SOLUTION
(15–20 min.) Classification of costs, merchandising sector.
Cost object: DVDs sold in movie section of store
Cost variability: With respect to changes in the number of DVDs sold
There may be some debate over classifications of individual items, especially with regard
to cost variability.
Cost Item D or I V or F
A D F
B I F
2-25 Classification of costs, manufacturing sector. The Cooper Furniture Company of
Potomac, Maryland, assembles two types of chairs (Recliners and Rockers). Separate assembly
lines are used for each type of chair.
Required:
Classify each cost item (A–I) as follows:
a. Direct or indirect (D or I) cost for the total number of Recliners assembled.
b. Variable or fixed (V or F) cost depending on how total costs change as the total number of
Recliners assembled changes. (If in doubt, select on the basis of whether the total costs will
change substantially if there is a large change in the total number of Recliners assembled.)
You will have two answers (D or I; V or F) for each of the following items:
Cost Item D or I V or F
A. Cost of fabric used on Recliners
B. Salary of public relations manager for Cooper Furniture
C. Annual convention for furniture manufacturers; generally
Cooper Furniture attends
D. Cost of lubricant used on the Recliner assembly line
E. Freight costs of Recliner frames shipped from Durham to
Potomac, MD
F. Electricity costs for Recliner assembly line (single bill
covers entire plant)
G. Wages paid to temporary assembly-line workers hired in
periods of high Recliner production (paid on hourly basis)
H. Annual fire-insurance policy cost for Potomac, MD plant
I. Wages paid to plant manager who oversees the assembly
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Cost Item D or I V or F
lines for both chair types
SOLUTION
(15–20 min.) Classification of costs, manufacturing sector.
Cost object: Type of chair assembled (Recliners or Rockers)
Cost variability: With respect to changes in the number of Recliners assembled
There may be some debate over classifications of individual items, especially with regard to cost
variability.
Cost Item D or I V or F
A D V
B I F
2-26 Variable costs, fixed costs, total costs. Bridget Ashton is getting ready to open a small
restaurant. She is on a tight budget and must choose between the following long-distance phone
plans:
Plan A: Pay 10 cents per minute of long-distance calling.
Plan B: Pay a fixed monthly fee of $15 for up to 240 long-distance minutes and 8 cents per
minute thereafter (if she uses fewer than 240 minutes in any month, she still pays
$15 for the month).
Plan C: Pay a fixed monthly fee of $22 for up to 510 long-distance minutes and 5 cents per
minute thereafter (if she uses fewer than 510 minutes, she still pays $22 for the
month).
Required:
1. Draw a graph of the total monthly costs of the three plans for different levels of monthly
long-distance calling.
2. Which plan should Ashton choose if she expects to make 100 minutes of long-distance calls?
240 minutes? 540 minutes?
SOLUTION
(20 min.) Variable costs, fixed costs, total costs.
1.
2-2
Minutes/month 0 50 100 150 200 240 300 327.5 350 400 450 510 540 600 650
Plan A ($/month) 0 5 10 15 20 24 30 32.75 35 40 45 51 54 60 65
Plan B ($/month) 15 15 15 15 15 15 19.80 22 23.80 27.80 31.80 36.60 39 43.80 47.80
Plan C ($/month) 22 22 22 22 22 22 22 22 22 22 22 22 23.50 26.50 29
2. In each region, Ashton chooses the plan that has the lowest cost. From the graph (or from
calculations)*, we can see that if Ashton expects to use 0–150 minutes of long-distance each
month, she should buy Plan A; for 150–327.5 minutes, Plan B; and for more than 327.5 minutes,
Plan C. If Ashton plans to make 100 minutes of long-distance calls each month, she should
choose Plan A; for 240 minutes, choose Plan B; for 540 minutes, choose Plan C.
