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1. eBookeBookeBookeBookeBookeBookeBookeBook Exercise 3-23 Cost Behavior Alisha Incorporated manufactures medical stents for use in heart bypass surgery. Based on past experience, Alisha has found that its total maintenance costs can be represented by the following formula: Maintenance Cost = $1,750,000 + $125X, where X = Number of Heart Stents. Last year, Alisha produced 50,000 stents. Actual maintenance costs for the year were as expected. Required: 1. What is the total maintenance cost incurred by Alisha last year? $ _________________ 2. What is the total fixed maintenance cost incurred by Alisha last year? $ _________________ 3. What is the total variable maintenance cost incurred by Alisha last year? $ _________________ 4. What is the maintenance cost per unit produced? $ _________________ per unit 5. What is the fixed maintenance cost per unit? $ _________________ per unit 6. What is the variable maintenance cost per unit? $ _________________ per unit 7. Conceptual Connection: Briefly explain how Alisha management could improve its cost function to better understand past maintenance costs and predict future maintenance costs. The input in the box below will not be graded, but may be reviewed and considered by your instructor. _________________ 2. eBookeBookeBookeBookeBookeBookeBookeBook Exercise 3-24 Cost Behavior Alisha Incorporated manufactures medical stents for use in heart bypass surgery. Based on past experience, Alisha has found that its total maintenance costs can be represented by the following formula: Maintenance Cost = $1,750,000 + $125X, where X = Number of Heart Stents. Last year, Alisha produced 25,000 medical stents. Actual maintenance costs for the year were as expected. Required: 1. What is the total maintenance cost incurred by Alisha last year? Round your answer to nearest dollar. $ _________________ 2. What is the total fixed maintenance cost incurred by Alisha last year? Round your answer to nearest dollar. $ _________________ 3. What is the total variable maintenance cost incurred by Alisha last year? Round your answer to nearest dollar. $ _________________ 4. What is the maintenance cost per unit produced? Round your answer two decimal places. $ _________________ per unit 5. What is the fixed maintenance cost per unit? Round your answer two decimal places. $ _________________ per unit 6. What is the variable maintenance cost per unit? Round your answer two decimal places. $ _________________ per unit 7. Conceptual Connection: The number of stents produced in Exercise 3-24 (25,000) is only half of the number produced in Exercise 3-23 (50,000), yet the maintenance cost per unit (see Requirement 4) is larger in Exercise 3-24 than in Exercise 3-23. Briefly explain why Alisha's maintenance cost per unit in Exercise 3-24 is different than in Exercise 3-23. Should Alisha's management use maintenance cost per unit to make decisions? The input in the box below will not be graded, but may be reviewed and considered by your instructor. _________________ 3. eBookeBookeBookeBookeBookeBookeBookeBook Exercise 3-30 (Algorithmic) High-Low Method Luisa Crimini has been operating a beauty shop in a college town for the past 10 years. Recently, Luisa rented space next to her shop and opened a tanning salon. She anticipated that the costs for the tanning service would primarily be fixed but found that tanning salon costs increased with the number of appointments. Costs for this service over the past eight months are as follows: Tanning Month Appointments Total Cost January 700 $1,756 February 1,900 $2,180 March 3,300 $2,770 April 2,600 $2,400 May 1,600 $1,700 June 2,400 $2,275 July 2,110 $2,300 August 3,100 $2,620 Required: 1. Which month represents the high point? The low point? High point _________________ Low point _________________ In your calculations, round per unit costs to the nearest cent. 2. Using the high-low method, compute the variable rate for tanning. Compute the fixed cost per month. Round the variable rate per tanning appointment to the nearest cent and use it in your further calculations. Round the fixed cost per month to the nearest dollar and use it in your further calculations. Variable rate for tanning $ _________________ per tanning appointment Fixed cost per month $ _________________ 3. Using the variable rate and fixed cost, what is the cost formula for tanning services? _________________ 4. Calculate the total predicted cost of tanning services for September for 2,500 appointments using the cost formula found in Requirement 3. Of that total cost, how much is the total fixed cost for September? How much is the total predicted variable cost for September? If required, round the final answers to the nearest dollar. Total predicted cost for September $ _________________ Total fixed cost for September $ _________________ Total predicted variable cost for September $ _________________ 5. Conceptual Connection: Identify and briefly explain any additional issues that Luisa might be wise to consider when using the high-low method to estimate the costs of her tanning salon. The input in the box below will not be graded, but may be reviewed and considered by your instructor. _________________ 4. eBookeBookeBookeBookeBookeBookeBookeBook Exercise 3-33 High-Low Method, Cost Formulas During the past year, the high and low use of three different resources for Fly High Airlines occurred in July and April. The resources are airplane depreciation, fuel, and airplane maintenance. The number of airplane flight hours is the driver. The total costs of the three resources and the related number of airplane flight hours are as follows: Required: Use the high-low method to answer the following questions. If an answer is zero, enter "0". 