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Question 1 (25 marks – estimated time required: 40 minutes) Doggone Groomers is in the dog-grooming business. Its costs of operation in 2008 have been gathered below: a) Using the high-low method, express the above relationship between the number of dogs groomed and operating costs in the form of y = a + bx. [4] b = (\$4 400 \$2 650) ÷ (325 150 ) = \$1 750 ÷ 175 = \$10 a + \$10 × 325 = \$4 400 a = \$1 150 y = \$1 150 + \$10 x b) Puli, the owner, had expected to groom 175 dogs in April of 2009. What were the operating costs Puli would have expected for the month? [2] y = \$1 150 + \$10 × 175 = \$2 900 c) Puli charges an average of \$60 per dog groomed. Prepare, in good form, a flexible budget for monthly activity levels of 165 and 175 dogs groomed. [4] Doggone Groomers Flexible Budget for 2009 Dogs groomed per month 165 175 Grooming revenue \$9 900 \$10 500 Variable operating costs 1 650 1 750 Contribution margin 8 250 8 750 Fixed operating costs 1 150 1 150 Operating income \$7 100 \$7 600 Month Number of Dogs Groomed Operating Costs Jan 175 \$3 000 Feb 225 3 600 Mar 275 4 180 Apr 175 3 800 May 200 2 700 Jun 225 3 200 Jul 300 4 250 Aug 325 4 400 Sep 275 4 100 Oct 200 3 150 Nov 150 2 650 Dec 175 2 750
c) Puli uses your answer to a) to forecast expenses for 2009. As it turned out, April of 2009 was a slower month than expected. A total of only 150 dogs were groomed and operating costs for the month were \$2 800. Calculate the Flexible Budget and the Sales Volume variances. [4] Actual operating income: \$60 × 150 \$2 800 = \$6 200 Budgeted operating income at level of 150 dogs groomed: (\$60 \$10) × 150 \$1 150 = \$6 350 Budgeted operating income at level of 175 dogs groomed: \$7 600 Flexible budget variance: \$6 200 \$6 350 = \$150 U Sales volume variance: \$6 3500 \$7 600 = \$1 250 U Static budget variance: \$150 + \$1 250 = \$1 400 U d) Puli is wondering what to make of the variances you have calculated. Can you explain? [3] Operating income dropped by \$150 as a result of lax cost control.

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