"All the independent variables in a cost function estimated with regression analysis are cost drivers." Do you agree? Explain.

When using the high-low method, should you base the high and low observations on the dependent variable or on the cost driver?

Nandita Summers works at Modus, a store that caters to fashion for young adults. Nandita is responsible for the store's online advertising and promotion budget. For the past year, she has studied search engine optimization and has been purchasing keywords and display advertising on Google, Facebook, and Twitter. In order to analyze the effectiveness of her efforts and to decide whether to continue online advertising or move her advertising dollars back to traditional print media, Nandita collects the following data: 1\. Nandita performs a regression analysis, comparing each month's online advertising expense with that month's revenue. Verify that she obtains the following result: Revenue \(=\$ 51,999.64-(0.98 \times \text { Online advertising expense })\) 2\. Plot the preceding data on a graph and draw the regression line. What does the cost formula indicate about the relationship between monthly online advertising expense and monthly revenues? Is the relationship economically plausible? 3\. After further thought, Nandita realizes there may have been a flaw in her approach. In particular, there may be a lag between the time customers click through to the Modus website and peruse its social media content (which is when the online ad expense is incurred) and the time they actually shop in the physical store. Nandita modifies her analysis by comparing each month's sales revenue to the advertising expense in the prior month. After discarding September revenue and August advertising expense, show that the modified regression yields the following: Revenue \(=\$ 28,361.37+(5.38 \times \text { Online advertising expense })\) 4\. What does the revised formula indicate? Plot the revised data on a graph. Is this relationship economically plausible? 5\. Can Nandita conclude that there is a cause-and-effect relationship between online advertising expense and sales revenue? Why or why not?

What is the difference between a linear and a nonlinear cost function? Give an example of each type of cost function.

Gower, Inc., a manufacturer of plastic products, reports the following manufacturing costs and account analysis classification for the year ended December 31,2017. $$\begin{array}{lcr}\text { Account } & \text { Classification } & \text { Amount } \\ \hline \text { Direct materials } & \text { All variable } & \$ 300,000 \\ \text { Direct manufacturing labor } & \text { All variable } & 225,000 \\ \text { Power } & \text { All variable } & 37,500 \\ \text { Supervision labor } & 20 \% \text { variable } & 56,250 \\ \text { Materials-handling labor } & 50 \% \text { variable } & 60,000 \\ \text { Maintenance labor } & 40 \% \text { variable } & 75,000 \\ \text { Depreciation } & 0 \% \text { variable } & 95,000 \\ \text { Rent, property taxes, and administration } & 0 \% \text { variable } & 100,000\end{array}$$ Gower, Inc., produced 75,000 units of product in 2017 . Gower's management is estimating costs for 2018 on the basis of 2017 numbers. The following additional information is available for 2018. a. Direct materials prices in 2018 are expected to increase by \(5 \%\) compared with 2017. b. Under the terms of the labor contract, direct manufacturing labor wage rates are expected to increase by \(10 \%\) in 2018 compared with 2017. c. Power rates and wage rates for supervision, materials handling, and maintenance are not expected to change from 2017 to 2018. d. Depreciation costs are expected to increase by \(5 \%\), and rent, property taxes, and administration costs are expected to increase by \(7 \%\). e. Gower expects to manufacture and sell 80,000 units in 2018 . 1\. Prepare a schedule of variable, fixed, and total manufacturing costs for each account category in 2018 . Estimate total manufacturing costs for 2018. 2\. Calculate Gower's total manufacturing cost per unit in 2017 , and estimate total manufacturing cost per unit in 2018. 3\. How can you obtain better estimates of fixed and variable costs? Why would these better estimates be useful to Gower?

A firm uses simple linear regression to forecast the costs for its main product line. If fixed costs are equal to \(\$ 235,000\) and variable costs are \(\$ 10\) per unit, how many units does it need to sell at \(\$ 15\) per unit to make a \(\$ 300,000\) profit? a. 21,400 b. 47,000 c. 60,000 d. 107,000