Exercise 5

Exercise 5 - Exercise 5-2 Scattergraph Analysis[LO2 Oki...

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Unformatted text preview: Exercise 5-2 Scattergraph Analysis [LO2] Oki Products, Ltd., has observed the following processing costs at various levels of activity over the last 15 months: Month Units Produced Processing Cost 1 4,500 \$ 38,000 2 11,000 \$ 52,000 3 12,000 \$ 56,000 4 5,500 \$ 40,000 5 9,000 \$ 47,000 6 10,500 \$ 52,000 7 7,500 \$ 44,000 8 5,000 \$ 41,000 9 11,500 \$ 52,000 10 6,000 \$ 43,000 11 8,500 \$ 48,000 12 10,000 \$ 50,000 13 6,500 \$ 44,000 14 9,500 \$ 48,000 15 8,000 \$ 46,000 Requirement 1: Offline: Prepare a scattergraph using the above data. Plot cost on the vertical axis and activity on the horizontal axis. Fit a line to your plotted points using a ruler. Requirement 2: Using the quick-and-dirty method, what is the approximate monthly fixed cost? The approximate variable cost per unit processed? (Round monthly fixed cost to the nearest 1000 dollar amount. Omit the "\$" sign in your response.) Monthly fixed cost \$ 30,000 with a tolerance of ± 2.0% Variable cost per unit \$ 2 with a tolerance of ± 3.0% Feedback: (Students' answers will vary considerably due to the inherent imprecision of the quick-and-dirty method.) The approximate monthly fixed cost is \$30,000—the point where the line intersects the cost axis. The variable cost per unit processed can be estimated using the 8,000-unit level of activity, which falls on the line: Total cost at the 8,000-unit level of activity \$ 46,000 ` 30,000 Variable costs at the 8,000-unit level of activity \$ 16,000 \$16,000 ÷ 8,000 units = \$2 per unit. Therefore, the cost formula is \$30,000 per month plus \$2 per unit processed. Observe from the scattergraph that if the company used the high-low method to determine the slope of the regression line, the line would be too steep. This would result in underestimating fixed costs and overestimating the variable cost per unit. Exercise 5-6 High-Low Method [LO2, LO3] The following data relating to units shipped and total shipping expense have been assembled by Archer Company, a wholesaler of large, custom-built air-conditioning units for commercial buildings: Month Units Shipped Total Shipping Expense January 3 \$ 1,800 February 6 \$ 2,300 March 4 \$ 1,700 April 5 \$ 2,000 May 7 \$ 2,300 June 8 \$ 2,700 July 2 \$ 1,200 Requirement 1: Using the high-low method, estimate the cost formula for shipping expense where X is the number of units shipped. (Omit the "\$" sign in your response.) Y = \$ 700 + \$ 250 X Feedback: Units Shipped Shipping Expense High activity level (June) 8 \$ 2,700 Low activity level (July) 2 1,200 Change 6 \$ 1,500 Variable cost element: Fixed cost element: Shipping expense at the high activity level \$ 2,700 Less variable cost element (\$250 per unit × 8 units) 2,000 Total fixed cost \$ 700 The cost formula is \$700 per month plus \$250 per unit shipped or Y = \$700 + \$250X, where X is the number of units shipped....
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This note was uploaded on 10/17/2010 for the course ACCT 1234 taught by Professor Duck during the Spring '10 term at A.T. Still University.

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Exercise 5 - Exercise 5-2 Scattergraph Analysis[LO2 Oki...

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