Transcript
Problem 2-16 – Scattergraph; High-Low Method; Cost Estimation
The Salinas Corporation has gathered the following data on its copy machine costs for the first eight months of the year.
Month Number of Copies Total Copy Cost
January 60000 7400
February 50000 6500
March 70000 7000
April 90000 9200
May 80000 7600
June 100000 8500
July 120000 10000
August 110000 9800
Directions:
a. Prepare a scattergraph of the cost information and then choose a line that you believe best represents the cost function. Represent your chosen line with a cost equation of the form y = mx + b. Show your calculations.
Here's one way you could solve this problem:
1. Highlight the data in the table above.
(NOTE: Select G9: G17 and hold down the CTRL key will selecting I9:I17)
2. Click on the Insert menu and then click Scatter and choose the first scattergraph.
3. Choose a line that you believe best represents the cost function.
4. Cost equation: y = $.05125/copy + $3,500
Or solve your own way:
b. Using the high-low method, what is the variable cost per copy?
Solve:
Number of Copies Total Copy Cost
High value G16120000 I1610000
Low Value G1150000 I116500
Variable cost per copy (I45-I46)/(G45-G46)0.05
c. Using the high-low method, what is the fixed cost per month?
Solve:
Fixed cost I45-(G48*G45)4000
(using high value)
d. Using the high-low method, represent the cost function with a cost equation of the form y = mx + b.
Solve:
y = $.05x + $4,000
e. Using your cost equation from part d, provide your best estimate of the copy costs for September if 70,000 copies will be made. Why does your estimate differ from the $7,000 cost incurred in March?
Answer:
September cost + ($.05 x 70,000) + $4,000 = $7,500. The equation is just an approximation of the relationship between costs and copies. Since the March cost was not one of the two points (February and July) used to construct the line, then it is not surprising that the September cost estimate is not equal to the cost incurred in March.
Problem 2-18 – High-Low Method
Harlan Gravity Grips produces spike sets for track shoes. CEO Brittany Harlan has gathered the following information about the company’s sales volume and marketing cost for the past six months.
Sales Volume Total Marketing Costs
January 550700 82770
February 390500 74525
March 561000 83050
April 543000 82330
May 546600 82480
June 552900 82860
Directions:
a. Using the high-low method, compute the variable marketing cost per spike set.
Here's one way you could solve this problem:
Variable Cost = High Cost - Low Cost
High Volume - Low Volume
= I1383050 - I1274525
G13561000 - G12390500
= G28-I288525
G29-I29170500
= G31/G320.05 per spike set sold
Or solve your own way:
b. Compute the total fixed marketing cost.
Solve:
Fixed cost F25= High Cost H28- (Variable Cost x High Volume)
F45= 83050 - ($.05 x 561,000)
= G47-(G34*G29)55000
c. Represent the marketing cost function in equation form.
Solve:
Marketing Cost = $.05(sets sold) + 55000
d. Examine the data and identify the potential outlier.
Solve:
February sales volume and costs are much lower than the others.
e. Recalculate the marketing cost function removing the potential outlier.
Solve:
Variable cost = (I13-I14)/(G13-G14)0.04 per spike set sold
Fixed cost = I13-(E72*G13)60610
Marketing cost = $.04 (sets sold) + 60610
f. Which of the two cost functions you calculated would be appropriate to use in estimating future marketing costs? Why?
Answer:
The second equation is better because the endpoints used to estimate the line are more consistent with the normal sales volumes and costs.
Problem 2-20 – Cost Behavior Identification; Contribution Format Income Statement
Mighty Bright Window Cleaners’ monthly income statement at several levels of activity is as follows:
Windows Washed 2000 4000 6000
Sales 3000 6000 9000
Cost of Goods Sold 1200 2400 3600
Gross Profit 1800 3600 5400
Operating Expenses
Advertising 400 400 400
Salaries and Wages 700 900 1100
Insurance 200 200 200
Postage 400 800 1200
Total Operating Expenses 1700 2300 2900
Operating Income 100 1300 2500
Directions:
a. Identify each expense as fixed, variable, or mixed.
Here's one way you could solve this problem:
List out the expenses and choose the type each one is:
Cost of Goods Sold Variable Fixed
Advertising Fixed Variable
Salaries and Wages Mixed Mixed
Insurance Fixed
Postage Variable
Or solve your own way:
b. Prepare a contribution margin income statement based on a volume of 5,000 windows.
Solve:
5,000 windows Per Unit
Sales revenue 5000*(E10/E9)7500 E10/E91.5
Less variable costs:
COGS I50*50003000 E11/E90.6
Salaries I51*5000500 (G15-E15)/(G9-E9)0.1
Postage I52*50001000 E17/E90.2
Total variable costs SUM(E50:E52)4500 SUM(I50:I52)0.89999999999999991
Contribution margin G48-G533000 I48-I530.60000000000000009
Less fixed costs:
Advertising 400
Salaries E15-(I51*E9)500
Insurance 200
Total fixed costs SUM(E56:E58)1100
Operating income G54-G591900
$G$31:$G$33 Problem 2-22 – Contribution Format Income Statement; Decision Making
Henley Horticulture provides and maintains live plants in office buildings. The company’s 850 customers are charged $30 per month for this service, which includes weekly watering visits. The variable cost to service a customer’s location is $17 per month. The company incurs $2,000 each month to maintain its fleet of four service vans and $3,000 each month in salaries. Henley pays a bookkeeping service $2 per customer each month to handle all invoicing and accounting functions.
Directions:
a. Prepare Henley’s contribution format income statement for the month.
Here's one way you could solve this problem:
Per Unit
Sales Revenue I18*85025500 30
Less Variable Costs:
Service I20*85014450 17
Bookkeeping I21*8501700 2
Total Variable Costs E20+E2116150 I20+I2119
Contribution Margin G18-G229350 I18-I2211
Less Fixed Costs:
Vans 2000
Salaries 3000
Total Fixed Costs E25+E265000
Operating Income G23-G274350
Or solve your own way:
b. What is the expected monthly operating income if 150 customers are added?
Solve:
$4,350 + 150($11) = G28+150*I236000
c. Mr. Henley is exploring options to reduce the annual bookkeeping costs.
Option 1 : Renegotiate the current contract with the bookkeeping service to pay a flat fee of $10,200 per year plus $1 per customer per month.
Option 2 : Hire a part-time bookkeeper for $18,000 per year to handle the invoicing and simple accounting. He would need to pay $5,000 per year to have taxes and year-end financial statements prepared.
Compare the current bookkeeping cost with the two options at customer levels of 850, 1,000 and 1,100.
Solve:
850 1000 1100
Current cost 2*E60*1220400 2*G60*1224000 2*I60*1226400
($2 x customers x 12 months)
Option 1: $10,200 + 10200+(E60*12)20400 10200+(G60*12)22200 10200+(I60*12)23400
($1 x customers x 12 months)
Option 2: $18,000 + $5,000 23000 23000 23000
d. Besides the bookkeeping costs incurred, what should Mr. Henley consider before he makes a change in bookkeeping services?
Answer:
Mr. Henley needs to evaluate future demand for his services. If he thinks he will have more customers, then he should switch to options 1 or 2 before prices increase. If he services fewer than 850 customers, options 1 and 2 will be more expensive than his current arrangement.
