Response to the following problems:
1. Chump Rentals offers machine rental services for concrete cutting. Consider the following costs of the company over the relevant range of 4,000 to 10,000 hours of operating time for its concrete cutting equipment.
|
|
Hours of Operating Time
|
|
|
4,000
|
6,000
|
8,000
|
10,000
|
|
Total Costs:
|
|
|
|
|
|
Variable Costs
|
$ 20,000
|
?
|
?
|
?
|
|
Fixed Costs
|
82,000
|
?
|
?
|
???
|
|
Total Costs
|
$102,000
|
???
|
?
|
?
|
|
Cost per hour:
|
|
|
|
|
|
Variable cost
|
?
|
?
|
???
|
?
|
|
Fixed cost
|
?
|
?
|
?
|
?
|
|
Total cost per hour
|
?
|
?
|
???
|
?
|
a. What are the estimated total costs at a volume of 6,000 hours?
b. What is the estimated total cost per hour at a volume of 8,000 hours?
c. What are the estimated total fixed costs at a volume of 10,000 hours?
d. What is the estimated variable cost per hour at a volume 8,000 hours?
2. Phenning Company had the following costs for the past three years in which it produced 40,000, 48,000, and 60,000 units, respectively.
|
|
Year1
|
Year 2
|
Year 3
|
|
Direct Materials
|
$80,000
|
$96,000
|
$120,000
|
|
Utilities Expense
|
44,000
|
98,000
|
104,000
|
|
Property Taxes
|
12,000
|
12,000
|
12,000
|
|
Direct Labor
|
60,000
|
72,000
|
90,000
|
|
Maintenance Expense
|
22,000
|
26,000
|
32,000
|
Identify which of the costs were variable, fixed, and mixed.
3. Really Fast Delivery Services has the collected the following information about operating expenditures for its delivery truck fleet for the past five years:
|
Year
|
Miles
|
Operating Costs
|
|
2013
|
55,000
|
$190,000
|
|
2014
|
70,000
|
$210,000
|
|
2015
|
50,000
|
$160,000
|
|
2016
|
65,000
|
$205,000
|
|
2017
|
85,000
|
$219,500
|
a. Using the high-low method, what is the cost estimate for variable costs for 2018?
b. Using the high-low method, what is the cost estimate for fixed costs for 2018?
c. What is the best estimate of total operating expenses for 2018 using the high-low method based on total expected miles of 60,000?
d. Using the cost function you developed to answer questions a - c, why would it not be valid to estimate the cost for 90,000 miles?
4. Poke Company sells three different products that are similar, but are differentiated by various product features. Budgeted sales by product and in total for the coming year are shown below:
|
|
Product
|
|
|
Standard
|
Deluxe
|
Premium
|
Total
|
|
Percentage of total sales
|
48%
|
20%
|
32%
|
100%
|
|
Sales
|
$120,000
|
$50,000
|
$80,000
|
$250,000
|
|
Less: Variable costs
|
36,000
|
40,000
|
44,000
|
120,000
|
|
Contribution margin
|
$84,000
|
$10,000
|
$36,000
|
$130,000
|
|
Less: Fixed expenses
|
|
|
|
$117,000
|
|
Net operating income
|
|
|
|
$ 13,000
|
What is the breakeven point in sales dollars for Poke Company?
5. Herman's income statement is as follows:
|
Sales (5,000 units)
|
$75,000
|
|
Less variable costs
|
(24,000)
|
|
Contribution margin
|
$51,000
|
|
Less fixed costs
|
(12,000)
|
|
Net income
|
$ 39,000
|
If sales increase by 1,000 units, what will be the increase in net income?
6. Anderson produces color cartridges for inkjet printers. Suppose cartridges are sold to mail-order distributors for $12 each and that manufacturing and other costs are as follows:
|
Variable Cost per Unit
|
|
Fixed Cost per month
|
|
|
Direct material
|
$4.00
|
Factory overhead
|
$17,000
|
|
Direct labor
|
0.40
|
Selling and administrative
|
8,000
|
|
Factory overhead
|
0.50
|
|
|
|
Distribution
|
0.10
|
|
_______
|
|
Total
|
$5.00
|
Total
|
$25,000
|
The variable distribution costs are for transportation to mail-order distributors. Also assume the current monthly production and sales volume is 20,000 and monthly capacity is 25,000 units.
If the sales price per unit increases by $2.00 and at the same time unit sales decrease by 2,000 units, what would be the effect on Anderson's monthly profit?
7. Colorado Ski Company makes downhill ski equipment. Assume that New Mexico Ski Company has offered to produce ski poles for Colorado Ski Company for $18 per pair. Colorado Ski Company needs 100,000 pairs of poles per period. Colorado Ski Company can only avoid $125,000 of fixed costs if it outsources; the remaining fixed costs are unavoidable.
Colorado Ski Company currently has the following costs at a production level of 100,000 pairs of poles:
|
Manufacturing Costs
|
Total Cost
|
Cost per Pair
|
|
Direct Materials
|
$ 750,000
|
$ 7.50
|
|
Direct Labor
|
80,000
|
0.80
|
|
Variable MOH
|
520,000
|
5.20
|
|
Fixed MOH
|
650,000
|
6.50
|
|
Total
|
$2,000,000
|
$20.00
|
Considering only the information provided, should Colorado outsource its production to New Mexico? Be sure to state any relevant effect on Colorado's income.
8. Lorraine manufactures a single product with the following full unit costs for 3,000 units:
|
Direct materials
|
$80
|
|
Direct labor
|
40
|
|
Manufacturing overhead (40% variable)
|
120
|
|
Selling expenses (60% variable)
|
40
|
|
Administrative expenses (10% variable)
|
20
|
|
Total per unit
|
$300
|
A company recently approached Lorraine with a special order to purchase 500 units for $300. Lorraine currently sells the models to dealers for $550. Capacity is sufficient to produce the extra 1,000 units. No selling expenses would be incurred on the special order.
a. Should Lorraine accept the special order (if its goal is to maximize short-run profits)? Determine the impact on profit of accepting the order.
b. When making a specialorder decision, what non-quantitative aspects of the decision should Lorraine consider?