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Cost estimation: Contrasting high-low and account classification methods (LO2, LO3;Continuation of Comfort Pillows). Refer to the data in Problem 4.54....

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Cost estimation: Contrasting high-low and account classification methods (LO2, LO3;Continuation of Comfort Pillows). Refer to the data in Problem 4.54. As an alternative to;the detailed account analysis, management at Comfort Pillows desires to use the high-low;method to estimate the variable cost associated with producing a pillow. The firm plans;to add 25% to the variable cost to arrive at the price charged to the department store.;Management of Comfort Pillows has provided you with the total costs associated with;the highest (September) and lowest (March) monthly production volumes for the most;recent year of operations.;Required;a. Use the high-low method to estimate Comfort Pillows? monthly cost equation (i.e.;use the high-low method to estimate Comfort Pillows? monthly fixed costs and variable;cost per pillow produced).;b. Using the variable cost estimate, calculate the price per pillow that Comfort will;charge the department store.;c. Explain why your answer to part (b) above differs from your answer to part(a) in;Problem 4.54. Which of these two estimates do you believe is better/more reliable?;Why?;Item Cost;Fabric $2.50 per pillow;Fill $18.00 per pillow;Industrial sewing machines 1/2 hour per pillow, the long-term lease cost is;$100,000 per year, Comfort Pillows has enough sewing;machines to produce 20,000 pillows per month.;Labor 1/2 hour per pillow, labor costs $12 per hour.;Plastic wrap & other packing $0.50 per pillow;Cartoning & crating $10.00 per 25 pillows.;Transportation $1,500 for a truckload of 2,500 pillows;Purchasing & manufacturing $32,500 for 12,000 pillows per month. Comfort;support expects this cost to increase by $15,000 per month;(to $47,500 per month) if volume increases to;15,000 or more pillows per month.;Advertising brochures $150,000 per year;Office expenses $300,000 per year. The current office staff can support;a volume of 20,000 pillows per month.;Sales & customer support $200,000 per year for 250 customers. The department;store is not a regular customer. Comfort expects;to spend a total of $1,000 in arranging logistics;and incorporating the department store into its;regular client list

 

Paper#78923 | Written in 18-Jul-2015

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