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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.
_________________
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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.
_________________
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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.
_________________
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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
$ _________________
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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 = $ _________________
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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 = $ _________________
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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?
$ _________________
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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.
_________________