Skip to main content
Business LibreTexts

5.E: Exercises (Part 2)

Exercises: Set B

  1. Identifying Cost Behavior. Ivanov, Inc., is trying to identify the cost behavior of the three costs shown. Cost information is provided for six months.
    Cost A Cost B Cost C
Month Units Produced Total Costs Cost per Unit Total Costs Cost per Unit Total Costs Cost per Unit
1 8,000 $10,000   $24,000   $32,000  
2 10,000 $10,000   $29,000   $40,000  
3 12,000 $10,000   $33,600   $48,000  
4 14,000 $10,000   $36,400   $56,000  
5 16,000 $10,000   $38,400   $64,000  
6 18,000 $10,000   $39,600   $72,000  

Required:

  1. Calculate the cost per unit, and then identify how the cost behaves (fixed, variable, or mixed) for each of the three costs. Explain the reasoning behind your answers.
  2. Why is it important to identify how costs behave with changes in activity?
  1. Account Analysis. Swim-Safe Company hires several instructors who provide weekly one-hour private swim lessons to individuals. The company would like to estimate costs associated with its swim lessons on a weekly basis. Assume costs for towels, snacks, drinks, and instructor wages are variable costs. The accounting records indicate the following costs were incurred last week for 250 customer lessons:
Towels, snacks, drinks $1,250
Instructor wages (hourly employees) $3,000
Manager (owner) salary $1,500
Pool rental $2,000

Required:

  1. Use account analysis to estimate total fixed costs per week, and the variable cost per lesson. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\) .
  2. Estimate the total costs for this coming week assuming 220 lessons will be provided.
  1. High-Low Method Quality Tools. Quality Tools Incorporated would like to estimate costs associated with its sales personnel. Salespeople are paid a salary plus commission. Commission rates vary among products and are based on sales dollars. The company reported the following monthly cost data related to sales personnel:
Reporting Period (Month) Total Costs Sales Amount
January $710,000 $13,800,000
February $695,000 $13,600,000
March $765,000 $15,100,000
April $650,000 $12,000,000
May $775,000 $15,500,000
June $750,000 $14,700,000
July $715,000 $14,500,000
August $680,000 $13,100,000
September $830,000 $16,500,000
October $815,000 $16,000,000
November $800,000 $15,600,000
December $690,000 $13,200,000

Required:

  1. Use the four steps of the high-low method to estimate total fixed costs per month and the variable cost per sales dollar. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
  2. What would Quality Tools’ estimated costs be if it had sales of $12,500,000 next month?
  3. What would Quality Tools’ estimated costs be if it had sales of $20,000,000 next month? Why should you feel uncomfortable estimating costs for $20,000,000 in sales?
  1. Scattergraph Method. Quality Tools Incorporated would like to estimate costs associated with its sales personnel. Salespeople are paid a salary plus commission. Commission rates vary among products and are based on sales dollars. The company reported the following monthly cost data related to sales personnel (this is the same data as the previous exercise):
Reporting Period (Month) Total Costs Sales Amount
January $710,000 $13,800,000
February $695,000 $13,600,000
March $765,000 $15,100,000
April $650,000 $12,000,000
May $775,000 $15,500,000
June $750,000 $14,700,000
July $715,000 $14,500,000
August $680,000 $13,100,000
September $830,000 $16,500,000
October $815,000 $16,000,000
November $800,000 $15,600,000
December $690,000 $13,200,000

Required:

  1. Use the five steps of the scattergraph method to estimate total fixed costs per month and the variable cost per sales dollar. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
  2. What would Quality Tools’ estimated costs be if it had sales of $12,500,000 next month?
  3. What would Quality Tools’ estimated costs be if it had sales of $20,000,000 next month?
  1. Regression Analysis. Regression analysis was run for Quality Tools Incorporated resulting in the following output (this is based on the same data as the previous two exercises):
  Coefficients
y-intercept 129,188
x variable 0.04

Required:

  1. Use the regression output given to develop the cost equation \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
  2. What would Quality Tools’ estimated costs be if it had sales of $12,500,000 next month?
  3. What would Quality Tools’ estimated costs be if it had sales of $20,000,000 next month?
  1. Contribution Margin Income Statement, Service Company. Last month Seafood Grill had total sales of $200,000. Food preparation and service costs totaled $90,000 (20 percent fixed, 80 percent variable). Selling and administrative costs totaled $30,000 (70 percent fixed, 30 percent variable).

