Cost Behavior
1. The following costs are related to plane trips between Portland, Oregon and Charlotte, North Carolina. Pilots are paid on a per-trip basis. Identify the costs as fixed or variable.
Variable expenses are those expenses that go up and down with the ups and downs of sales or another volume measure, such as number of passengers or number of trips flown.
Fixed expenses will remain the same regardless of whether sales increase, decrease or stay the same or another volume measure, such as number of passengers or number of trips flown.
a. Pilots' salaries relative to the number of trips flown. Cost of refreshments relative to the number of passengers.
b. Pilots' salaries relative to the number of passengers on a particular trip.
c. Cost of refreshments relative to the number of passengers.
d. Cost of a maintenance check relative to the number of passengers on a particular trip.
e. Fuel costs relative to the number of trips.
2. Charlene Ripper and Tonya Upper own and run the Ripper-Upper Carpet Cleaning Company. They charge $100 for each carpet cleaning job. Their expenses are:
a. Sales commission: 20 percent ($20 per job)
b. Operator (the individual who actually pushes the equipment over the carpets: $30 per carpet cleaning job.
c. Gas for truck: average $5 per cleaning job.
d. Soap: $2 per job
e. Maintenance of cleaning machine: overhaul of machine costs $300 and has to be done after every 100 jobs (Hint: Divide the $300 overhaul costs by the 100 jobs to find the overhaul cost per job.)
f. Rent, office and warehouse: $500 per month
g. Salaries to Charlene and Tonya: Total $2,250
h. Receptionist: $2,300 per month
i. Insurance: $100 per month
j. Utilities and telephone: $250 per month
Separate the expenses into two lists:
- Variable expenses: List these with the dollar amount of cost per cleaning job. Calculate variable cost per unit
- Fixed expenses: List these with the dollar amount of the expense per month.
Calculate the total fixed cost per month.
What is the breakeven point? Graph your answer using Excel if possible. If you are not Excel savvy, please either skip the graph or draw one by hand and submit a photo from your cell phone.
3. Marino Company is considering adding a new product. The following estimates are the additional costs that would be incurred if Marino decided to produce this new product:
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Marino Company
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New Product Analysis
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per unit
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5,000
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8,000
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11,000
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Sales
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484,000
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Variable expenses:
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Manufacturing cost
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336,000
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Sales commission
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40,000
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Total variable expense
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376,000
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Fixed Expenses:
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Manufacturing costs
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49,000
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Administrative costs
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32,000
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Total fixed expense
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81,000
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Total expenses
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457,000
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Net Income
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27,000
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a. Use the information you have to complete the information that should be in the blue cells. Calculate the breakeven point on the new product. What decision rule does the breakeven point give to Marino Company? Graph your answer using Excel if possible. If you are not Excel savvy, please either skip the graph or draw one by hand and submit a photo from your cell phone.
b. You are the boss, would you approve this new product as currently proposed and costed or would you ask for changes? If so, which ones.