978-0078025532 Chapter 3 Solution Manual Part 2

Chapter 3 – Basic Cost Management Concepts

3-16

3-42 (continued –1)

3. The growth of the company globally means that the company will be

more exposed to the effects of foreign currency fluctuations. For

example, a falling dollar relative to the Euro will lower the effective

cost of PGI’s U.S.-based services to European customers, thereby

the Euro. The same currency issues apply should the company’s

business continue to grow in China. In this case, the currency effect

is likely to be smaller, since the Chinese currency has not changed

much relative to the dollar in recent years.

Chapter 3 – Basic Cost Management Concepts

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3-43 Fixed, Variable and Mixed Costs (10 min)

Department A fixed

Department B variable

Department C mixed

Department D mixed

Department E variable

3-44 Fixed, Variable and Mixed Costs (10 min)

Department A mixed

Department B mixed

Department C fixed

Department D variable

Department E variable

Chapter 3 – Basic Cost Management Concepts

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3-45 Strategy; Variable and Fixed Costs (20 min)

1. The variable costs for Zipcar would be the same as for any car

owner – gasoline (customers do not pay for gas, but instead a simple

hourly rate) and upkeep. The fixed cost are the largest part of total

cost, the cost of the car, insurance, and the parking spot, among

others.

2. The key challenge facing Zipcar is the entrance of competitors such

as Hertz and Enterprise car rental agencies. Zipcar has no “barrier

to entry,” and is vulnerable to new competition.

A good question for class discussion: “How will Zipcar be able to

compete effectively against the larger companies?” Is the Zipcar

concept a commodity which can be copied and used by the other

companies, or are there some features and services that can make

environmental contribution over the last 10 years, ideas that might

have traction with those customers who want to make a statement

about their commitment to the environment.

Since fixed costs are a key component of total costs for the

company, the ability of the company to grow at a fast rate is critical.

A larger company, with more members and more usage of its

vehicles, would be able to more easily cover those fixed costs. As

which must be covered by that fixed hourly rate.

Source: “The Business of Sharing,” The Economist, October 14, 2010;

Adam Aston, “Growth Galore, but Profits are Zip,” Business Week,

September 8, 2008, p 62. Also: Mark Clothier, ”In The Race for the Car–

less, Can Hertz Outrun Zipcar?” Bloomberg Businessweek, April 2, 2012,

pp. 23-24.

Chapter 3 – Basic Cost Management Concepts

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3-46 Interpreting Average Cost (15 min)

This question is based on a report by Paul Raeburn, “Hybrid Cars: Less

Fuel but More Costs,” Business Week, April 15, 2002, p 107. See also

information on the history of gas prices from January 2000 to the present at

the U.S. Department of Energy website:

http://tonto.eia.doe.gov/oog/info/gdu/gaspump.html

CAFÉ standards have remained at 27.5 mpg since 2002 but have been

increased by 2007 legislation which required 35 mpg by the year 2020. In

May 2009, the Obama admiration pushed the 35MPG target back to 2012,

and in August 2011 legislation was passed that required 54.5 mpg by 2025.

The urgency of energy sustainability, oil independence from non-domestic

supplies, and climate change have substantially increased the efforts to

improve vehicle efficiency and reduce vehicle emissions.

The rapid increase of gasoline prices in 2004-2011 should enhance the

interest in the issue discussed. The costs shown for each gallon of

For example, since in this case total cost per gallon of gas depends

on both variable costs (gasoline) and fixed costs (vehicle cost), the

determination of an average cost requires an assumption of activity level.

While variable costs (the price of gasoline) are constant per unit, for the

number of gallons purchased, theaverage per-gallon fixed costof

purchasing the vehicle will depend on the number of miles traveled. Car

owners who travel relatively few miles will have large average fixed costs in

Chapter 3 – Basic Cost Management Concepts

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3-46 (continued –1)

The Business Week report does a good job in this regard by reporting

that the assumed activity was 12,000 miles per year for 12 years. This

cost is determined in this case. The key idea to bring out is that average

fixed cost is determined by some pre-determined activity level.

CAFÉ Standards links:

http://www.nhtsa.gov/fuel-economy

Chapter 3 – Basic Cost Management Concepts

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3-47 Interpreting Average Cost (15 min)

This question is based upon the following: Vincent Ryan, “Treasury:

Bigger is Better,” CFO.com, November 9, 2010; “How Does Your Finance

Department Measure Up?”Journal of Accountancy, January 1997, pp50-51.

The main point of this exercise, as for 3-46 above, is to help the student

understand the importance of taking activity levels into account when

interpreting average cost information.

The two articles show, as represented by the information presented in the

fall. Average fixed cost would continue to fall with increasing numbers of

transactions, until the firm felt it necessary to increase capacity in the

accounting department, thereby increasing fixed costs.

Thus, the data presented is as we would expect – larger firms will have

lower average costs. We would not expect otherwise. Average fixed

costs should be lower for the larger firms.

Chapter 3 – Basic Cost Management Concepts

3-48 Average Cost (15 min)

The percentage increase in total variable manufacturing cost, averaging

both labor and fuel costs, is 7.5% for Company A and 6% for Company B.

The increase is higher for Company A because it has a higher percent of

fuel costs which have risen faster than labor costs.

Calculations:

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3-48 (continued –1)

Here is another example. The recession in the early 1980s caused an

increase in unemployment for workers at all educational levels. Also, in

the great recession, during 2009, the unemployment rates were higher for

highly educated group than in 1983, and this group’s unemployment rate

was lower (in both periods), the effect was to bring down the overall

unemployment rate in 2009 relative to 1983.

Source: Carl Bialik, “When Combined Data Reveal the Flaw of Averages,”

The Wall Street Journal, December 9, 2009, p A21.

Chapter 3 – Basic Cost Management Concepts

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3-49 Classification of Costs; Customer Profitability Analysis (15 min)

1.

Direct (D) or

Indirect(I)

1. Staff salaries

D

2. Rent on office and work space used

by the company

I

3. Licenses and fees

I

4. Supplies; grooming supplies, and