Required:

  1. Prepare a traditional income statement for Seafood Grill.
  2. Prepare a contribution margin income statement for Seafood Grill.
  3. Why do companies use the contribution margin income statement format?
  1. Regression Analysis Using Excel (Appendix). Cain Company produces calculators. Management wants to estimate the cost of production equipment used to produce the calculators. The company reported the following monthly cost data related to production equipment:
Reporting Period (Month) Total Costs Machine Hours
January $1,250,000 59,000
February $990,000 33,000
March $850,000 28,000
April $1,500,000 67,000
May $1,860,000 128,000
June $1,480,000 71,000
July $1,500,000 67,000
August $1,860,000 128,000
September $1,480,000 71,000
October $1,500,000 67,000
November $1,860,000 128,000
December $1,480,000 71,000

Required:

  1. Use Excel to perform regression analysis. Provide a printout of the results.
  2. Use the regression output to develop the cost equation \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
  3. What would Cain Company’s estimated costs be if it used 110,000 machine hours this month?

Problems

  1. Cost Behavior. Assume you are a consultant performing work for two different companies. Each company has asked you to help them identify the behavior of certain costs.

Required:

  1. Identify each of the following costs for Hwang Company, a producer of ski boats, as variable (V), fixed (F), or mixed (M): 
    1. _____Salary of production manager
    2. _____Materials required for production
    3. _____Monthly rent on factory building
    4. _____Hourly wages for assembly workers
    5. _____Straight-line depreciation for factory equipment
    6. _____Annual insurance on factory building
    7. _____Invoices sent to customers
    8. _____Salaries and commissions of salespeople
    9. _____Salary of chief executive officer
    10. _____Company cell phones with first 50 hours free, then 10 cents per minute
  2. Identify each of the following costs for Rainier Camping Products, a maker of backpacks, as variable (V), fixed (F), or mixed (M): 
    1. _____Hourly wages for assembly workers
    2. _____Fabric required for production
    3. _____Straight-line depreciation on factory building
    4. _____Salaries and commissions of salespeople
    5. _____Lease payments for factory equipment
    6. _____Company cell phones with first 80 hours free, then 8 cents per minute
    7. _____Invoices sent to customers
    8. _____Salary of production manager
    9. _____Salary of controller (accounting)
    10. _____Electricity for factory building
  3. How might the managers of these companies use the cost behavior information requested?
  1. Account Analysis and Contribution Margin Income Statement. Madden Company would like to estimate costs associated with its production of football helmets on a monthly basis. The accounting records indicate the following production costs were incurred last month for 4,000 helmets.
Assembly workers’ labor (hourly) $70,000
Factory rent $3,000
Plant manager’s salary $5,000
Supplies $20,000
Factory insurance $12,000
Materials required for production $20,000
Maintenance of production equipment (based on usage) $18,000

Required:

  1. Use account analysis to estimate total fixed costs per month and the variable cost per unit. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
  2. Estimate total production costs assuming 5,000 helmets will be produced and sold.
  3. Prepare a contribution margin income statement assuming 5,000 helmets will be produced, and each helmet will be sold for $70. Fixed selling and administrative costs total $10,000. Variable selling and administrative costs are $8 per unit.
  1. High-Low, Scattergraph, and Regression Analysis; Manufacturing Company. Woodworks, Inc., produces cabinet doors. Manufacturing overhead costs tend to fluctuate from one month to the next, and management would like to accurately estimate these costs for planning and decision-making purposes.

    The accounting staff at Woodworks recommends that costs be broken down into fixed and variable components. Because the production process is highly automated, most of the manufacturing overhead costs are related to machinery and equipment. The accounting staff believes the best starting point is to review historical data for costs and machine hours:

 

Reporting Period (Month) Total Costs Machine Hours
January $278,000 1,550
February $280,000 1,570
March $266,000 1,115
April $290,000 1,700
May $262,000 1,110
June $269,000 1,225
July $275,000 1,335
August $286,000 1,660
September $250,000 1,000
October $253,000 1,020
November $260,000 1,025
December $281,000 1,600

These data were entered into a computer regression program, which produced the following output:

  Coefficients
y-intercept 210,766
x variable 45.31

Required:

