ApEc 3002
XXXXXXXXXXSpring 2019
XXXXXXXXXXT. Hurley
Lab Assignment 7: Cost Function Estimation
Due Date: Tuesday, March 25 (11:59 pm online)
You’re on the job with the online grocery ordering/delivery service introduced in Lab 5. With plans to
expand to new areas of the Metro and the number of orders per week growing in the areas you cu
ently
serve, your boss has asked you to analyze how expansion will affect the cost side of the business. Over
the past six months, the average revenue per order has remained fairly constant at approximately
$95/order. Only since late November, however, have combined average costs for warehouse and delivery
operations consistently fallen below $100. The investor group that has funded the start-up of the business
has expressed concern about the ability of the business to cover costs and provide them with some return
on their investment.
Once again, you’ve gone to company records for data you can use in your analysis. It’s saved in an Excel
worksheet named APEC 3002 Lab 07S19.xlsx. In addition to data on orders per week (labeled Orders in
the worksheet), you’ve asked accounting to provide data on weekly costs. They maintain and have
provided cost records on two distinct aspects of your company’s operations. One series of cost figures is
for warehouse operations (labeled Warehouse Variable Cost in the worksheet). This includes labor and
supply costs for all activities related to ordering product and assembling grocery orders for customers, as
well as the cost of goods sold. The second series of cost figures is for delivery of orders to customers’
homes (labeled Delivery Variable Cost in the worksheet). This includes labor for drivers and
dispatchers, fuel, and other vehicle expenses.
Because these two aspects of the overall business may be affected differently by expansion, you’ve
decided to examine cost-output relationships for them separately. Since the time period for the analysis is
elatively short and all the data are from the same operation, you have decided to ignore prices in your
analysis. You’ll simply estimate parameters for two variable cost functions that are simple relationships
etween cost and output:
VCWH = f(Orders) where VCWH stands for Warehouse Variable Cost
VCDEL = f(Orders) where VCDEL stands for Delivery Variable Cost
You can choose the functional form. The multiplicative exponential and polynomial are good candidates.
In your write-up (which should be a memo addressed to your boss, Matt Bombyk), you should describe
the basic features of your analysis including the purpose and your data sources, explain your choice of
functional form, and present your estimation results.1 Then you should turn to the real issue – how
expansion from nearly 3,500 to as many as 7,000 orders per week will affect costs in the warehouse and
for deliveries. Are there economies or diseconomies of size for these activities? Will average variable
costs increase or decrease for these two activities with expansion? What will happen to overall average
variable costs per order – i.e., the sum of average variable costs for the two activities? What do your
findings suggest about the ability of the business to cover variable costs as your service expands?
1 Include Excel output as an attachment, but do not put the Excel output in the main body of your report. Rather, in
your memo you should report estimation results in equation form, as we did in earlier labs.
Grading Ru
ic for Lab Assignment 7
Not
Present Weak Satisfactory Strong Outstanding
Background Information
Purpose of analysis XXXXXXXXXX
Data – description and
source XXXXXXXXXX
Analysis
Identify and justify choice
of functional form XXXXXXXXXX
Present and interpret
estimation results, including
discussion of economies of
size.
XXXXXXXXXX
Project AVC for
Warehouse, Delivery, and
the combination of the two
over the range 3,500 to
7,000 orders – present in a
table or a graph.
XXXXXXXXXX
Interpretation
Discussion of prospects for
future profit contributions XXXXXXXXXX
Address Target Audience XXXXXXXXXX
Memo Format XXXXXXXXXX
Layout and Appearance XXXXXXXXXX
Grammar and Mechanics XXXXXXXXXX
Comments:
Final Grade: