Management Accounting

E5-3

Part (a)

Variable cost = Change in cost / Change in activity

Months | Total

Maintenance Cost | Total

Machine Hours |

January | $2,400 | 300 |

February | 3,000 | 400 |

March | 3,600 | 600 |

April | 4,500 | 790 |

May | 3,200 | 500 |

June | 4,900 | 800 |

Using the high and low point method we first identify the period with the highest and lowest activity-in the following data Jan and June. We then use the activity and cost data from these two periods to estimate the variable cost component as follows:

Activity Levels | Maintenance Cost | Machine Hour |

High activity level (June) | $4,900 | 800 |

Low activity level(Jan) | 2,400 | 300 |

Variable Cost = Change in Cost / Change in Activity

$2,500 / 500 hours

= $ 5 per Unit

Variable rate is $5 per unit according to above calculation under high and low point method. We can now determine the amount of fixed cost as follows:

Fixed cost element = Total cost − variable cost element

$4,900 − ($5 per unit × 800 hours)

= $900

Both variable and fixed have now been isolated. The cost of maintenance can now be expressed as $900 per month, and $5 per Unit.

E5-9

The Lake Shore Inn is trying to determine its break even point. The inn has 50 rooms that it rents at $60 a night. Operating costs are as follows.

Salaries $7200 per month

Utilities $1500 per month

Depreciation $1200 per month

Maintenance $300 per month

Maid Service $8 per room

Other costs $28 per room

Determine the inn’s break even point (1) number of rented rooms per month (2) dollars

(1) Salaries 7,200

Utilities 1,500

Depreciation 1,200

Maintenance 300

Total Fixed Cost : 10,200

Maid Service 8

Other Cost 28

Total Variable Cost : 36

Contribution Margin Point(CMP) = Selling Price – Variable Cost

= 60 – 36...