Question

Davis Stores sells clothing in 15 stores located around the southwestern United States. The managers at Davis are considering expanding by opening new stores and are interested in estimating costs in potential new locations. They believe that costs are driven in large part by store volume measured by revenue. The following data were collected from last year’s operations (revenues and costs in thousands of dollars).

Store	Revenues	Costs
101	$4,100	$4,214
102	2,227	2,894
103	5,738	5,181
104	3,982	3,998
105	2,914	3,676
106	4,023	3,319
107	6,894	5,029
108	1,779	2,374
109	5,416	4,688
110	3,228	2,959
111	3,886	4,179
112	4,690	3,200
113	3,552	2,556
114	4,817	4,655
115	2,124	2,986

Exercise 5-42 (Static) Methods of Estimating Costs: High-Low (LO 5-4)

Required:

a. Use the high-low method to estimate the fixed and variable portions of store costs based on revenues.
b. Managers estimate that one of the proposed stores will have revenues of $2.5 million. What are the estimated monthly overhead costs, assuming no inflation?
c. Managers are also considering a “mega-store” with revenues of $10 million. What are the estimated monthly overhead costs, assuming no inflation?

Answer 1