formula that can be used to predict cost of an activity for a month, a quarter and a year.
In preparing a scattergraph, the horizontal axis represents level of activity and the vertical axis represents cost of activity. Data is plotted and then a line is drawn connecting two points selected by judgment.
In preparing cost formula using