Cost Behavior

Assignment: HW Set #2 - E3.10, E3.19, E16.16, E16.20

1.

Exercise 3.10

Cost Behavior

SmokeCity, Inc., manufactures barbeque smokers. Based on past experience, SmokeCity has found

that its total annual overhead costs can be represented by the following formula: Overhead cost =

$543,000 + $1.34X, where X equals number of smokers. Last year, SmokeCity produced 20,000

smokers. Actual overhead costs for the year were as expected.

Required:

1. What is the driver for the overhead activity?

_________________

For questions 2-4, Enter the final answers rounded to the nearest dollar.

2. What is the total overhead cost incurred by SmokeCity last year?

$ _________________

3. What is the total fixed overhead cost incurred by SmokeCity last year?

$ _________________

4. What is the total variable overhead cost incurred by SmokeCity last year?

$ _________________

For questions 5-8, round your answers to the nearest cent. Use those rounded figures in subsequent

computations, if necessary.

5. What is the overhead cost per unit produced?

$ _________________ per unit

6. What is the fixed overhead cost per unit?

$ _________________ per unit

7. What is the variable overhead cost per unit?

$ _________________ per unit

8. Recalculate Requirements 5, 6, and 7 for the following levels of production: (a) 19,500 units and (b)

21,600 units.

19,500 Units 21,600 Units

Unit

cost

$

_________________

$

_________________

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Unit

fixed

cost

_________________

_________________

Unit

variable

cost

_________________

_________________

The reason the unit costs changed in the way they did is because:

_________________

2.

Exercise 3.19

High-Low Method, Cost Formulas

The controller of the South Charleston plant of Ravinia, Inc., monitored activities associated with

materials handling costs. The high and low levels of resource usage occurred in September and March

for three different resources associated with materials handling. The number of moves is the driver.

The total costs of the three resources and the activity output, as measured by moves for the two

different levels, are presented as follows:

Required:

If required, round your answers to two decimal places. Enter a "0" if required.

1. Determine the cost behavior formula of each resource. Use the high-low method to assess the

fixed and variable components.

Forklift depreciation:

V $ _________________

F $ _________________

Y $ _________________

Indirect labor:

V $ _________________

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F $ _________________

Y $ _________________ + $ _________________ X

Fuel and oil for forklift:

V $ _________________

F $ _________________

Y $ _________________ X

2. Using your knowledge of cost behavior, predict the cost of each item for an activity output level of

9,000 moves. For interim computations, carry amounts out to two decimal places. Round your final

answer to the nearest dollar.

Forklift depreciation $ _________________

Indirect labor $ _________________

Fuel and oil for

forklift

$ _________________

3. Construct a cost formula that can be used to predict the total cost of the three resources

combined. If required, round your answers to two decimal places.

Materials handling cost = $ _________________ + $ _________________ X

Using this formula, predict the total materials handling cost if activity output is 9,000 moves.

Y = $ _________________

3.

Exercise 16.16

CVP: Before- and After-Tax Targeted Income

Head-Gear Company produces helmets for bicycle racing. Currently, Head-Gear charges a price of

$230 per helmet. Variable costs are $80.50 per helmet, and fixed costs are $1,255,800. The tax rate

is 25 percent. Last year, 14,000 helmets were sold.

Required:

1. What is Head-Gear's net income for last year?

$ _________________

2. What is Head-Gear's break-even revenue? In your computations, round the contribution margin

ratio to two decimal places.

$ _________________

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3. Suppose Head-Gear wants to earn before-tax operating income of $900,000. How many units must

be sold? Round to the nearest whole unit.

_________________ units

4. Suppose Head-Gear wants to earn after-tax net income of $650,000. How many units must be

sold? Round to the nearest whole unit.

_________________ units

5. Suppose the income tax rate rises to 35 percent. How many units must be sold for Head-Gear to

earn after-tax income of $650,000? Round to the nearest whole unit.

_________________ units

4.

Exercise 16.20

Contribution Margin, CVP, Net Income, Margin of Safety

Nail Glow, Inc., produces novelty nail polishes. Each bottle sells for $5.90. Variable unit costs are as

follows:

Fixed overhead costs are $34,475 per year. Fixed selling and administrative costs are $6,720 per

year. Nail Glow sold 35,000 bottles last year.

Required:

1. What is the contribution margin per unit for a bottle of nail polish?

$ _________________ per unit

What is the contribution margin ratio? Round your answer to four decimal places.

_________________

2. How many bottles must be sold to break even?

_________________ bottles

What is the break-even sales revenue? Round your answer to the nearest dollar, if rounding is

required.

$ _________________

3. What was Nail Glow’s operating income last year?

$ _________________

4. What was the margin of safety in revenue?

$ _________________

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5. Suppose that Nail Glow, Inc., raises the price to $6.50 per bottle, but anticipated sales will drop to

28,750 bottles. What will the new break-even point in units be? Round your answer up to the nearest

whole number of units.

_________________

Should Nail Glow raise the price?

_________________