Chapter 05

# Chapter 05 - 955/4 Parker Company manufactures and sells a...

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Unformatted text preview: 955/4 Parker Company manufactures and sells a single product. A partially completed schedule of the com— pany’s total and per unit costs over a relevant range of 60,000 to 100,000 units produced and sold each year is given below: ' Total-c9315: variable cosis-,....I._. ._.\$150000 . ?_ ' f?“ I; _-"_Fixé'd_icosts-. . . . _. \$360,000 ? - '_ ? "'Toiarccisi's... "\$510,000 _? -’ 2. ._ .COS'tQperunltz. ' ' _. ' . . variablecgsi...._.....__. . ‘ ? I. ' :2 . . T? . . FixedGOSt fl. _ . ?_ ? \ z-Totai_eost'3.:per-uni'i..._..... ' ?. » -?- _ , 11?. Required: . 1. Complete the schedule of the company’s total and unit costs, above. . . - 2. Assume that the company produces and sells 90,000'units during the year at the selling price of \$7.50 per unit. Prepare a contribution format income statement for the year. 1. The company’s variable cost per unit would be: \$150,000 50,000 units Taking into account the difference in behavior between variable and fixed costs, the completed schedule would be: =\$2.50 per unit. Unﬁproduoed and sold 50,000 80,000 100 000 Total costs: . Variable costs ............ ' ............ \$ 150,000 * \$200,000 \$250,000 ﬁxed costs ............................ 360,000 * 360,000 360,000 Total costs M * M m Cost per unit: Variable cost ......................... \$2.50 \$2.50 . \$2.50 Fixed cost ............................. M _,ﬂ_,5_g _3.6_0 Total cost per unit .................... gig £2,942 M *leen. ' 2. The company’s income statement. in the contribution format would be: Sales (90,000 units x \$7.50 per unit) ............................ \$675,000 Variable expenses (90,000 units >< \$2.50 per unit) ......... 225,000 Contribution margin ..... _ ................................................ 450,000 . Fixed expenses ............................................................ 360,000 Net operating income .................................................. M ES'QA Zerbel Company, a wholesaler of large, custom-built air conditioning units for commercial buildings, has noticed considerable ﬂuctuation in its shipping expense from month to month, as shown below: \$2,200 January ., ..... '. .’ ; 4 February ...... '7 ' \$3,100 , March. . _:-5 \$2,600 --April ..... r. . ’. ,_ .'-. 2 . \$1,500 May ’3 \$2,200 dune. .' . . .' 6 \$3,000 .-.:July..- . . ; ‘. ..' 8. \$3,600 Required: 1. Using the high—low method, estimate the cost formula for shipping expense. 1. Units .9th Shwpin Ex ense High activity level ........... 8 \$367605 Low activity level ............ g 1,500 - Change ......................... f; M Variable cost element: Change in cost = \$2,100 Change in activity 6 units =\$350 per unit Fixed cost element: Shipping expense at the high activity level .................. \$3,600 Less variable cost element (\$350 per unit x 8 unils).... 2,800 Total fixed cost .......................................................... w The cost formula is \$800 per month plus \$350 per unit shipped or Y = \$800 + \$350X, where X is the number of units shipped. 055/714 Golden Company’s total overhead cost at various levels of activity are presented below: March 50,000‘--;. _' ' \$194,000 ' April ..... . ..... 40,000 .' \$170,200 May ......... 60,000 '. \$217,800 June ..... 70,000 \$241,600 - Assume that the overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 40,000 machine-hour level of activity is as follows: Utilities (variable) ...-. i .1 . i. . .\$ 52 ,000 Supervisory salaries .(fixe ‘).. 60, 000 '- ' Maintenance (mixed) ' _ Total overhead cost The company wants to break dewn the maintenance cost into its variable and ﬁxed cost elements. Required. 1. Estimate how much of the \$241 600 of overhead cost in June was maintenance cost. (Hint: To do this, it may be helpful to ﬁrst determine how much of the \$241 600 consisted of utilities and supervisory salaries. Think about the behavior-of variable and ﬁxed costs within the relevant range.) 2. Using the high— —low method,- estimate a cost formula for maintenance 3. Express the company s total overhead cost in the form Y— — a + bX. 4. What total overhead cost would you expect to be incurred at an activity level of 45,000 machine— hours? , _ _ 3. Variable Rate per 1. Maintenance cost at the 70,000 machine—hour level of actIVIty can be Ma chin e-Hour I-7xed Cost isolated as follows: Maintenance cost..........'... \$1.08 \$15,000 Level ofAct/v/tz Utilities cost ..................... 1.30 40,000 MH 70,000 MH Supervisory salaries .cost _ _6_0,0_OQ Total factory overhead cost ............ \$170,200 \$241,600 ' Totals ............................... iii M Deduct: Therefore, the cost formula would be \$75,000 plus \$2.38 per machine— Utilities cost @ \$1.30 per MH* ..... 52,000 91,000 - hour, or y = \$75,000 + \$2.38X. Supervisory salaries ..................... 60,000 60,000 Maintenance cost --------------------------- L5.§..2_QQ 6.911.000 4. Fixed costs .......................................................... \$ 75,000 *\$52,000 + 40,000 MHs = \$1.30 per MH Variable costs: \$2 38 per MH x 45,000 MHs .......... 107,100 ' Total overhead costs ............................................ \$4M 2. High-low analysis of maintenance cost: Maintenance Machine- Cost Hours High activity level ............. \$90,600 70,000 Low activity level .............. 58,200 40,000 Change ............................ M M Variable cost per unit of activity: Change in cost \$32,400 —— = ———— = 1.08 r MH Change in activity 30,000 MHs \$ pe Total fixed cost: Total maintenance cost at the low activity level ............ \$58,200 Less the variable cost element - (40,000 MHs x \$1.08 per MH) ................................. 43,200 Fixed cost element ..................................................... M Therefore, the cost formula is \$15, 000 per month plus \$1. 08 per ma- chine-hour or Y: \$15,000 + \$1. 08X, where X represents machine- hours. ...
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