Problem 1-22A (continued)
3. The high-low estimate of fixed costs is $170.90 lower than the estimate
provided by least-squares regression. The high-low estimate of the
Problem 1-23A (45 minutes)
1. High-low method:
Units
Sold
Shipping
Expense
High activity level …………..
20,000
$210,000
Low activity level ……………
10,000
119,000
Change ………………………..
10,000
$91,000
Change in cost
Variable cost per unit = Change in activity
$91,000
= = $9.10 per unit
10,000 units
Fixed cost element:
Total shipping expense at high activity
level ……………………………………………..
$210,000
Less variable element:
20,000 units × $9.10 per unit …………….
182,000
Fixed cost element …………………………….
$ 28,000
Problem 1-23A (continued)
Milden Company
Budgeted Contribution Format Income Statement
For the First Quarter, Year 3
Sales (12,000 units × $100 per unit) ………..
$1,200,000
Variable expenses:
Cost of goods sold
(12,000 units × $35 unit) ………………….
$420,000
Sales commission (6% × $1,200,000) …….
72,000
Shipping expense
(12,000 units × $9.10 per unit) …………..
109,200
Total variable expenses ………………………….
601,200
Contribution margin ………………………………
598,800
Fixed expenses:
Advertising expense …………………………...
210,000
Shipping expense ………………………………
28,000
Administrative salaries ………………………..
145,000
Insurance expense ……………………………..
9,000
Depreciation expense ………………………….
76,000
Total fixed expenses ……………………………..
468,000
Net operating income …………………………...
$ 130,800
Problem 1-24A (45 minutes)
1.
Cost Behavior
Selling or
Administrative
Product Cost
Cost Item
Variable
Fixed
Cost
Direct
Indirect
Direct labor ………………………….
$118,000
$118,000
Advertising …………………………..
$50,000
$50,000
Factory supervision ………………..
40,000
$40,000
Property taxes, factory building ..
3,500
3,500
Sales commissions …………………
80,000
80,000
Insurance, factory …………………
2,500
2,500
Depreciation, administrative
office equipment …………………
4,000
4,000
Lease cost, factory equipment ….
12,000
12,000
Indirect materials, factory ……….
6,000
6,000
Depreciation, factory building …..
10,000
10,000
Administrative office supplies …..
3,000
3,000
Administrative office salaries ……
60,000
60,000
Direct materials used ……………..
94,000
94,000
Utilities, factory …………………….
20,000
20,000
Total costs …………………………..
$321,000
$182,000
$197,000
$212,000
$94,000
Problem 1-24A (continued)
2. The average product cost for one patio set would be:
Direct ………………………………………….
$212,000
Indirect ………………………………………..
94,000
Total ……………………………………………
$306,000
$306,000 ÷ 2,000 sets = $153 per set
3. The average product cost per set would increase if the production
4. a. Yes, the president may expect a minimum price of $153, which is the
average cost to manufacture one set. He might expect a price even
higher than this to cover a portion of the administrative costs as well.
Ethics Challenge (30 minutes)
1. A cost that is classified as a period cost will be recognized on the income
statement as an expense in the current period. A cost that is classified
as a product cost will be recognized on the income statement as an
2. The discussion below is divided into two parts—Gallant’s actions to
postpone expenditures and the actions to reclassify period costs as
product costs.
The decision to postpone expenditures is questionable. It is one thing to
postpone expenditures due to a cash bind; it is quite another to
Analytical Thinking (30 minutes)
1. The scattergraph of direct labor cost versus the number of units
produced is presented below:
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
050 100 150
Thousands of Units Produced
Direct Labor Cost
X
Y
Analytical Thinking (continued)
2. The scattergraph of the direct labor cost versus the number of paid days
is presented below:
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
0 5 10 15 20 25
Number of Workdays
Direct Labor Cost
X
Y
Number of Paid Days
Analytical Thinking (continued)
3. The number of paid days should be used as the activity base rather than
the number of units produced. The scattergraphs reveal a much
stronger relation (i.e., higher correlation) between direct labor costs and
number of paid days than between direct labor costs and number of
Teamwork in Action
1. Student answers will vary concerning what is the best overall measure
of activity in each business. Some possibilities are:
a. Dental clinic: number of patient-visits; total patient revenues
b. Fast-food restaurant: total sales
c. Auto repair shop: hours of service provided; total sales
Teamwork in Action (continued)
2. Within the relevant range, changes in activity have these effects:
Increases
in activity
Decreases
in activity
Total fixed cost ………………………………..
Constant
Constant
Fixed cost per unit of activity ………………
Decrease
Increase
Total variable costs …………………………..
Increase
Decrease
Variable cost per unit of activity ………….
Constant
Constant
Total cost ……………………………………….
