The folloing Information appwes to the questions displayed below) Davis Stores s

Question

The folloing Information appwes to the questions displayed below) 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 follawing data were collected from last years operations (revenues and costs in thousands of dollars) Store Revenues Costs $4364 $4,200 $ 5,888 4248 3,976 3,064 4.223 6,994 ,929 105 4429 2,856 2,624

Explanation / Answer

(a) Fixed and Variable Portions of costs-

Using High-Low method:

Variable cost = Difference in costs / Difference in revenues

Variable cost = $2305 / $5065 = 0.45508= 45.5% of revenue

At revenue of $6994 :

Justification at revenue of $1929:

Therefore fixed cost in dollars = $1996

(b) Store costs :

At revenue of 3.5 million dollars or 3500 dollars:

Therefore store costs = $3623

(c) Store Costs :

At revenue of 20 million dollars or 20000 dollars :

Particulars Revenues Costs Associated with high and low revenues High $6994 $5179 Low $1929 $2874 Difference $5065 $2305

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