Concept explainers
1.
Introduction:
Variable costs and Fixed costs:
Variable costs are those that increase or decrease with the general volume of work. Some of the examples of variable costs are sales commissions, labor costs, raw material costs, etc. Fixed costs are those costs that remain fixed irrespective of the volume of work. Some of the examples of fixed costs are office rent, administrative expenses,
Least square regression method:
The least-square regression method uses the regression line to classify the total cost into variable and fixed cost and thus minimizing the sum of squares of the errors and hence we can get the best line of fit with minimum variances. The least-square regression can be expressed as Y = a + bx
Where Y is Total cost
A is the total fixed cost
B is the variable cost
X is the activity level
To prepare: a scatter plot graph.
1.
Answer to Problem 2A.2E
This is the scatterplot graph for the B rental car.
Explanation of Solution
According to the given information the rental returns and car wash costs of B rental cars have been given and we have to prepare a scatter graph plot where the car wash cost should be on the vertical axis and the rental returns on the horizontal axis. To prepare the scatter graph first we have to go to insert option and select scatter graph from charts. The next step is to enter the X values and Y values and then we will get the graph. Now we can add trend line and axis title by clicking on the + symbol next to the graph. After adding the trend line we can click on the arrow button next to the trend line and select more options and then in that we have to checkmark display equation and display R squared value on the chart. The following is the data for plotting the graph:
Rental returns | Car wash costs ($) |
2380 | 10825 |
2421 | 11865 |
2586 | 11332 |
2725 | 12422 |
2968 | 13850 |
3281 | 14419 |
3353 | 14935 |
3489 | 15738 |
3057 | 13563 |
2876 | 11889 |
2735 | 12683 |
2983 | 13796 |
2.
Introduction:
Variable costs are those that increase or decrease with the general volume of work. Some of the examples of variable costs are sales commissions, labor costs, raw material costs, etc. Fixed costs are those costs that remain fixed irrespective of the volume of work. Some of the examples of fixed costs are office rent, administrative expenses, depreciation, etc.
Least square regression method:
The least-square regression method uses the regression line to classify the total cost into variable and fixed cost and thus minimizing the sum of squares of the errors and hence we can get the best line of fit with minimum variances. The least-square regression can be expressed as Y = a + bx
Where Y is Total cost
A is the total fixed cost
B is the variable cost
X is the activity level
To calculate: the variable cost per rental return and the monthly fixed washing cars using least square regression method.
2.
Answer to Problem 2A.2E
Thus, the variable cost per unit is $4.04 and the fixed cost per unit is $145583 for Bargain rental car.
Explanation of Solution
To calculate the variable cost per rental return and the monthly fixed washing cars using the least square regression method first we have to calculate the X, Y, X2 and XY. In the given data the rental return is taken as X and car wash costs is taken as Y, let us now calculate the X2 and XY:
Months | X | Y | X2 | XY |
January | 2380 | 10825 | 5664400 | 25763500 |
February | 2421 | 11865 | 5861241 | 28725165 |
March | 2586 | 11332 | 6687396 | 29304552 |
April | 2725 | 12422 | 7425625 | 33849950 |
May | 2968 | 13850 | 8809024 | 41106800 |
June | 3281 | 14419 | 10764961 | 47308739 |
July | 3353 | 14935 | 11242609 | 50077055 |
August | 3489 | 15738 | 12173121 | 54909882 |
September | 3057 | 13563 | 9345249 | 41462091 |
October | 2876 | 11889 | 8271376 | 34192764 |
November | 2735 | 12683 | 7480225 | 34688005 |
December | 2983 | 13796 | 8898289 | 41153468 |
Total | 34854 | 157317 | 102623516 | 462541971 |
Now let us calculate the variable cost using following formula:
Variable cost per unit
Now, let us calculate the fixed cost per unit using following formula:
Fixed cost per unit
Want to see more full solutions like this?
