Chapter 2 solutions

Topics: Costs, Variable cost, Fixed cost Pages: 24 (1495 words) Published: March 12, 2014

Exercise 2-1 (10 minutes)
1.The wages of employees who build the sailboats: direct labor cost.

2.The cost of advertising in the local newspapers: marketing and selling cost.

3.The cost of an aluminum mast installed in a sailboat: direct materials cost.

4.The wages of the assembly shop’s supervisor: manufacturing overhead cost.

5.Rent on the boathouse: a combination of manufacturing overhead, administrative, and marketing and selling cost. The rent would most likely be prorated on the basis of the amount of space occupied by manufacturing, administrative, and marketing operations.

6.The wages of the company’s bookkeeper: administrative cost.

7.Sales commissions paid to the company’s salespeople: marketing and selling cost.

8.Depreciation on power tools: manufacturing overhead cost.

Exercise 2-2 (15 minutes)

Product
Cost
Period
Cost
1.
The cost of the memory chips used in a radar set
X

2.
Factory heating costs
X

3.
Factory equipment maintenance costs
X

4.
Training costs for new administrative employees

X
5.
The cost of the solder that is used in assembling the radar sets X

6.
The travel costs of the company’s salespersons

X
7.
Wages and salaries of factory security personnel
X

8.
The cost of air-conditioning
executive offices

X
9.
Wages and salaries in the department that handles billing customers

X
10.
Depreciation on the equipment in the fitness room used by factory workers X

11.
Telephone expenses incurred by factory management
X

12.
The costs of shipping completed radar sets to customers

X
13.
The wages of the workers who assemble the radar sets
X

14.
The president’s salary

X
15.
Health insurance premiums for factory personnel
X

Exercise 2-3 (15 minutes)
1.

Cups of Coffee Served
in a Week

1,800
1,900
2,000

Fixed cost
$1,100
$1,100
$1,100

Variable cost
    468
    494
    520

Total cost
$1,568
$1,594
$1,620

Average cost per cup served*
$0.871
$0.839
$0.810

* Total cost ÷ cups of coffee served in a week

2.The average cost of a cup of coffee declines as the number of cups of coffee served increases because the fixed cost is spread over more cups of coffee. Exercise 2-4 (20 minutes)
1.

Occupancy-Days
Electrical Costs

High activity level (August)
3,608
$8,111

Low activity level (October)
  186
 1,712

Change
3,422
$6,399

Variable cost= Change in cost ÷ Change in activity
= $6,399 ÷ 3,422 occupancy-days
= $1.87 per occupancy-day

Total cost (August)
$8,111

Variable cost element
($1.87 per occupancy-day × 3,608 occupancy-days)
 6,747

Fixed cost element
$1,364

2.Electrical costs may reflect seasonal factors other than just the variation in occupancy days. For example, common areas such as the reception area must be lighted for longer periods during the winter. This will result in seasonal effects on the fixed electrical costs.

Additionally, fixed costs will be affected by how many days are in a month. In other words, costs like the costs of lighting common areas are variable with respect to the number of days in the month, but are fixed with respect to how many rooms are occupied during the month.

Other, less systematic, factors may also affect electrical costs such as the frugality of individual guests. Some guests will turn off lights when they leave a room. Others will not. Exercise 2-5 (15 minutes)

1. Traditional income statement

Redhawk, Inc.
Traditional Income Statement

Sales ($15 per unit × 10,000 units)

$150,000
Cost of goods sold
($12,000 + $90,000 – $22,000)

80,000
Gross margin

70,000
Selling and administrative expenses:

Selling expenses
(($2 per unit × 10,000 units) + $20,000)
40,000

Administrative expenses
(($1 per unit × 10,000 units) + $15,000)
 25,000
 65,000
Net operating income

$ 5,000

2. Contribution format...
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