Question 1-4

Variable: Variable costs (VC) or expenses are the cost that changes with the change in the production of
products or services. This cost totally depends on the entity’s product expenses or sales volume, when
they changed the VC also changed.

Fixed: Fixed costs (FC) are the costs that remain the same or never change with the change in the
production or sales volume. As prescribed by the name the cost is fixed and not dependent on any type
of activity, production, and so on.

Mixed cost (MC): MC is the cost that is partly fixed and partly variable such as a specified amount of
expenses in the production is fixed and after crossing that amount the cost will be calculated on the
units produced or sold units.

Question 1-5

As activity level increases

a. Average fixed costs per unit decreases

b. The effect on variable costs per unit depends on the nature of the variable costs. If variable costs
are constant per unit, an increase in the activity level would not affect the variable costs per
unit. However, if variable costs increase with each unit produced, then an increase in the activity
level would lead to an increase in variable costs per unit.Total fixed costs remain the same
c. Total fixed costs remained constant
d. Total variable costs increases

Question 1-8

Assuming a linear relationship between cost and activity level is valid or invalid depending on the nature
of the cost and the level of activity considered. It is valid when the cost is a variable cost and invalid
when it is a fixed cost. Variable costs vary with changes in activity, while fixed costs remain the same
regardless of activity.

Problem 5A-3

105,000 km a yr – 11.4 cent/km

70,000 km a yr – 13.4 cent

1. High-low method
Total cost at high level of activity: =105,000x11.4=1,197,000 cent = $11,970
Total cost at low level of activity: =70,000x13.4=938,000 cent = $,9380
 Change∈cost
Variable operating cost per kilometer ¿
Change∈level of activity
$ 11,970−$ 9,380
= =0.074
105,000−70,000

Total operating cost = 0.074*Level of activity + Annual fixed operating cost

Or

$11,970 = 0.074x105,000+Fixed operating cost

So

Annual fixed operating cost = $11,970-0.074*105,000 = $4,200

2. Variable and fixed costs in the form of Y = a + bX

Y = $4,200 + 0.074X
3. Level of activity = 80,000 km
Total operating cost = $4,200 + 0.074*80,000 = $10,120

Problem 5A-7

1. Variable Expense: Cost of goods sold

Fixed Expense: Advertising expense, Insurance Expense, Depreciation Expense
Mixed Expense: Salaries and commissions, shipping expense
2. Shipping expense:
38,000−34,000
Variable expense per unit = =$ 4
5,000−4,000
Total expense = 0.074*Level of activity + Monthly fixed expense

Or

$38,000 = 4*5,000 + Monthly fixed expense

So

Monthly fixed expense = $38,000 - 4*5,000 = $18,000

Therefore, variable and fixed portions of shipping expense can be expressed in the form:

Y = $18,000 + 4X

Salaries and commissions expense:

90,000−78,000
Variable expense per unit = =$ 12
5,000−4,000
Total expense = 12xLevel of activity + Monthly fixed expense
 Or

$90,000 = 12*5,000 + Monthly fixed expense

So

Monthly fixed expense = $90,000 - 12*5,000 = $30,000

Therefore, variable and fixed portions of salaries and commissions expense can be expressed in
the form:

Y = $30,000 + 12X

3.

Morrisey & Brown, Ltd

Income Statement
For the month ended September 30
Sales $500,000
Variable costs
Cost of goods sold $300000
Shipping expense 20,000
Salaries and commissions 60,000 380,000
Contribution Margin 120,000
Fixed costs
Advertising expense 21,000
Shipping expense 18,000
Salaries and commissions 30,000
Insurance expense 6,000
Depreciation expense 15,000 90,000
Net income 30,000

Problem 5A-9
1. Shipping expense:
210,000−119 , 000
Variable expense per unit = =$ 9.1
20,000−10 , 000
Total expense = 9.1xLevel of activity + Quarterly fixed expense

Or

$210,000 = 9.1*20,000 + Quarterly fixed expense

So

Quarterly fixed expense = $210,000 – 9.1*20,000 = $28,000

Therefore, variable and fixed portions of shipping expense can be expressed in the form:

Y = $28,000 + 9.1X
2. At 12,000 units sales level
Variable shipping cost = 9.1*12,000 = $109,200
Fixed shipping cost = $28,000
Sales = 12,000*$100=1,200,000
Sales commissions expense = 1,200,000*6% = 72,000
Cost of goods sold = 35*12,000 = 420,000

Morrisey & Brown, Ltd

Income Statement
For the month ended September 30
Sales $1,200,000
Variable costs
Cost of goods sold $420,000
Shipping expense 109,200
Salaries and commissions 72,000 601,200
Contribution Margin 598,800
Fixed costs
Advertising expense 210,000
Shipping expense 28,000
Administrative salaries 145,000
Insurance expense 9,000
Depreciation expense 76,000 468,000
Net income 130,800