Increase
Decrease
Average total cost per unit of activity ……
Decrease
Increase
3. The dental clinic probably has the lowest ratio of variable to fixed costs.
Very little of the costs of a dental clinic are variable with respect to the
number of patient-visits. Because of its high fixed costs and low variable
Chapter 1
Take Two Solutions
Exercise 1-4 (15 minutes)
1.
Cups of Coffee Served
in a Week
2,000
2,100
2,200
Fixed cost …………………………..
$1,000
$1,000
$1,000
Variable cost ……………………….
600
630
660
Total cost …………………………..
$1,600
$1,630
$1,660
Average cost per cup served * ..
$0.800
$0.776
$0.755
* Total cost ÷ cups of coffee served in a week
2. The average cost of a cup of coffee declines as the number of cups of
Exercise 1-5 (20 minutes)
1.
Occupancy-
Days
Electrical
Costs
High activity level (August) ..
2,406
$5,148
Low activity level (May) …….
360
1,871
Change ………………………….
2,046
$3,277
Variable cost = Change in cost ÷ Change in activity
= $3,277 ÷ 2,046 occupancy-days
= $1.60 (rounded) per occupancy-day
Total cost (August) …………………………………………….
$5,148.00
Variable cost element
($1.60 per occupancy-day × 2,406 occupancy-days)
3,849.60
Fixed cost element …………………………………………….
$1,298.40
2. Electrical costs may reflect seasonal factors other than just the variation
in occupancy days. For example, common areas such as the reception
area must be lighted for longer periods during the winter than in the
Exercise 1-6 (15 minutes)
1. Traditional income statement
Cherokee Inc.
Traditional Income Statement
Sales ($30 per unit × 24,000 units) ………………..
$720,000
Cost of goods sold
($24,000 + $212,000 – $44,000) …………………
192,000
Gross margin …………………………..…………………
528,000
Selling and administrative expenses:
Selling expenses
(($4 per unit × 24,000 units) + $40,000)…….
136,000
Administrative expenses
(($2 per unit × 24,000 units) + $30,000)…….
78,000
214,000
Net operating income ………………………………….
$314,000
2. Contribution format income statement
Cherokee Inc.
Contribution Format Income Statement
Sales …………………………..…………………………..
$720,000
Variable expenses:
Cost of goods sold
($24,000 + $212,000 – $44,000) ………………
$192,000
Selling expenses ($4 per unit × 24,000 units) …
96,000
Administrative expenses
($2 per unit × 24,000 units) …………………….
48,000
336,000
Contribution margin …………………………………….
384,000
Fixed expenses:
Selling expenses ………………………………………
40,000
Administrative expenses …………………………….
30,000
70,000
Net operating income ………………………………….
$314,000
Exercise 1-8 (20 minutes)
Kilometers
Driven
Total Annual
Cost*
High level of activity …………………….
105,000
$10,500
Low level of activity ……………………..
70,000
9,380
Change ……………………………………..
35,000
$ 1,120
*
105,000 kilometers × $0.100 per kilometer = $10,500
70,000 kilometers × $0.134 per kilometer = $9,380
Total cost at 105,000 kilometers …………………
$10,500
Less variable portion:
105,000 kilometers × $0.032 per kilometer ..
3,360
Fixed cost per year ………………………………….
$ 7,140
2. Y = $7,140 + $0.032X
Fixed cost …………………………………………………
$ 7,140
Variable cost:
80,000 kilometers × $0.032 per kilometer ……..
2,560
Total annual cost ………………………………………..
$ 9,700
Exercise 1-13 (20 minutes)
1. Traditional income statement
The Alpine House, Inc.
Traditional Income Statement
Sales …………………………..…………………………..
$165,000
Cost of goods sold
($30,000 + $135,000 – $40,000) …………………
125,000
Gross margin …………………………..…………………
40,000
Selling and administrative expenses:
Selling expenses (($50 per unit × 220 pairs of
skis*) + $20,000) …………………………………..
31,000
Administrative expenses (($10 per unit × 220
pairs of skis) + $20,000)………………………….
22,200
53,200
Net operating income (loss) ………………………….
$ (13,200)
2. Contribution format income statement
The Alpine House, Inc.
Contribution Format Income Statement
Sales …………………………..…………………………..
$165,000
Variable expenses:
Cost of goods sold
($30,000 + $135,000 – $40,000) ………………
$125,000
Selling expenses
($50 per unit × 220 pairs of skis) ………………
11,000
Administrative expenses
($10 per unit × 220 pairs of skis) ………………
2,200
138,200
Contribution margin …………………………………….
26,800
Fixed expenses:
Selling expenses ………………………………………
20,000
Administrative expenses …………………………….
20,000
40,000
Net operating income (loss) ………………………….
$ (13,200)
Exercise 1-13 (continued)
2. Since 220 pairs of skis were sold and the contribution margin totaled
$121.82 per pair of skis).