67. If this company uses the high-low method of estimating the cost equation, the relationship between the
hours of activity and the total maintenance costs would be:
68. Based upon the information from the regression analysis, the total maintenance costs budgeted for 420 hours
of activity would be (rounded to the nearest whole dollar):
69. The percent of the change in the maintenance costs that can be explained by a change in the activity hours
is:
70. The Salem Company can be 95% confident that the true value of the variable maintenance cost per hour will
be within which of the following ranges?
Use the following to answer questions 71-72:
Controller Vicky Menendez would like to predict the costs of producing chocolate candy bars for October. She
reviews the cost for the last 9 months the results are presented below.
Hilton – Chapter 11
71. Using the High Low Method, the fixed cost (rounded to the nearest dollar) she should expect for October
are:
72. If she expects to product 1,575 bars in October and uses the High Low method to predict cost, she should
expect variable costs (rounded to the nearest dollar) of:
73. In the learning curve formula “Y = aXb”, which component represents the number of labor hours required
for the first cost-driver unit.
74. The regression results for Cruz Catering give the following results:
Total costs = $3,000 + $1.90 meals + $15 catering jobs + $100 new products + $100 new customers.
What are the estimated total costs in a month in which there are 3,000 meals sold, 20 catering jobs, 2 new
products and 4 new customers?
75. In which cost estimation method would costs most likely be broken into unit–level, batch-level,
product-level and facility-level costs?
76. A regression analysis of total labor costs (y) based upon the number of visitors (x) for the Wacky World
Theme Park, yielded a coefficient of $2.75. The t statistic was t=6.141 and the R2=.921. Based upon those
results, we can conclude
77. Engineers and accountants working together with present and future cost information predict the following
cost information for the Chocolate Candy Bar Company’s new HiCalcium Bar
Ⴠ The cost of materials for each bar is $0.58
Ⴠ The labor cost for each batch of bars is $12.50
Ⴠ The Rate per New Customer is expected to be $185 per bar customer
Ⴠ New Product Management Cost will be $840 for the product
Ⴠ The associated Facility costs will be $1490
Assuming 5000 bars are produced in 100 batches for 80 new wholesale customers.
Based upon the engineering analysis, estimated total cost for this new product isare
78. An amusement park estimates average costs per day. Which of the following is true?
79. The Hernandez Haunted House wants to predict Total Cost as a function of the number of visitors. They
will ultimately use this information in pricing.
There results show the following information
1) Using the high-low method, determine the “TC=F + VX” cost formula for total costs. What would you
predict costs to be in October if we expect 265,000 visitors
2) Using linear regression, determine the “TC=F + VX” cost formula for total costs. What would you predict
costs to be in October if we expect 265,000275,000 visitors
80. Information regarding processing costs for Holcomb Corporation for the first six months of the year is as
follows:
Required:
1) Using the high-low method, determine the “TC = F + VX” cost formula for processing costs.
2) Estimate the total processing costs if 75 orders are processed during July.
3) What is the one major limitation of the high-low method compared to the use of simple regression?
81. Petruska Corp. produces a product that is very machine intensive. They have determined that machine hours
are a likely explanation for manufacturing overhead costs. Therefore, machine hours is the independent variable
and manufacturing overhead is the dependent variable. The results of their regression analysis produced the
following:
Petruska is planning on operating at a level of 15,000 machine hours for the year.
Required:
1) What is the “TC = F + VX” cost formula for manufacturing overhead?
2) Based on the cost equation in part 1, compute the estimated overhead cost that Petruska could expect for the
coming year.
3) What does the R-squared indicate? Would Petruska likely benefit from going to multiple regression analysis
to determine their cost formula for manufacturing overhead?
82. Mundy Missiles Corp. is negotiating with the government for the production of cruise missiles. The
government is considering purchasing either eight missiles for $2,500,000 or sixteen missiles for $5,000,000.
Mundy requires a margin of 30 percent to cover administrative costs, research and development, and to make a
profit. Mundy has started a chart for this product assuming the production costs are subject to an 80 percent
cumulative learning curve.
1) Complete the chart (items a – f) by filling in the cost amounts for volumes 4, 8, and 16 units.
2) Should Mundy sell eight units? Sixteen units?
83. Strain Corporation currently has a plant capacity (i.e., relevant range) to produce 5,000 units per month.
Their accounting department has used regression analysis to determine their cost structure and this analysis has
resulted in the following:
Total costs = $3,582 + $4.26X.
Required:
1) What are the estimated total costs for a month in which 4,000 units will be produced?
2) What are the estimated fixed costs for a month in which 4,000 units will be produced?
3) What are the estimated total variable costs for a month in which 4,000 units will be produced?
4) During the month of December, Strain estimates that they will need to produce 6,000 units to meet customer
demand. What problems might result from trying to predict the total cost incurred using the regression equation
listed above?
