Question One

PART A
Different approaches Munir can use to estimate a cost function are;
a. Industrial engineering method which estimates cost function by analysing relationship between inputs and outputs in physical terms. It is thorough, detailed way to estimate cost but very time consuming and too costly.
b. Conference method estimates cost functions based on analysis and opinions about costs and their drivers from various departments within the company.
c. Account analysis method estimates cost functions by classifying accounts into variable, fixed or mixed with respect to identified level of activity. Reasonably accurate, cost effective and easy to use.
d. Quantitative analysis method uses formal mathematical models to fit cost functions to past data observations. Most common methods used are high low and regression analysis.

PART B
A. Cost estimation method used by Miller’s Good Value Appliance Store is the account analysis method.

B. Variable costs
Variable costs
Cost of Goods Sold 540,000
Commission on sales 67,500 $ 607,500

Variable cost per unit = 607,500 = $121.50 per unit 5,000

C. Total estimated costs for 6,500 units
Fixed costs
Store manager salary 75,000
Operating costs per year 225,000
Advertising and promotion 25,000 $ 325,000

Estimated costs = $325,000 + ($121.50 per unit x 6,500 units)
= $1,114,750

Question Two

PART A
A.
Units of output Total cost
Highest observation of cost driver 42,000 2,865,000
Lowest observation of cost driver 30,000 2,188,800
Difference 12,000 676,200

Slope coefficient = 676,800 = $ 56.40 12,000

Constant (a) = $2,865,600 – ($56.40 per unit x 42,000 units) = $496,800 =$2,188,800 – ($56.40 per unit x 30,000 units) = $496,800

Linear Cost