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

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