Solutions Manual, Chapter 2 11
Exercise 2-5 (20 minutes)
1.
Occupancy-
Days
Electrical
Costs
High activity level (August) ..
2,406
$5,148
Low activity level (October) ..
124
1,588
Change ………………………….
2,282
$3,560
Total cost (August) …………………………………………….
$5,148
Variable cost element
($1.56 per occupancy-day × 2,406 occupancy-days)
Fixed cost element …………………………………………….
2. Electrical costs may reflect seasonal factors other than just the variation
in occupancy days. For example, common areas such as the reception
costs.
Additionally, fixed costs will be affected by the number of days in a
Other, less systematic, factors may also affect electrical costs such
12 Managerial Accounting for Managers, 4th edition
Exercise 2-6 (15 minutes)
1. Traditional income statement
Cherokee, Inc.
Traditional Income Statement
Sales ($30 per unit × 20,000 units) ………………..
$600,000
Cost of goods sold
($24,000 + $180,000 – $44,000) …………………
160,000
Gross margin ……………………………………………..
440,000
Selling and administrative expenses:
Selling expenses
(($4 per unit × 20,000 units) + $40,000) ……
120,000
Administrative expenses
(($2 per unit × 20,000 units) + $30,000) ……
70,000
190,000
Net operating income ………………………………….
$250,000
2. Contribution format income statement
Cherokee, Inc.
Contribution Format Income Statement
Sales …………………………..…………………………..
$600,000
Variable expenses:
Cost of goods sold
($24,000 + $180,000 – $44,000) ………………
$160,000
Selling expenses ($4 per unit × 20,000 units) …
80,000
Administrative expenses
($2 per unit × 20,000 units) …………………….
40,000
280,000
Contribution margin …………………………………….
320,000
Fixed expenses:
Selling expenses ………………………………………
40,000
Administrative expenses …………………………….
30,000
70,000
Net operating income ………………………………….
$250,000
Solutions Manual, Chapter 2 13
Exercise 2-7 (15 minutes)
Item
Differential
Cost
Opportunity
Cost
Sunk
Cost
1.
Cost of the old X-ray machine ….
X
2.
The salary of the head of the
Radiology Department …………
3.
The salary of the head of the
Pediatrics Department …………
4.
Cost of the new color laser
printer ……………………………..
X
5.
Rent on the space occupied by
Radiology …………………………
6.
The cost of maintaining the old
machine …………………………..
X
7.
Benefits from a new DNA
analyzer …………………………...
X
8.
Cost of electricity to run the X-
ray machines …………………….
X
irrelevant in the decision, but they are not sunk costs because they occur
in the future.
14 Managerial Accounting for Managers, 4th edition
Exercise 2-8 (20 minutes)
1.
Kilometers
Driven
Total Annual
Cost*
High level of activity …………………….
105,000
$11,970
Low level of activity ……………………..
70,000
9,380
Change ……………………………………..
35,000
$ 2,590
*
105,000 kilometers × $0.114 per kilometer = $11,970
70,000 kilometers × $0.134 per kilometer = $9,380
Variable cost per kilometer:
Change in cost $2,590
= =$0.074 per kilometer
Change in activity 35,000 kilometers
Fixed cost per year:
Total cost at 105,000 kilometers …………………
$11,970
Less variable portion:
105,000 kilometers × $0.074 per kilometer ..
7,770
Fixed cost per year ………………………………….
$ 4,200
3.
Fixed cost …………………………………………………
$ 4,200
Variable cost:
80,000 kilometers × $0.074 per kilometer ……..
5,920
Total annual cost ………………………………………..
$10,120
Solutions Manual, Chapter 2 15
Exercise 2-9 (10 minutes)
1. Product costs:
Direct materials ………………………
$ 80,000
Direct labor …………………………...
42,000
Manufacturing overhead …………..
19,000
Total product costs ………………….
$141,000
2. Period costs:
Selling expenses ……………………..
$22,000
Administrative expenses ……………
35,000
Total period costs ……………………
$57,000
3. Conversion costs:
Direct labor …………………………...
$42,000
Manufacturing overhead …………..
19,000
Total conversion costs ……………..
$61,000
4. Prime costs:
Direct materials ………………………
$ 80,000
Direct labor …………………………...
42,000
Total prime costs …………………….
$122,000
Exercise 2-10 (20 minutes)
Solutions Manual, Chapter 2 17
Exercise 2-11 (45 minutes)
1. The scattergraph appears below:
units shipped and the total shipping expense.
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
0 2 4 6 8 10
Shipping Expense
Units Shipped
Shipping expense at high activity level …………………..
Less variable cost element ($250 per unit × 8 units)…
Total fixed cost …………………………………………………
Exercise 2-11 (continued)
2. The high-low estimates and cost formula are computed as follows:
Units Shipped
Shipping Expense
High activity level (June) ……
8
$2,700
Low activity level (July) ……..
2
1,200
Change ………………………….
6
$1,500
Solutions Manual, Chapter 2 19
Exercise 2-11 (continued)
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
0 2 4 6 8 10
Shipping Expense
Units Shipped
20 Managerial Accounting for Managers, 4th edition
Exercise 2-12 (30 minutes)
Product Cost
Period
(Selling
Name of the Cost
Variable
Cost
Fixed
Cost
Direct
Materials
Direct
Labor
Manu-
facturing
Overhead
and
Admin)
Cost
Oppor-
tunity
Cost
Sunk
Cost
Rental revenue forgone, $30,000
per year ……………………………….
X
Direct materials cost, $80 per unit .
X
X
Rental cost of warehouse, $500
per month…………………………….
X
X
Rental cost of equipment, $4,000
per month…………………………….
X
X
Direct labor cost, $60 per unit …….
X
X
Depreciation of the annex space,
$8,000 per year …………………….
X
X
X
Advertising cost, $50,000 per year .
X
X
Supervisor’s salary, $1,500 per
month …………………………………
X
X
Electricity for machines, $1.20 per
unit …………………………………….
X
X
Shipping cost, $9 per unit …………..
X
X
Return earned on investments,
$3,000 per year …………………….
X