# Solutions Manual Chapter 6

Topics: Costs, Variable cost, Cost Pages: 6 (1320 words) Published: March 19, 2013
Problem 6-36
1. Machine supplies: \$102,000 / 34,000 DLH = \$3/hr
January: 23,000 DLH x \$3 = \$69,000
Depreciation: Fixed at \$15,000
2. Plant maintenance cost:
| March| January|
| (34,000 hrs)| (23,000hrs)|
Total cost*Less: Machine Supplies DepreciationPlant maintenance| \$ 586,000(102,000) (15,000)\$ 469,000| \$ 454,000(69,000) (15,000)\$ 370,000| *Excludes supervisory labor cost

Variable maintenance cost = difference in cost / difference in DLH
=(\$469,000 - \$370,000) / (34,000 – 23,000)
=\$99,000 / 11,000 hrs
= \$9/hr
Fixed maintenance cost:
| March| January|
| (34,000 hrs)| (23,000hrs)|
Total maintenance costLess: Variable cost at \$9/hrFixed maintenance cost| \$ 469,000 306,000\$ 163,000| \$ 370,000 207,000\$ 163,000| 3. Manufacturing OH at 29,500 labor hours:

Machine supplies at \$3/hrDepreciationPlant maintenance cost: Variable at \$9/hr Fixed Supervisory laborTotal| \$ 88,50015,000265,500163,000 90,000\$ 622,000 | 4. A fixed cost remains constant when a change occurs in the cost driver (or activity base). A step-fixed cost, on the other hand, remains constant within a range but will change (rise or fall) when activity falls outside that range. A fixed cost is constant over a much larger range of activity than is a step-fixed cost. 5. Ideally, the company should operate on the right-most portion of a step, just prior to the jump in cost. In this manner, a firm receives maximum benefit (1.e., the maximum amount of activity) for the dollars invested. Problem 6-37

1. Straight-line depreciation-committed fixed
Charitable contributions-discretionary fixed
Mining labor/fringe benefits-variable
Royalties-semivariable
Trucking and hauling-step-fixed

The per ton mining labor/fringe benefit cost is constant at both volume levels presented, which is characteristic of a variable cost.
\$360,000 / 1,500 tons = \$240/ton
\$624,000 / 2,600 tons = \$240/ton
Royalties have both a variable and a fixed component, making it a semivariable (mixed) cost.
Variable royalty cost = difference in cost / difference in tons
= (\$201,000 - \$135,000) / (2,600 – 1,500)
= \$66,000 / 1,100 tons
= \$66/ton
Fixed royalty cost:

| June(2,600 tons)| December(1,500 tons)|
Total royalty costLess: variable cost at \$60 per tonFixed royalty cost| \$ 201,000 156,000\$ 45,000| \$ 135,000 90,000\$ 45,000| 2. Total cost for 1,650 tons:

DepreciationCharitable contributionsMining labor/fringe benefits at \$230/tonRoyalties: Variable at \$66/ton FixedTrucking and haulingTotal| \$ 25,000-360,000108,90045,000 275,000\$ 824,900| 3. Hauling 1,500 tons is not very cost effective. Kalimantan will incur sot of \$275,000if it needs 1,500 tons hauled or, for that matter, 18,99 tons. The company would be better off if it had 1,499 tons hauled, saving outlays of \$25,000. In general, with this type of cost function, effectiveness is maximized if a firm operates on the right-most portion of a step, just prior to a jump in cost. 4. A committed fixed cost results from an entity’s ownership or use of facilities and its basic organizational structure. Examples of such costs include property taxes, depreciation, rent, and management salaries. Discretionary fixed costs, on the other hand, arise from a decision to spend a particular amount of money for specific purpose. Outlays for research and development, advertising, and charitable contributions fall in this category. In times of severe economic difficulties, management should try to cut discretionary fixed costs. Such costs are more easily altered in the short run and in some cases may not have significant long-term ramifications...