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
Fixed cost element …………………………….
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:
Total variable expenses ………………………….
Contribution margin ………………………………
Fixed expenses:
Total fixed expenses ……………………………..
Net operating income …………………………...
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 ..
Sales commissions …………………
Insurance, factory …………………
Lease cost, factory equipment ….
12,000
Indirect materials, factory ……….
6,000
Depreciation, factory building …..
Administrative office supplies …..
Administrative office salaries ……
Direct materials used ……………..
Utilities, factory …………………….
Total costs …………………………..
$321,000
$182,000
$212,000
Problem 1-24A (continued)
2. The average product cost for one patio set would be:
Direct ………………………………………….
$212,000
$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:
X
$12,000
$14,000
$16,000
$18,000
Y
Analytical Thinking (continued)
2. The scattergraph of the direct labor cost versus the number of paid days
is presented below:
$16,000
$18,000
Y
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
Again, student answers will vary for examples of fixed and variable
costs, but some possibilities are:
Business
Measure
of Activity
Examples of
Fixed Costs
Examples of
Variable Costs
a.
Dental clinic
Number of
patient-visits
Receptionist’s
wages; office rent
Supplies such as
mouthwash,
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
Total variable costs …………………………..
Variable cost per unit of activity ………….
Constant
Constant
Average total cost per unit of activity ……
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 …………………………..
Total cost …………………………..
Average cost per cup served * ..
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
Total cost (August) …………………………………………….
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
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
Gross margin …………………………..…………………
Selling and administrative expenses:
Administrative expenses
Net operating income ………………………………….
$314,000
2. Contribution format income statement
Cherokee Inc.
Contribution Format Income Statement
Sales …………………………..…………………………..
$720,000
Variable expenses:
Administrative expenses
Contribution margin …………………………………….
Fixed expenses:
Net operating income ………………………………….
Cost of goods sold
Exercise 1-8 (20 minutes)
Kilometers
Driven
Total Annual
Cost*
High level of activity …………………….
105,000
$10,500
Low level of activity ……………………..
Change ……………………………………..
*
105,000 kilometers × $0.100 per kilometer = $10,500
70,000 kilometers × $0.134 per kilometer = $9,380
Total cost at 105,000 kilometers …………………
Fixed cost per year ………………………………….
2. Y = $7,140 + $0.032X
Fixed cost …………………………………………………
$ 7,140
Total annual cost ………………………………………..
Exercise 1-13 (20 minutes)
1. Traditional income statement
The Alpine House, Inc.
Traditional Income Statement
Sales …………………………..…………………………..
$165,000
Gross margin …………………………..…………………
Net operating income (loss) ………………………….
Cost of goods sold
2. Contribution format income statement
The Alpine House, Inc.
Contribution Format Income Statement
Sales …………………………..…………………………..
$165,000
Variable expenses:
Contribution margin …………………………………….
Fixed expenses:
Net operating income (loss) ………………………….
Exercise 1-13 (continued)
2. Since 220 pairs of skis were sold and the contribution margin totaled