 This textbook is available at Chapter 3, End Of Chapter, REVIEW PROBLEMS, Exercise I

# Resource Usage and Cost Behavior Thompson Manufacturing Company has three salaried clerks to process purchase orders. Each clerk is paid a salary of \$28,000 and is capable of processing 5,000 purchase orders per year (working efficiently). In addition to the salaries, Thompson spends \$7,500 per year for forms, postage, etc. Thompson assumes 15,000 purchase orders will be processed. During the year, 12,500 orders were processed. Required: Calculate the activity rate for the purchase order activity. Break the activity into fixed and variable components.

### Explanation

- To get the total activity rate, we will add first the salaries and the cost for the forms and postage. The total cost will be 91,500. Then we will divide the 15,000 purchase orders that will be processed to get the activity rate of 6.10. This activity rate is the combination of the variable and fixed component.

- The salaries of the three employees will be the fixed component since even though there is an increase or decrease in the purchase orders, the \$84,000 salary cost will not change. Thus this salary is a fixed cost. To get the fixed component, we will just divide the 15,000 purchase orders to the total salary cost to have 5.60.

- On the other hand, the variable component is the forms and postage cost. As the number of purchase orders increases, the usage of forms and postage will increase therefore its cost will also increase. Thus, the forms and postage is a variable cost. We will divide the 7,500 cost to the total purchase orders to have the variable activity rate of 0.50