*Let x be the number of minutes when Plan A and Plan B have equal cost
$0.10x = $15
2-27 Variable and Fixed Costs. Consolidated Motors specializes in producing one specialty
vehicle. It is called Surfer and is styled to easily fit multiple surfboards in its back area and
top-mounted storage racks. Consolidated has the following manufacturing costs:
Plant management costs, $1,992,000 per year
Cost of leasing equipment, $1,932,000 per year
Workers’ wages, $800 per Surfer vehicle produced
Direct materials costs: Steel, $1,400 per Surfer; Tires, $150 per tire, each Surfer takes 5 tires
(one spare).
City license, which is charged monthly based on the number of tires used in production:
0–500 tires $ 40,040
501–1,000 tires $ 65,000
more than 1,000 tires $249,870
2-3
Consolidated currently produces 170 vehicles per month.
Required:
1. What is the variable manufacturing cost per vehicle? What is the fixed manufacturing cost
per month?
2. Plot a graph for the variable manufacturing costs and a second for the fixed manufacturing
costs per month. How does the concept of relevant range relate to your graphs? Explain.
3. What is the total manufacturing cost of each vehicle if 80 vehicles are produced each month?
205 vehicles? How do you explain the difference in the manufacturing cost per unit?
SOLUTION
(15–20 min.) Variable costs and fixed costs.
1. Variable manufacturing cost per vehicle
Steel $1,400 per Surfer
Tires 750 per Surfer
Fixed manufacturing costs per month
Plant management costs ($1,992,000 ÷ 12) $ 166,000
Fixed costs per month (1 surfer takes 5 tires)
2.
2-4
The concept of relevant range is potentially relevant for both graphs. However, the question does
3.
Vehicles
Produced
per Month
Tires
Produced
per Month
Fixed Cost
per Month
Unit Fixed
Cost per Vehicle
Unit Variable
Cost per
Vehicle
Unit Total
Cost per
Vehicle
(1) (2) = (1) × 5 (3) (4) = FC ÷ (1) (5) (6) = (4) + (5)
(a) 80 400 $367,040 $367,040 ÷ 80 = $4,588 $2,950 $7,538
The unit cost for 80 vehicles produced per month is $7,538, while for 205 vehicles it is only
2-28 Variable costs, fixed costs, relevant range. Gummy Land Candies manufactures
jaw-breaker candies in a fully automated process. The machine that produces candies was
purchased recently and can make 5,000 per month. The machine costs $6,500 and is depreciated
using straight-line depreciation over 10 years assuming zero residual value. Rent for the factory
space and warehouse and other fixed manufacturing overhead costs total $1,200 per month.
Gummy Land currently makes and sells 3,900 jaw-breakers per month. Gummy Land buys
just enough materials each month to make the jaw-breakers it needs to sell. Materials cost 40¢
per jaw-breaker.
Next year Gummy Land expects demand to increase by 100%. At this volume of materials
purchased, it will get a 10% discount on price. Rent and other fixed manufacturing overhead
costs will remain the same.
Required:
1. What is Gummy Land’s current annual relevant range of output?
2. What is Gummy Land’s current annual fixed manufacturing cost within the relevant range?
What is the annual variable manufacturing cost?
3. What will Gummy Land’s relevant range of output be next year? How, if at all, will total
annual fixed and variable manufacturing costs change next year? Assume that if it needs to
Gummy Land could buy an identical machine at the same cost as the one it already has.
SOLUTION
(20 min.) Variable costs, fixed costs, relevant range.
