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# New Jersey Designs:Regression and High-Low Forecasting

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Question I

What do you know about Seacode's method of conducting business?
What is the applicability of the method in a present day business organization?
What do you understand by an activity base when dealing with variable costs? Give several examples of activity bases.

Question II

Analyze the effect that an increase in production volume has on per unit fixed costs, per unit variable costs, total fixed costs, and total variable costs. Explain giving examples.

Problem I

New Jersey Designs is a large merchandiser of apparel for budget-minded families. Management recently became concerned about the amount of inventory carrying costs and transportation costs between warehouses and retail outlets. As a starting point in further analyses, Mike Hancock, the controller, wants to test different forecasting methods and then use the best one to forecast quarterly expenses for 2012. The relevant data for the previous three years have been attached.

The results of a simple regression analysis using all 12 data points yielded an intercept of \$11,854.55 and a coefficient for the independent variable of \$126.22 (R-squared =0.19, t = 1.5, SE = 974).

On the basis of the given data, complete the following:
Run the regression in Microsoft Excel and verify the results above.
Calculate the quarterly forecasts for 2012 using the high-low method and regression analysis. Recommend the method Mike should use and explain the reason.
Explain how has your forecast in the above question changed when ACME Designs is involved in global sourcing of products for its stores.

Problem II

The management of ACME Designs would like to have a better understanding of the behavior of its inspection costs. The company has provided the data attached.

The management believes that inspection cost is a mixed cost that depends on direct labor-hours.

On the basis of the given data, complete the following:
Estimate the variable cost per direct labor-hour using the high-low method. Show your workings.
Estimate the fixed cost per month using the high-low method. Show your workings.

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#### Solution Preview

Question I

What do you know about Seacode's method of conducting business?

Seacode is finding a low cost solution to the cost of labor, the largest ingredient in programming services. They have figured out how to be close to the US and yet not limited by competition from the US labor market and labor rules of US regulators. Programmers likely enjoy the community and the room and board!

What is the applicability of the method in a present day business organization?

It is applicable. Firms will innovate to find the low cost solution. If they can get workers to adopt a floating office, it works. Maybe there will be a space station full of programmers ...

#### Solution Summary

Your coaching is in Excel and shows the regression output, the high low computations, formula and a few sentences to interpret the regression vs. the high low method. The high low is demonstrated for the second problem and interpreted with a sentence.

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