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Problem 2A-3 (30 minutes)
1. The scattergraph plot and regression estimates of fixed and variable
costs using Microsoft Excel are shown below:
Problem 2A-3 (continued)
2. The scattergraph plot and regression estimates of fixed and variable
costs using Microsoft Excel are shown below:
3. The company should probably use direct labor-hours as the activity
base, since the fit of the regression line to the data is much tighter than
Problem 2A-4 (30 minutes)
1. and 2.
The scattergraph plot and regression estimates of fixed and variable costs
using Microsoft Excel are shown below:
Problem 2A-4 (continued)
3. Expected total cost would be:
Fixed cost .......................................................
$ 3,700
Variable cost (8 sections × $1,750 per section) .
14,000
Total cost ........................................................
$17,700
The problem with using the cost formula from (2) to derive total cost is
that an activity level of 8 sections may lie outside the relevant range—
the range of activity within which the fixed cost is approximately $3,700
per term and the variable cost is approximately $1,750 per section
offered. These approximations appear to be reasonably accurate within
the range of 2 to 6 sections, but they may be invalid outside this range.
CASE 2A-5 (45 minutes)
1. and 2.
The scattergraph plot and regression estimates of fixed and variable
costs using Microsoft Excel are shown below:
278.)
Second, the data points are all fairly close to the straight line. This
indicates that most of the variation in overhead expenses is explained by
CASE 2A-5 (continued)
3. Using the least-squares regression estimate of the variable overhead
cost, the total variable cost per guest is computed as follows:
Food and beverages .............................
$15.00
Labor (0.5 hour @ $10 per hour) ..........
5.00
Overhead (0.5 hour @ $3.95 per hour) .
1.98
Total variable cost per guest .................
$21.98
The total contribution from 180 guests paying $31 each is computed as
follows:
Sales (180 guests @ $31.00 per guest) ..............
$5,580.00
Variable cost (180 guests @ $21.98 per guest) ...
3,956.40
Contribution to profit.........................................
$1,623.60
Fixed costs are not included in the above computation because there is
no indication that any additional fixed costs would be incurred as a
consequence of catering the cocktail party. If additional fixed costs were
incurred, they should also be subtracted from revenue.
4. Assuming that no additional fixed costs are incurred as a result of
catering the charity event, any price greater than the variable cost per
guest of roughly $22 would contribute to profits.
CASE 2A-5 (continued)
5. We would favor bidding slightly less than $30 to get the contract. Any
bid above $22 would contribute to profits and a bid at the normal price
of $31 is unlikely to land the contract. And apart from the contribution
to profit, catering the event would show off the company’s capabilities
