Problem - CWT Lawyers Pty Ltd started to operate in 2015 in Melbourne. CWT advises clients on legal issues relating to commercial contracts, ASIC compliance, Trade Practices and Corporations Act requirements, business structuring, mergers and acquisitions of business. CWT experienced the first year's widely fluctuating client number in each month. Peter, the accountant of CWT, lists the client number and administrative cost in 2015 shown below.
|
Month
|
Client Number
|
Administrative Cost
|
|
January
|
140
|
$1,490
|
|
February
|
50
|
702
|
|
March
|
40
|
600
|
|
April
|
100
|
1,000
|
|
May
|
130
|
1,900
|
|
June
|
95
|
920
|
|
July
|
110
|
1,020
|
|
August
|
30
|
410
|
|
September
|
70
|
950
|
|
October
|
120
|
1,220
|
|
November
|
60
|
830
|
|
December
|
30
|
750
|
Peter has estimated that CWT's relevant range of monthly activity in the future will be 50 to 120 clients.
Required-
A. Draw a scatter diagram of the administrative cost and client number from January to December as shown above.
B. Visually fit a semi-variable cost line to the plotted data in part A above. What are the fixed and variable costs? Express the cost behavior in formula form Y = a + bX correct to two decimal places.
C. Identify the number of client number and administrative costs, for each month within the relevant range.
D. Use the high-low method to estimate the behavior of CWT's administrative costs based on the client load within the relevant range. Express the cost behavior in formula form Y = a + bX correct to two decimal places.
E. Construct an Excel spreadsheet and use Excel commands to perform a least-square regression and estimate the administrative cost behavior within the relevant range. Express the cost behavior in formula form Y= a + bX correct to two decimal places. Compute and interpret the R2 value for the expression in NOT more than 50 words.
F. Predict the administrative costs for a month when there are 80 clients. Use the cost equations, high low method in Part D and least-square regression in Part E to make the predication. Which prediction would you prefer to use? Why? Justify your answer of NOT more than 100 words.
G. How confident should Peter be about the three cost models (the scatter diagram and a visual fit semi-variable cost line, high-low method and least-square regression within a relevant range)? Explain your answer of NOT more than 150 words.