© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
Solutions Manual, Appendix 5A 99
Problem 5A-9 (continued)
2. Milden Company
Budgeted Contribution Format Income Statement
For the First Quarter, Year 3
Sales (12,000 units × $100 per unit) ……….. $1,200,000
V
ariable expenses:
Cost of
g
oods sold
T
otal variable expenses ………………………… 601,200
Contribution mar
g
in …………………………….. 598,800
Fixed expenses:
A
dvertisin
g
expense ………………………….. 210,000
Shippin
g
expense ……………………………… 28,000
A
T
g
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
100 Managerial Accounting, 16th Edition
Problem 5A-10 (30 minutes)
1. and 2.
The scattergraph plot and regression estimates of fixed and variable costs
The cost formula, in the form
Y
=
a
+
bX
, using number of sections
Note that the R
2
is approximately 0.96, which means that 96% of the
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
Solutions Manual, Appendix 5A 101
Problem 5A-10 (continued)
3. Expected total cost would be:
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
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
102 Managerial Accounting, 16th Edition
Case 5A-11 (60 minutes)
1. High-low method:
Hours Cost
Hi
g
h level of activity ……. 25,000 $99,000
Fixed element:
Less variable element:
2. The scattergraph is shown below:
$85,000
$90,000
$95,000
$100,000
Y
Overhead
Costs
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
Solutions Manual, Appendix 5A 103
Case 5A-11 (continued)
2. The scattergraph shows that there are two relevant ranges—one below
19,500 MH and one above 19,500 MH. The change in equipment lease
3. The cost formulas computed with the high-low and regression methods
are faulty since they are based on the assumption that a single straight
4. High-low method:
Hours Cost
Hi
g
h level of activity ……. 25,000 $99,000
Variable element: $19,000 ÷ 5,000 MH = $3.80 per MH
Fixed element:
T
otal cost
—
25,000 MH …………………….. $99,000
Less variable element:
V
T
5. The high-low estimate of fixed costs is $6,090 (= $10,090 – $4,000)
lower than the estimate provided by least-squares regression. The high-
low estimate of the variable cost per machine hour is $0.27 (= $3.80 –
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
104 Managerial Accounting, 16th Edition
Case 5A-12 (45 minutes)
1. and 2.
The scattergraph plot and regression estimates of fixed and variable
costs using Microsoft Excel are shown below:
The scattergraph reveals three interesting findings. First, it indicates the
relation between overhead expense and labor hours is approximated
reasonably well by a straight line. (However, there appears to be a slight
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
Third, most of the overhead expense appears to be fixed. Maria should
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
Solutions Manual, Appendix 5A 105
CASE 5A-12 (continued)
The cost formula, in the form
Y
=
a
+
bX
, using labor-hours as the
activity base is $48,126 per month plus $3.95 per labor-hour, or:
3. Using the least-squares regression estimate of the variable overhead
cost, the total variable cost per guest is computed as follows:
Food and bevera
g
es ………………………. $15.00
T
The total contribution from 180 guests paying $31 each is computed as
follows:
Sales (180
g
uests @ $31.00 per
g
uest) ………….. $5,580.00
V
g
g
4. Assuming that no additional fixed costs are incurred as a result of
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
106 Managerial Accounting, 16th Edition
CASE 5A-12 (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
to potential clients. The danger is that a price that is lower than the
normal bid of $31 might set a precedent for the future or it might