Solutions+for+Homework+5

# Solutions+for+Homework+5 - Exercise 5-1 1 Fixed cost.\$1,100...

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Exercise 5-1   1. Cups of Coffee Served  in a Week 1,800 1,900 2,000 Fixed cost. .................................. \$1,100 \$1,100 \$1,100 Variable cost. .............................         468             494             520     Total cost. ................................... \$1,568 \$1,594 \$1,620 Cost per cup of coffee served *. . \$0.871 \$0.839 \$0.810 * 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 coffee served increases because the fixed cost is  spread over more cups of coffee.

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Exercise 5-2 1. The completed scattergraph is presented below: 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 0 2,000 4,000 6,000 8,000 10,000 Units Processed Total Cost
Exercise 5-2  (continued) 2. (Students’ answers will vary considerably due to the inherent  imprecision and subjectivity of the quick-and-dirty  scattergraph method of estimating variable and fixed costs.)  The approximate monthly fixed cost is \$6,000—the point  where the straight line intersects the cost axis.  The variable cost per unit processed can be estimated as  follows using the 8,000-unit level of activity, which falls on the  straight line: Total cost at the 8,000-unit level of activity. ............. \$14,000 Less fixed costs. ......................................................       6,000     Variable costs at the 8,000-unit level of activity. ...... \$ 8,000 \$8,000 ÷ 8,000 units = \$1 per unit. Observe from the scattergraph that if the company used the  high-low method to determine the slope of the line, the line  would be too steep. This would result in underestimating the  fixed cost and overestimating the variable cost per unit.

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Exercise 5-3   1. Month Occupancy- Days Electrical  Costs High activity level (August). . 3,608 \$8,111 Low activity level (October). .     186       1,712     Change. ............................... 3,422 \$6,399 Variable cost = Change in cost ÷ Change in activity  = \$6,399 ÷ 3,422 occupancy-days  = \$1.87 per occupancy-day Total cost (August). ........................................................ \$8,111 Variable cost element  (\$1.87 per occupancy-day × 3,608 occupancy-days).   6,747     Fixed cost element. ........................................................ \$1,364 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. This will result in seasonal effects on the  fixed electrical costs. Additionally, fixed costs will be affected by how many days
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Solutions+for+Homework+5 - Exercise 5-1 1 Fixed cost.\$1,100...

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