Submitted by: Submitted by Mohammmad
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Pages: 3
Category: Business and Industry
Date Submitted: 08/12/2011 09:47 AM
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...