Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 40

Cost Estimation, High-Low Method Jay Bauer Company specializes in the purchase, renovation, and resale of older homes. Jay Bauer employs several carpenters and painters to do the work for him. It is essential for him to have accurate cost estimates so he can determine total renovation costs before he purchases a piece of property. If estimated renovation costs plus the purchase price of a house are higher than its estimated resale value, the house is not a worthwhile investment.

Jay has been using the home’s interior square feet for his exterior paint cost estimations. Recently he decided to include the number of openings—the total number of doors and windows in a house—as a cost driver. Their cost is significant because they require time-consuming preparatory work and careful brushwork. The rest of the house usually is painted either by rollers or spray guns, which are relatively efficient ways to apply paint to a large area. Jay has kept careful records of these expenses on his last 12 jobs:

House	Square Feet	Openings	Cost
1	2,600	13	$3,300
2	3,010	15	3,750
3	2,800	12	3,100
4	2,850	12	3,150
5	4,050	19	4,700
6	2,700	13	3,250
7	2,375	11	2,800
8	2,450	11	2,800
9	2,600	10	2,875
10	3,700	16	4,100
11	2,650	13	3,200
12	3,550	16	3,950

Required

1. Using the high-low cost estimation technique, determine the cost of painting a 3,300-square-foot house with 14 openings. Also determine the cost for a 2,400-square-foot house with 8 openings.

---

2. Plot the cost data against square feet and against openings. Which variable is a better cost driver? Why?

Step 1 of 17

Cost estimation

Cost estimation results in estimating variable and fixed costs for business. Cost estimation is made in case of expansions or new product line set-up by companies. Cost estimation helps to determine the cost for product.