# Question & Answer: Scatter Diagrams and High-Low Cost Estimation Assume the local Pearle Vision has the following information on the number of sales orders received and order-processing costs…..

Scatter Diagrams and High-Low Cost Estimation Assume the local Pearle Vision has the following information on the number of sales orders received and order-processing costs Month Sales Orders Order-Processing Costs \$165,400 100,750 241,400 163,800 139,550 86,200 125,000 3,000 1,500 4,400 2,800 2,300 1,200 2,000 4 Required (a.) Use information from the high- and low-volume months to develop a cost- estimating equation for monthly order-processing costs. -\$ 28,000+ 48.5 X (b.) Plot the data on a scatter diagram. Using the information from representative high- and low-volume months, develop a cost estimating equation for monthly production costs. If needed, an Excel worksheet is provided in the following link in order to create the scatter diagram: Scatter_Diagram

1. High low volume cost estimating equation

High volume in month 3=no. of sales orders=4400

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Cost=\$241,400

Low volume month6=no. of sales orders=1200

Cost=\$86,200

Equation:

Y=a+bX

Y=cost

X=Volume=No. of sales order

Y1=\$86,200 , X1=1200

Y2=\$241,400 X2=4400

b=(Y2-Y1)/(X2-X1)=(241400-86200)/(4400-1200)=\$48.5

Estimated Variable cost per sales order=\$48.5

a=Y1-bX1=86200-48.5*1200=\$28,000

Estimated fixed cost=\$28,000

Cost Estimating Equation:

Order processing cost(Y)=\$28,000+48.5X

 Y= \$28,000 + \$48.50 X
 X Yac Ye=28000+48.5*X Month Number of orders Actual order processing cost Estimated order processing cost 1 3000 165400 173500 2 1500 100750 100750 3 4400 241400 241400 4 2800 163800 163800 5 2300 139550 139550 6 1200 86200 86200 7 2000 125000 125000