  1. Use the four steps of the high-low method to estimate total fixed costs per month and the variable cost per machine hour. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
  2. Use the five steps of the scattergraph method to estimate total fixed costs per month, and the variable cost per machine hour. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
  3. Use the regression output given to develop the cost equation \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
  4. Use the results of the high-low method (a), scattergraph method (b), and regression analysis (c), to estimate costs for 1,500 machine hours. (You will have three different answers—one for each method.) Which approach do you think is most accurate and why?
  5. Management likes the regression analysis approach and asks you to estimate costs for 5,000 machine hours using this approach (the company plans to expand by opening another facility and hiring additional employees). Calculate your estimate, and explain why your estimate might be misleading.
  1. High-Low, Scattergraph, and Regression Analysis; Service Company. Sanchez Accounting Company prepares tax returns for individuals. Marie Sanchez, the owner, would like an accurate estimate of the company’s costs for planning and decision-making purposes. When Marie asks you to devise a way to estimate costs on a monthly basis, you recall the importance of breaking costs into fixed and variable components. Because the company’s costs are driven primarily by the number of tax returns prepared, you decide to use historical data for costs and tax returns prepared:
Reporting Period (Month) Total Costs Returns Prepared
January $157,000 315
February $145,000 300
March $167,500 375
April $163,000 325
May $120,000 250
June $112,000 210
July $138,000 280
August $100,000 190
September $108,000 205
October $115,000 245
November $136,000 265
December $126,000 255

You enter these data into a computer regression program and get the following results:

  Coefficients
y-intercept 24,626
x variable 401.86

Required:

  1. Use the four steps of the high-low method to estimate total fixed costs per month and the variable cost per tax return prepared. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
  2. Use the five steps of the scattergraph method to estimate total fixed costs per month and the variable cost per tax return prepared. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
  3. Use the regression output given to develop the cost equation \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
  4. Use the results of the high-low method (a), scattergraph method (b), and regression analysis (c) to estimate costs for 290 tax returns. (You will have three different answers—one for each method.) Which approach do you think is most accurate, and why?
  5. Marie likes the regression analysis approach and asks you to estimate costs for 800 tax returns using this approach (she plans to expand by opening another office and hiring additional employees). Calculate your estimate, and explain why your estimate might be misleading.
  1. High-Low, Scattergraph, Regression Analysis, and Contribution Margin Income Statement. Eye Care, Inc., provides vision correction surgery for its patients. You are the accountant for Eye Care, and management has asked you to devise a way of accurately estimating company costs for planning and decision-making purposes. You believe that reviewing historical data for costs and number of surgeries is the best starting point. These data are as follows:
Reporting Period (Month) Total Costs Number of Surgeries
January $208,000 54
February $205,000 52
March $217,000 55
April $200,000 50
May $232,000 62
June $230,000 60
July $226,000 57
August $235,000 63
September $252,000 71
October $250,000 70
November $245,000 66
December $244,000 65

You enter these data into a computer regression program and get the following results:

  Coefficients
y-intercept 75,403
x variable 2,536.77

Required:

  1. Use the four steps of the high-low method to estimate total fixed costs per month, and the variable cost per surgery. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
  2. Use the five steps of the scattergraph method to estimate total fixed costs per month, and the variable cost per surgery. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
  3. Use the regression output given to develop the cost equation \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
  4. Use the results of the high-low method (a), scattergraph method (b), and regression analysis (c), to estimate costs for 70 surgeries. (You will have three different answers—one for each method.) Which approach do you think is most accurate and why?
  5. Assume Eye Care charges $4,000 for each surgery performed. Use the regression analysis cost information (for 70 surgeries) to prepare a contribution margin income statement. (Hint: You will only have one line item for variable costs and one line item for fixed costs.)
  1. Regression Analysis Using Excel (Appendix). Metal Products, Inc., produces metal storage sheds. The company’s manufacturing overhead costs tend to fluctuate from one month to the next, and management would like an accurate estimate of these costs for planning and decision-making purposes.

    The company’s accounting staff recommends that costs be broken down into fixed and variable components. Because the production process is highly automated, most of the manufacturing overhead costs are related to machinery and equipment. The accounting staff agrees that reviewing historical data for costs and machine hours is the best starting point. Data for the past 18 months follow.
Reporting Period (Month) Total Costs Total Machine Hours
January $695,000 3,875
February $700,000 3,925
March $665,000 2,788
April $725,000 4,250
May $655,000 2,775
June $672,500 3,063
July $687,500 3,338
August $715,000 4,150
September $625,000 2,500
October $632,500 2,550
November $650,000 2,563
December $702,500 4,000
January $730,000 4,025
February $735,000 4,088
March $697,500 2,900
April $762,500 4,425
May $687,500 2,888
June $705,000 3,188

Required:

  1. Use Excel to perform regression analysis. Provide a printout of the results.
  2. Use the regression output given to develop the cost equation \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
  3. Use the results of the regression analysis to estimate costs for 3,750 machine hours.
  4. Management is considering plans to expand by opening several new facilities and asks you to estimate costs for 22,000 machine hours. Calculate your estimate, and explain why this estimate may be misleading.
  5. What can be done to improve the estimate made in part d?