If equipment cost 20,000 and accumulated depreciation amounts to ...

[ashley]

If equipment cost 20,000 and accumulated depreciation amounts to 6,000, the book value of the equipment is
 a. 26,000.
  b. 6,000.
  c. 14,000.
  d. 20,000.
  e. none of these.

Question 2

High-low method and regression analysis.
 
  Fresh Choice, a cooperative of organic family-owned farms outside of Madison, Wisconsin, has recently started a fresh produce club to provide support to the group's member farms and to promote the benefits of eating organic, locally produced food to the nearby suburban community. Families pay a seasonal membership fee of 75 and place their orders a week in advance for a price of 35 per order. In turn, Fresh Choice delivers fresh-picked seasonal local produce to several neighborhood distribution points. Seven hundred families joined the club for the first season, but the number of orders varied from week to week.
   Daniel Craig has run the produce club for the first 10-week season. Before becoming a farmer, Daniel had been a business major in college, and he remembers a few things about cost analysis. In planning for next year, he wants to know how many orders will be needed each week for the club to break even, but first he must estimate the club's fixed and variable costs. He has collected the following data over the club's first 10 weeks of operation:
 
  Required:
  1. Plot the relationship between number of orders per week and weekly total costs.
  2. Estimate the cost equation using the high-low method, and draw this line on your graph.
  3. Harvey uses his computer to calculate the following regression formula:
 
  Draw the regression line on your graph. Use your graph to evaluate the regression line using the criteria of 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 Fresh Choice break even this season? Remember that each of the families paid a seasonal membership fee of 75.
  5. Assume that 850 families join the club next year and that prices and costs do not change. How many orders, on average, must Fresh Choice receive each week to break even?

[ong527]

Answer to Question 1

C

Answer to Question 2

1. See Solution Exhibit 10- 31.

EXHIBIT 10- 31

(Regression line solid, high low-line is dotted)

2.
Number of
Orders per week Weekly
Total Costs

Highest observation of cost driver (Week 9) 529 25,275
Lowest observation of cost driver (Week 1) 353 19,005
Difference 176  6,270

Weekly total costs = a + b (number of orders per week)

Slope coefficient (b) = 6,270/176=35.63 per order

Constant (a) = 25,275  (35.63 529) = 6,429.38
= 19,005  (37.41 353) = 6,429.38

Weekly total costs = 6,429.38 + 35.63  (Number of Orders per week)

See high-low line in Solution Exhibit 10- 31.

3. Solution Exhibit 10- 31 presents the regression line:

Weekly total costs = 10,048 + 28.91  (Number of Orders per week)

Economic Plausibility. The cost function shows a positive economically plausible relationship between number of orders per week and weekly total costs. Number of orders is a plausible cost driver of total weekly costs.

Goodness of fit. The regression line appears to fit the data well. The vertical differences between the actual costs and the regression line appear to be quite small.

Significance of independent variable. The regression line has a steep positive slope and increases by 28.91 for each additional order. Because the slope is not flat, there is a strong relationship between number of orders and total weekly costs.

The regression line is the more accurate estimate of the relationship between number of orders and total weekly costs because it uses all available data points while the high-low method relies only on two data points and may therefore miss some information contained in the other data points. In addition, because the low data point falls below the regression line, the high-low method predicts a lower amount of fixed cost and a steeper slope (higher amount of variable cost per order).

4. Profit =
Total weekly revenues + Total seasonal membership fees  Total weekly costs =
(Total number of orders  35) + (700  75)  229,940 =
(4,478  35) + (700  75)  229,940 =
156,730 + 52,500  229,940 = (20,710).
No, the club did not make a profit.
5. Let the average number of weekly orders be denoted by AWO. We want to find the value of AWO for which Fresh Choice will achieve zero profit. Using the format in requirement 4, we want:

Profit = AWO  10 weeks  35 + (850  75)  10,048 + (28.91  AWO)  10 weeks = 0

350  AWO + 63,750  100,480  289.1  AWO = 0

60.9  AWO = 36,730

AWO = 36,730  60.9 = 603.12

So, Fresh Choice will have to get at least 604 weekly orders in order to break even next year.