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CHAPTER 10

DETERMINING HOW COSTS BEHAVE

10-16 (10 min.) Estimating a cost function.

1. Slope coefficient =

= [pic]

= [pic]= $0.35 per machine-hour

Constant = Total cost – (Slope coefficient ( Quantity of cost driver)

= $5,400 – ($0.35 ( 10,000) = $1,900

= $4,000 – ($0.35 ( 6,000) = $1,900

The cost function based on the two observations is

Maintenance costs = $1,900 + $0.35 ( Machine-hours

2. The cost function in requirement 1 is an estimate of how costs behave within the relevant range, not at cost levels outside the relevant range. If there are no months with zero machine-hours represented in the maintenance account, data in that account cannot be used to estimate the fixed costs at the zero machine-hours level. Rather, the constant component of the cost function provides the best available starting point for a straight line that approximates how a cost behaves within the relevant range.

10-17 (15 min.) Identifying variable-, fixed-, and mixed-cost functions.

1. See Solution Exhibit 10-17.

2. Contract 1: y = $50

Contract 2: y = $30 + $0.20X

Contract 3: y = $1X

where X is the number of miles traveled in the day.

|3. |Contract |Cost Function |

| |1 | Fixed |

| |2 |Mixed |

| |3 |Variable |

Solution Exhibit 10-17

Plots of Car Rental Contracts Offered by Pacific Corp.

[pic]

10-18 (20 min.) Various cost-behavior patterns.

1. K

2. B

3. G

4. J Note that A is incorrect because, although the cost per pound eventually equals a constant at $9.20, the total dollars of cost increases linearly from that point onward.

5. I The total costs will be the same regardless of the volume level.

6. L

7. F This is a classic step-cost function.

8. K

9. C

10-19...