costacctg13_sm_ch10

# Usingtheequationabovetheexpectedpurchasecostsforeach

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: (0.5 hrs ´ \$3.93 per labor­hour) Total variable cost per person \$15.00 5.00 1.97 \$21.97 3. To earn a posit ive contribut ion margin, the minimum bid for a 200­person cocktail part y would be any amount greater than \$4,394. This amount is calculated by mult iplying the variable cost per person of \$21.97 by the 200 people. At a price above the variable costs of \$4,394, Bob Jones will be earning a contribut ion margin toward coverage of his fixed costs. Of course, Bob Jones will consider other factors in developing his bid including (a) an analys is of the competit ion––vigorous compet it ion will limit Jones’s abilit y to obtain a higher price (b) a determinat ion of whether or not his bid will set a precedent for lower prices––overall, the pr ices Bob Jones charges should generate enough contribution to cover fixed costs and earn a reasonable profit, and (c) a judgment of how representative past historical data (used in the regression analys is) is about future costs. SOLUTION EXHIBIT 10­27 Regressio n Line of Labor­Hours on Overhead Costs for Bob Jones’s Catering Co mpany \$90,000 80,000 70,000 Over head Costs 60,000 50,000 40,000 30,000 20,000 10,000 0 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 Cost Driver: Labor­Hours 10­14 10­28 High­low, regression 1. Pat will pick the highest point of act ivit y, 3400 parts (August) at \$20,500 of cost, and the lowest point of act ivit y, 1910 parts (March) at \$11560. Cost driver: Quantity Purchased Cost 3,400 \$20,500 1,910 11,560 1,490 \$ 8,940 Highest observat ion of cost driver Lowest observat ion of cost driver Difference Purchase costs = a + b ´ Quantit y purchased \$8, 940 Slope coefficient (b) = = \$6 per part 1, 490 Constant (a) = \$20,500 ─ (\$6 ´ 3,400) = \$100 The equation Pat gets is: Purchase costs = \$100 + (\$6 ´ Quant it y purchased) 2. Using the equation above, the expected purchase costs for each month will be: Purchase Quantity Expected 3,000 parts 3,200 2,500 Month October November December Formula Expected cost y = \$100 + (\$6 ´ 3,000) \$18,100 y = \$100 + (\$6 ´ 3,200) 19,300 y = \$100 + (\$6 ´ 2,500) 15,100 3. Economic Plausibilit y: Clearly, the cost of purchasing a part is associated with the quant it...
View Full Document

## This note was uploaded on 10/11/2010 for the course ACCT 321 taught by Professor Cole during the Spring '10 term at University of Miami.

Ask a homework question - tutors are online