Practice Midterm

ACCT 505 Solutions to Weekly Problems - Week 1

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 2-12 (20 minutes)

1. | | Miles Driven | Total Annual Cost* |

| High level of activity | 120,000 | $13,920 |

| Low level of activity |  80,000 |  10,880 |

| Change |  40,000 | $ 3,040 |

| | | |

* | 120,000 miles × $0.116 per mile = $13,920 |

| 80,000 miles × $0.136 per mile = $10,880 |

Variable cost per mile:

Fixed cost per year:

Total cost at 120,000 miles | $13,920 |

Less variable cost element:

120,000 miles × $0.076 per mile |    9,120 |

Fixed cost per year | $ 4,800 |

| |

2. Y = $4,800 + $0.076X

3. | Fixed cost | $ 4,800 |

| Variable cost: 100,000 miles × $0.076 per mile |...