1. What is the variable rate for airplane depreciation? $ _________________ per flight hour What is the fixed cost for airplane depreciation? $ _________________ 2. What is the cost formula for airplane depreciation? Total cost of airplane depreciation = $ _________________ 3. What is the variable rate for fuel? $ _________________ per flight hour What is the fixed cost for fuel? $ _________________ 4. What is the cost formula for fuel? Total cost of fuel = $ _________________ x _________________ 5. What is the variable rate for airplane maintenance? $ _________________ per flight hour What is the fixed cost for airplane maintenance? $ _________________ 6. What is the cost formula for airplane maintenance? Total cost of airplane maintenance = $ _________________ + ( $ _________________ × _________________ ) 7. Using the three cost formulas that you developed, predict the cost of each resource in a month with 36,000 airplane flight hours. Total cost of airplane depreciation $ _________________ Total cost of fuel $ _________________ Total cost of airplane maintenance $ _________________ 5. eBookeBookeBookeBookeBookeBookeBookeBook Exercise 3-35 (Algorithmic) Method of Least Squares, Developing and Using the Cost Formula The method of least squares was used to develop a cost equation to predict the cost of receiving purchased parts at a video game manufacturer. Ninety-six data points from monthly data were used for the regression. The following computer output was received: Intercept 179,100 Slope 325 The cost driver used was number of parts inspected. Required: 1. What is the cost formula? Total cost of receiving = $ _________________ + ( $ _________________ × _________________ ) 2. Using the cost formula from Requirement 1, identify each of the following: independent variable, dependent variable, Variable rate per professional hour, and fixed cost per month. Independent variable _________________ Dependent variable _________________ Variable rate per professional hour _________________ Fixed cost per month _________________ per part inspected 3. Using the cost formula, predict the cost of receiving for a month in which 7,200 parts are inspected. Total cost of receiving = $ _________________ 6. Learning Objective 3 Exercise 3-36 (Algorithmic) Method of Least Squares, Budgeted Time Period Is Different from Time Period Used to Generate Results The method of least squares was used to develop a cost equation to predict the cost of receiving purchased parts at a video game manufacturer. Ninety-six data points from monthly data were used for the regression. The following computer output was received: Intercept 162,200 Slope 250 The cost driver used was number of parts inspected. Required: 1. What is the cost formula for a year? Total annual cost of receiving = _________________ x ( $ _________________ ) + ( $ _________________ × _________________ ) 2. Using the cost formula from Requirement 1, predict the cost of parts inspection for a year in which 16,000 parts are inspected. Total annual cost of receiving = $ _________________ 7. eBookeBookeBookeBookeBookeBookeBookeBook Problem 3-43 Scattergraph, High-Low Method, and Predicting Cost for a Different Time Period from the One Used to Develop a Cost Formula Farnsworth Company has gathered data on its overhead activities and associated costs for the past 10 months. Tracy Heppler, a member of the controller's department, has convinced management that overhead costs can be better estimated and controlled if the fixed and variable components of each overhead activity are known. One such activity is receiving raw materials (unloading incoming goods, counting goods, and inspecting goods), which she believes is driven by the number of receiving orders. Ten months of data have been gathered for the receiving activity and are as follows: Required: 1. On your own paper, prepare a scattergraph based on the 10 months of data. Based on this, does the relationship appear to be linear? _________________ 2. Using the high-low method, select a cost formula for the receiving activity. _________________ Using the cost formula, what is the predicted cost of receiving for a month in which 1,450 receiving orders are processed? $ _________________ 3. Prepare a cost formula for the receiving activity for a quarter. Based on this formula, what is the predicted cost of receiving for a quarter in which 4,650 receiving orders are anticipated? $ _________________ Prepare a cost formula for the receiving activity for a year. Based on this formula, what is the predicted cost of receiving for a year in which 18,000 receiving orders are anticipated? $ _________________ 8. eBookeBookeBookeBookeBookeBookeBookeBook Problem 3-45 Cost Behavior, High-Low Method, Pricing Decision Fonseca, Ruiz, and Dunn is a large, local accounting firm located in a southwestern city. Carlos Ruiz, one of the firm's founders, appreciates the success his firm has enjoyed and wants to give something back to his community. He believes that an inexpensive accounting services clinic could provide basic accounting services for small businesses located in the barrio. He wants to price the services at cost. Since the clinic is brand new, it has no experience to go on. Carlos decided to operate the clinic for two months before determining how much to charge per hour on an ongoing basis. As a temporary measure, the clinic adopted an hourly charge of $25, half the amount charged by Fonseca, Ruiz, and Dunn for professional services. The accounting services clinic opened on January 1. During January, the clinic had 120 hours of professional service. During February, the activity was 150 hours. Costs for these two levels of activity usage are as follows: Required: 1. Classify each cost as fixed, variable, or mixed, using hours of professional service as the activity driver. Salaries: Senior accountant _________________ Office assistant _________________ Internet and software subscriptions _________________ Consulting by senior partner _________________ Depreciation (equipment) _________________ Supplies _________________ Administration _________________ Rent (offices) _________________ Utilities _________________ 2. Use the high-low method to separate the mixed costs into their fixed and variable components. (Note: Round variable rates to two decimal places and fixed amounts to the nearest dollar.) Components Mixed Cost Variable Rate Fixed Amount Internet and software subscriptions $ _________________ $ _________________ Supplies $ _________________ $ _________________ Utilities $ _________________ $ _________________ 3. Luz Mondragon, the chief paraprofessional of the clinic, has estimated that the clinic will average 140 professional hours per month. If the clinic is to be operated as a nonprofit organization, how much will it need to charge per professional hour? Round answer to two decimal places. $ _________________ per professional hour How much of this charge is variable? Round answer to two decimal places. $ _________________ per professional hour How much is fixed? Round answer to two decimal places. $ _________________ per professional hour 4. Conceptual Connection: Suppose the accounting center averages 170 professional hours per month. How much would need to be charged per hour for the center to cover its costs? Round answer to two decimal places. $ _________________ per professional hour Explain why the per-hour charge decreased as the activity output increased. The input in the box below will not be graded, but may be reviewed and considered by your instructor. _________________
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