1. The production capacity is 5,000 jaw breakers per month. Therefore, the current annual
2-5
2. Current annual fixed manufacturing costs within the relevant range are $1,200 × 12 =
3. If demand changes from 3,900 to 7,800 jaw breakers per month, or from 3,900 × 12 =
Assume the second machine costs $6,500 and is depreciated using straight-line
Fixed costs for next year will increase to $15,700 from $15,050 for the current year + $650
The variable cost per jaw breaker next year will be 90% × $0.40 = $0.36. Total variable
If Gummy Land decides not to increase capacity and meet only that amount of demand for
2-29 Cost drivers and value chain. Torrance Technology Company (TTC) is developing a new
touch-screen smartphone to compete in the cellular phone industry. The company will sell the
phones at wholesale prices to cell phone companies, which will in turn sell them in retail stores
to the final customer. TTC has undertaken the following activities in its value chain to bring its
product to market:
A. Perform market research on competing brands
B. Design a prototype of the TTC smartphone
C. Market the new design to cell phone companies
D. Manufacture the TTC smartphone
E. Process orders from cell phone companies
F. Deliver the TTC smartphones to the cell phone companies
G. Provide online assistance to cell phone users for use of the TTC smartphone
H. Make design changes to the smartphone based on customer feedback
During the process of product development, production, marketing, distribution, and customer
service, TTC has kept track of the following cost drivers:
Number of smartphones shipped by TTC
Number of design changes
Number of deliveries made to cell phone companies
2-6
Engineering hours spent on initial product design
Hours spent researching competing market brands
Customer-service hours
Number of smartphone orders processed
Machine hours required to run the production equipment
Required:
1. Identify each value-chain activity listed at the beginning of the exercise with one of the
following value-chain categories:
a. Design of products and processes
b. Production
c. Marketing
d. Distribution
e. Customer service
2. Use the list of preceding cost drivers to find one or more reasonable cost drivers for each of
the activities in TTC’s value chain.
SOLUTION
(20 min.) Cost drivers and value chain.
1. Perform market research on competing brands—Design of products and processes
Design a prototype of the TTC smartphone—Design of products and processes
2.
Value Chain
Category Activity Cost Driver
Design of
products and
processes
Perform market research on
competing brands
Hours spent researching competing market
brands
Production Manufacture the TTC
smartphones
Machine hours required to run the
production equipment
2-7
Customer
Provide on-line assistance to
Customer service hours
2-30 Cost drivers and functions. The representative cost drivers in the right column of this
table are randomized so they do not match the list of functions in the left column.
Function Representative Cost Driver
1. Accounts payable A. Number of invoices sent
2. Recruiting B. Number of purchase orders
3. Network Maintenance C. Number of units manufactured
4. Production D. Number of computers on the
network
5. Purchasing E. Number of employees hired
6. Warehousing F. Number of bills received from
vendors
7. Billing G. Number of pallets moved
Required:
1. Match each function with its representative cost driver.
2. Give a second example of a cost driver for each function.
SOLUTION
(10–15 min.) Cost drivers and functions.
1.
Function Representative Cost Driver
1. Accounts payable Number of bills received from vendors
2. Recruiting Number of employees hired
3. Network maintenance Number of computers on the network
2-8
2.
Function Representative Cost Driver
1. Accounts payable Number of checks written
2-31 Total costs and unit costs, service setting. National Training recently started a business
providing training events for corporations. In order to better understand the profitability of the
business, the owners asked you for an analysis of costs—what costs are fixed, what costs are
variable, and so on, for each training session. You have the following cost information:
Trainer: $11,000 per session
Materials: $2,500 per session and $35 per attendee
Catering Costs (subcontracted):
Food: $75 per attendee
Setup/cleanup: $25 per attendee
Fixed fee: $5,000 per training session
National Training is pleased with the service they use for the catering and have allowed them to
place brochures on each dinner table as a form of advertising. In exchange, the caterer gives
National Training a $1,000 discount per session.
Required:
1. Draw a graph depicting fixed costs, variable costs, and total costs for each training session
versus the number of guests.
2. Suppose 100 persons attend the next event. What is National Training’s total net cost and the
cost per attendee?
3. Suppose instead that 175 persons attend? What is National Training’s total net cost and the
cost per attendee?
4. How should National Training charge customers for their services? Explain briefly.
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