Managerial Accounting

Suggested solutions: Chapter 3

Exercises 3-3, 3-4, 3-8.
Problems 3-14 (2 & 3), 3-15
Exercise 3-3 (20 minutes)

1. Units Shipping
Month Shipped Expenses
High activity level (June) ..... 8 $5,400
Low activity level (August) ... 1 $1,200
Change............................... 7 $4,200
Variable cost = Change in cost ÷ Change in activity

= $4,200 ÷ 7 units shipped

= $600 per unit shipped

Total cost (June) ........................................................ $5,400

Variable cost element
($600 per unit shipped × 8 units) ............................. 4,800
Fixed cost element ..................................................... $600

2. The cost formula is Y = $600 + $600X

Where Y = total shipping expenses and X = the number of units
shipped.

3. I would not feel comfortable estimating shipping costs using the cost
formula from part 2 because it appears that 20 units would likely be
outside the relevant range for expenses. That is, 20 units is 150% more
than the highest level of activity used to estimate the cost formula.
Exercise 3-4 (20 minutes)
Crazy Canucks
1 Income Statement—Ski Department
. For the Month Ended January 31
Sales ...................................................... $300,000
Variable expenses:
Cost of goods sold ($900 per pair of skis $180,000
× 200 pairs*) .....................................
Selling expenses ($150 per pair × 200 30,000
pairs).................................................
Administrative expenses (20% × 4,000 214,000
$20,000) ............................................
Contribution margin ................................. 86,000
Fixed expenses:
Selling expenses (60,000-30,000) .......... 30,000
Administrative expenses(80% x 20,000) . 16,000 46,000
Operating income .................................... $ 40,000
*$300,000 sales ÷ $1,500 per pair of skis = 200 pairs.

2. Since 200 pairs of skis were sold and the contribution margin totaled
$86,000 for the month, the contribution of each pair of skis toward fixed
expenses and profits was $430 ($86,000 ÷ 200 pairs). Another way to
compute the $430 is:
Selling price per pair of skis ................ $1,500
Less variable expenses:
Cost per pair of skis ........................ $900
Selling expenses ............................. 150
Administrative expenses
($4,000 ÷ 200 pairs) .................... 20 1,070
Contribution margin per pair............... $430

3. If 150 pairs of skis were sold in a month then the total contribution margin would be:

150 x $430 = $64,500.

Exercise 3-8 (20 minutes)

1. Blood Tests Costs
High activity level (February) ........ 3,500 $14,500
Low activity level (June) ............... 1,500 8,500
Change........................................ 2,000 $ 6,000

Variable cost per blood test:

Change in cost = $6,000 = $3 per blood test
Change in activity 2,000 blood tests

Fixed cost per month:

Blood test cost at the high activity level ................ $14,500
Less variable cost element:
3,500 blood tests × $3.00 per test ..................... 10,500
Total fixed cost .................................................... $ 4,000
The cost formula is $4,000 per month plus $3.00 per blood test
performed or, in terms of the equation for a straight line:
Y = $4,000 + $3.00X
where X is the number of blood tests performed.

2. Expected blood test costs when 2,300 tests are performed:

Variable cost: 2,300 blood tests × $3.00 per test ...... $6,900
Fixed cost ............................................................... 4,000
Total cost ................................................................ $10,900
Problem 3-14 (45 minutes)
1. The completed scattergraph follows:

$7,000

$6,000

$5,000
Power Costs

$4,000

$3,000

$2,000

$1,000

$0
0 20 40 60 80 100 120 140
Ignots Processed

Power costs appear to be closely related to the number of ignots processed

each month. The data points all fall quite close to the trend line added to
the plot and suggest the relationship between power costs and ignots
processed is approximately linear.
Problem 3-14 (continued)
2. High-low method:
Number of PowerCo
Ignots sts
High activity level .............. 130 $6,000
Low activity level ............... 40 2,400
Change ............................. 90 $3,600
Variable cost per ignot:
Change in cost = $3,600 = $40 per ignot
Change in activity 90 ignots

Fixed cost: Total power cost at high activity level ........ $6,000
Less variable element:
130 ignots × $40 per ignot .................... 5,200
Fixed cost element ................................... $ 800
Therefore, the cost formula is: Y = $800 + $40X.

3. Using the cost formula determined in part 2, when the number of ignots processed is 140, the
prediction of total costs is:

$800 + ($40 x 140) = $6,400.

Problem 3-15 (45 minutes)
1. Maintenance cost at the 90,000 machine-hour level of activity can be
isolated as follows:
Level of Activity
60,000 MHs 90,000 MHs
Total factory overhead cost ........ $174,000 $246,000
Deduct:
Utilities cost @ $0.80 per MH*. 48,000 72,000
Supervisory salaries ................ 21,000 21,000
Maintenance cost ...................... $105,000 $153,000
*$48,000 ÷ 60,000 MHs = $0.80 per MH

2. High-low analysis of maintenance cost:

Machine- Maintenance
Hours Cost
High activity level .................... 90,000 $153,000
Low activity level ..................... 60,000 105,000
Change ................................... 30,000 $ 48,000
Variable rate:
Change in cost $48,000
= = $1.60 per MH
Change in activity 30,000 MHs
Total fixed cost:
Total maintenance cost at the high activity level .. $153,000
Less variable cost element
(90,000 MHs × $1.60 per MH) ......................... 144,000
Fixed cost element ............................................ $ 9,000
Therefore, the cost formula for maintenance is $9,000 per month plus
$1.60 per machine-hour or
Y = $9,000 + $1.60X.
Problem 3-15 (continued)

3. Variable Cost per

Machine-Hour Fixed Cost
Utilities cost .................... $0.80
Supervisory salaries cost.. $21,000
Maintenance cost ............ 1.60 9,000
Total overhead cost ......... $2.40 $30,000
Thus, the cost formula would be: Y = $30,000 + $2.40X.

4. Total overhead cost at an activity level of 75,000 machine-hours:

Fixed costs ................................................. $ 30,000
Variable costs: 75,000 MHs × $2.40 per MH . 180,000
Total overhead costs ................................... $210,000