84. Stringham Catering has determined the following regression equation to estimate their costs:
Total costs =$4,333 + $2.53 Meals + $37.90 Jobs + $219.87 New Products +
$393.91 New Customers
Required:
What are the estimated total costs in a month in where there are:
3,721 meals sold
40 jobs
3 new products
3 new customers
85. Hicken Corp. makes new video games. To keep customers happy, they must continually produce new and
exciting games. Each year, it makes between 6 and 10 new games that it produces in batches. At the end of each
year, the company destroys the master copy of all existing games, so that product designers always come up
with new games. The cost of designing the games are product-level costs. The cost of computer chips, plastic
and other component materials are unit–level costs. The cost of setting up the production run are batch–level
costs. All other costs are facility-level costs. The accounting records indicated the following costs for last year:
Production was for 15,000 units, for 7 new products, produced in 60 batches. For the coming year, costs are
expected to increase as follows: the unit-level costs are expected to increase by 8 percent; the batch–level costs
by 12 percent; the product-level costs by 10 percent; and the facility-level costs by 5 percent.
Required:
1) What are the costs per unit, per batch, and per product for last year?
2) What is the estimated cost per unit, per batch, and per product for the coming year?
3) What are the estimated facility-level costs for this coming year?
4) If Hicken expects to produce 20,000 units for 9 new products in 80 batches this coming year, what are
Hicken’s estimated total costs for the year?
86. Cache Valley Bank is determining the feasibility of offering a new debit card to its customers, for which
they expect to have a service charge of $.85 per transaction. The following cost estimates have been made
assuming 100,000 transactions per year:
Direct labor $40,000 (5,000 estimated hours x $8.00 per hour)
Overhead costs have not yet been estimated for the new debit card, but annual data on total production and
overhead costs for similar products have been analyzed using simple linear regression. The following results
were derived from the simple regression and provide the basis for overhead cost estimates for the new debit
card:
Required:
1) What percentage of the variation in overhead costs is explained by the independent variable?
2) What is the total estimated overhead cost for an estimated activity level of 5,000 direct–labor hours per year?
3) Will the $.85 per transaction charge cover the costs of direct labor and overhead, assuming 100,000
transactions per year?
87. What is cost estimation, and what is its purpose? What are the problems involved in cost estimation?
88. In what basic categories can costs be classified? Give examples of each.
89. What is the concept of the learning phenomenon and the learning curve, and what are their applications?
90. What is regression analysis? What are its major strengths and weaknesses as a cost estimation method?
91. The World Cup Company observed the following activity level for a randomly selected
Required:
1) Using the high-low method, determine the formula for total costs.
2) Using the formula you computed in part 1, what would you predict fixed cost to be when 1200 soccer balls
are produced.
3) Using the formula you computed in part 1, what would you predict variable costs to be when 1200 soccer
balls are produced.
4) Using the formula you computed in part 1, what would you predict total costs to be when 1200 soccer balls
are produced.
5) Using the computer, compute the cost formula with regression analysis, (round to the nearest dollar).
6) Use the formula computed in part 5 and compare your results for 1200 soccer balls with those you computed
in part 4.
Computer required for part 5 & 6.
92. The following graphs represent cost behaviors that a company might have:
Required:
For each of the following items, identify the graph that best illustrates the cost behavior:
_____1. Supervisors’ salaries where one supervisor is required for every 800 workers.
_____2. Cost of direct materials used to produce bicycles is $2.40.
_____3. Cost of inventory purchased which cost $2.00 per unit for the first 1,000 units purchased; the next 300
units
can be purchased at a per unit price of $1.90; any units purchased above 1,3500 cost $2.07 per unit.
_____4. Straight–line depreciation.
______5. Salaries of sales people where they receive a $1,000 flat fee per month plus a 4% commission of sales.
______6. Lease of factory equipment with a fixed minimum payment of $1,000 for up to 400 machine hours
used,
plus $3 per hour up to 400 additional hours used, then a flat fee of $2,200plus $1.50 per hour for above 800
hours.
______7. Cost for water where the fee is $50 for using up to 100 acre feet per month, and then a $2 per acre
foot
used thereafter.
______8. Wages of delivery drivers where each driver can make 30 deliveries in one eight hour shift.
93. Tucker Corporation needs to purchase 80,000 components from a supplier each year. Management is
determining if they could produce the unit in-house at a lower cost per unit than the $50 per unit currently being
charged by the outside vendor. They determined the following costs would be incurred to produce an initial
batch of 10,000 units:
The production manager determined that the direct labor is subject to an 80% learning curve. The initial
production run is 10,000 units.
Required:
Should Tucker make or buy the 80,000 units? Assume that variable overhead cost varies directly with direct
labor cost.
94. Suntharam Corp. plans to manufacture a new product that is subject to labor costs. The new product will
have a materials cost of $250 per unit. The standard direct labor rate is $15 per direct labor–hour. Variable
overhead is applied at a rate of $10 per direct labor hour. The first unit required a total of 200 hours. The second
unit required a total of 140 hours. This implies an 85% cumulative learning curve. From experience, the
production manager believes that improvements in production time will be limited to the first 32 units. A
standard for production time will be determined based on the average hours per unit for units 17 – 32.
Required:
1) Calculate the standard for direct labor-hours that Suntharam should establish for each
unit of new product.
2) After 32 units have been produced, Suntharam has to submit a bid on an additional 100 units. A competitor
has submitted a bid of $2,500 per unit. Would Suntharam be likely to win the contract (i.e., come in with a
lower bid)?