work_at_home_soultions_ch11[1]

# work_at_home_soultions_ch11[1] - Chapter 11 Cost Behavior...

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Chapter 11 Cost Behavior, Operating leverage, and Profitability Analysis Exercise 11-1 Requirement Fixed Variable Mixed a. x b. x c. x d. x e. x f. x Exercise 11-2 Requirement Fixed Variable Mixed a. x b. x c. x d. x e. x f. x g. x h. x i. x j. x Exercise 11-3 Total Fixed Cost: 11-1

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Item Cost Depreciation \$ 34,000 Officers' salaries 120,000 Long-term lease 42,000 Property taxes 9,000 Total fixed \$205,000 Units Produced (a) 4,000 4,500 5,000 Total fixed cost (b) \$205,000 \$205,000 \$205,000 Fixed cost per unit (b ÷ a) \$51.25 \$45.56 \$41.00 Exercise 11-4 Units Produced (a) 5,000 15,000 25,000 Variable cost per unit (b) \$8.70 \$8.70 \$8.70 Total variable cost (a x b) \$43,500 \$130,500 \$217,500 Exercise 11-5 a. March April Units Produced (a) 90 230 Total rent cost (b) \$1,500 \$1,500 Rent cost per unit (b ÷ a) \$16.67 \$6.52 Total utility cost (c) \$450 \$1,150 Utility cost per unit (c ÷ a) \$5 \$5 b. Since the total rent cost remains unchanged when the number of units produced changes, it is a fixed cost. Since the total utility cost changes in direct proportion with changes in the number of units, it is a variable cost. Exercise 11-6 Number of Units 8,000 10,000 12,000 14,000 Total costs incurred 11-2 a.
Fixed \$48,000 \$ 48,000 \$ 48,000 \$ 48,000 Variable 48,000 60,000 72,000 84,000 Total costs \$96,000 \$108,000 \$120,000 \$132,000 Cost per unit Fixed \$ 6.00 \$ 4.80 \$ 4.00 \$3.43 Variable 6.00 6.00 6.00 6.00 Total cost per unit \$12.00 \$10.80 \$10.00 \$9.43 b. The total cost per unit declines as volume increases because the same amount of fixed cost is spread over an increasingly larger number of units of product. 11-3

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Exercise 11-7 a. Number Attending (a) 2,000 2,500 3,000 3,500 4,000 Total cost of concert (b) \$75,000 \$75,000 \$75,000 \$75,000 \$75,000 Cost per person (b) ÷ (a) \$37.50 \$30.00 \$25.00 \$21.43 \$18.75 b. Since the cost of hiring a band remains at \$75,000 regardless of the number attending, it is a fixed cost. c. 11-4 0 2,000 2,500 3,000 3,500 4,000 \$ 75,000 Total cost Number attending
Exercise 11-7 (continued) d. Walter’s major business risk is the uncertainty about whether it can generate enough revenue to cover the fixed cost. Walter must pay the \$75,000 cost even if no one buys a ticket. Accordingly, there is a potential for Walter to experience a significant financial loss. Since the cost per ticket decreases as volume increases, Walter can sell tickets for less if the band attracts a large crowd. Also, lower ticket prices encourage higher attendance. Walter must set a price that en- courages attendance and produces sufficient revenue to cover the fixed cost and provide a reasonable profit. To a large extent, Walter’s business risk is the result of its cost struc-

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work_at_home_soultions_ch11[1] - Chapter 11 Cost Behavior...

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