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AYB202 TUTORIAL 2: QUESTIONS
Question 1:
Matt operates a car wash. Incoming cars are put on an automatic conveyor belt which activates when a car is placed on it. Cars are washed as the conveyor belt carries them from the start station to the finish station. After a car moves off the conveyor belt, it is dried manually. Workers then clean and vacuum the
inside of the car. Depreciation is computed on a straight-line basis.
Matt serviced 80 000 cars in 2020. Matt reports the following costs for 2020.
Account description
Costs
Car wash labour
$260 000
Soap, cloth, and supplies
42 000
Water
38 000
Electricity to move conveyor belt
72 000
Depreciation
64 000
Salaries
46 000
Required
1.
Classify each account as variable or fixed with respect to the number of cars washed. Fixed: Depreciation, salaries Variable: Car wash labour, Water, Electricity to move conveyor belt, Water, Soap, cloth and supplied
2.
Create a cost function
Total cost = Fixed + (Variable/unit * Quantity)
TC = 110,000 + ((412,0000/80,000) * Q)
TC = 110,000 + (5.15* Q)
3.
Suppose Matt expects to wash 90 000 cars in 2021. Use the cost function you developed above to estimate Matt’s total costs in 2021. TC = 110,000 + (5.15 * 90,000)
= $573,500
AYB202 TUTORIAL 2: QUESTIONS
Question 2:
Pat Wilson is the new manager of the materials storeroom for Perth Manufacturing. Pat has been asked to estimate future monthly purchase costs for part no. 4599, used in two of Perth Manufacturing’s products. Pat has cost of purchase and quantity data for the past nine months as follows:
Month
Cost of purchase
Quantity purchased
January
$12 675
2 710 parts
February
13 000
2 810
March
17 653
4 153
April
15 825
3 756
May
13 125
2 912
June
13 814
3 387
July
15 300
3 622
August
10 233
2 298
September
14 950
3 562
Estimated monthly purchases for this part, based on expected demand of the two products for the rest of the year, are:
•
October
3 340 parts
•
November
3 710 parts
•
December
3 040 parts
Required
a)
Use the high-low method to estimate the expected purchase costs for each of the last three months of the year.
See above highlighted for the high and low point Var Cost per unit = (17653 – 10233)/ (4153-2298)
= $4/ unit
Fixed cost = cost at high point – (Var cost per unit * activity at high point) = 17653 – (4 * 4153)
= $1041
TC = 1041 + (4 * Q)
Cost of Purchase
Quantity Purchased
October
$14,401
3340
November $15,881
3710
December
$13,201
3040
b)
Pat has used the first nine months of data and regression analysis to estimate the relationship between the quantity purchased and the purchase costs of part no. 4599. The regression line Pat obtains is: Total cost = $2 582.57 + 3.54X Use the regression results to calculate the expected purchase costs for October, November and December. Cost of Purchase
Quantity Purchased
October
$14,406.17
3340
November $15,715.97
3710
December
$13,344.17
3040
AYB202 TUTORIAL 2: QUESTIONS
c)
Compare the expected purchase costs with the expected purchase costs calculated using the high–low method in requirement 2. Comment on your results.
QUESTION 3
Samford Motors is a small car dealership. On average, it sells a car for $25,000, which it purchases from the manufacturer for $22,000. Each month the firm pays fixed costs of $50,000 in rent and $60,000 for sales salaries. In addition to their salaries, salespeople are paid a commission of $500 for
each car they sell. The firm spends $10,000 each month for local advertisements.
Required
1.
How many cars must Samford Motors sell each month to break even?
Breakeven point in units = fixed costs / Unit Contribution Margin Unit Contribution Margin = Sales revenue – Variable costs = 25,000 – (22,000 + 500)
= 2,500
Breakeven point in units = (50,000 + 60,000 + 10,000) / 2500 = 120,000 / 2,500
= 48 units
2.
Samford Motors has a target monthly net income of $54,000 after tax. How many cars must be
sold each month to reach this target? Its tax rate is 40%.
Pre-tax Profit = 54000/ (1-0.4)
= $90,000
Breakeven point in units = (120,000 + 90,000) / 2500
= 84 units
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