Chapter 2A Solutions
MANAGERIAL ACCOUNTING(LL)-W/CONNECT >C<
- Required information Exercise 5A-2 (Algo) Least-Squares Regression [LO5-11] [The following information applies to the questions displayed below.] Bargain Rental Car offers rental cars in an off-airport location near a major tourist destination in California. Management would like to better understand the variable and fixed portions of its car washing costs. The company operates its own car wash facility in which each rental car that is returned is thoroughly cleaned before being released for rental to another. customer. Management believes that the variable portion of its car washing costs relates to the number of rental returns. Accordingly, the following data have been compiled: Month January February March April May June July August September October November December Rental Returns 2,400 2,500 2,800 3,100 Fixed cost per month Variable cost per rental return i 3,700 5,100 5,600 5,600 4,800 4,100. 2,200 3,000. Car Wash Costs $ 11,400 $ 13,300 $ 12,200 $ 14,900 $ 16,600 $ 24,100 $…arrow_forwardBargain Rental Car offers rental cars in an off-airport location near a major tourist destination in California. Management would like to better understand the variable and fixed portions of its car washing costs. The company operates its own car wash facility in which each rental car that is returned is thoroughly cleaned before being released for rental to another customer. Management believes that the variable portion of its car washing costs relates to the number of rental returns. Accordingly, the following data have been compiled: Rental Car Wash Month Returns Costs January 2,400 $ 10,500 February 2,500 $ 12,900 March 2,700 $ 11,300 April 2,900 $ 13,500 May 3,600 $ 15,700 June 4,900 $ 22,300 July 5,500 $ 21,700 August 5,400 $ 20,900 September 4,700 $ 22,300 October November December 3,800 $ 19,600 2,100 $ 10,200 2,600 $ 12,500 . Using least-squares regression, estimate the variable cost per rental return and the monthly fixed cost incurred to wash cars. (Round Fixed cost to the…arrow_forwardBargain Rental Car offers rental cars in an off-airport location near a major tourist destination in California. Management would like to better understand the variable and fixed portions of its car washing costs. The company operates its own car wash facility in which each rental car that is returned is thoroughly cleaned before being released for rental to another customer. Management believes that the variable portion of its car washing costs relates to the number of rental returns. Accordingly, the following data have been compiled: Month Rental Returns Car Wash Costs $ 11,500 $ 13,400 $ 12,300 $ 15,000 $ 16,700 $ 24,300 $ 22,700 $ 23,400 $ 23,300 $ 22,600 $ 11,200 $ 16,000 January February 2,500 2,500 March April May June July August September October 2,800 3,100 3,700 5,100 5,600 5,600 4,800 4,100 2,200 3,000 November December 2. Using least-squares regression, estimate the variable cost per rental return and the monthly fixed cost incurred to wash cars. (Round Fixed cost to the…arrow_forward
- Bargain Rental Car offers rental cars in an off-airport location near a major tourist destination in California. Management would like to better understand the variable and fixed portions of its car washing costs. The company operates its own car wash facility in which each rental car that is returned is thoroughly cleaned before being released for rental to another customer. Management believes that the variable portion of its car washing costs relates to the number of rental returns. Accordingly, the following data have been compiled: Month Rental Returns Car Wash Costs January 2,500 $ 11,600 February 2,500 $ 13,400 March 2,800 $ 12,400 April 3,100 $ 15,200 May 3,700 $ 16,800 June 5,200 $ 24,500 July 5,600 $ 22,800 August 5,600 $ 23,700 September 4,800 $ 23,400 October 4,200 $ 22,900 November 2,300 $ 11,300 December 3,000 $ 16,300 2. Using least-squares regression, estimate the variable cost…arrow_forwardSerial Problem Business Solutions LO P3 Santana Rey has found that Business Solutions's line of computer desks and chairs has become very popular, and she is finding it hard to keep up with demand. She knows that she cannot fill all of her orders for both items, so she decides she must determine the optimal sales mix given the resources she has available. Information about the desks and chairs follows. Selling price per unit. Variable costs per unit Contribution margin per unit Direct labor hours per unit Expected demand for next quarter Contribution per direct labor hour Maximum number of units to be sold Hours required to produce maximum units For most profitable sales mix Desks $1,203.50 Santana has determined that she only has 1,167 direct labor hours available for the next quarter and wants to optimize her contribution margin given the limited number of direct labor hours available. Hours dedicated to the production of each product 410.00 $ 793.50 Required: Determine the optimal…arrow_forwardQ. 8 Which following costs need to be considered for both make or buy options? O. Fixed overhead O. Variable overhead O. Rental revenue Q. 9 What is the per unit cost to purchase from the vendor? Round to the nearest penny. Q. 10 Based on your analysis, the CreativeStationary Co. should make the product in-house or buy them from the vender? O. Make O. Buy Do (Q8,9,10 plz)arrow_forward
- Cost Behavior, High-Low Method, Pricing Decision Fonseca, Ruiz, and Dunn is a large, local accounting firm located in a southwestern city. Carlos Ruiz, one of the firms founders, appreciates the success his firm has enjoyed and wants to give something back to his community. He believes that an inexpensive accounting services clinic could provide basic accounting services for small businesses located in the barrio. He wants to price the services at cost. Since the clinic is brand new, it has no experience to go on. Carlos decided to operate the clinic for 2 months before determining how much to charge per hour on an ongoing basis. As a temporary measure, the clinic adopted an hourly charge of 25, half the amount charged by Fonseca, Ruiz, and Dunn for professional services. The accounting services clinic opened on January 1. During January, the clinic had 120 hours of professional service. During February, the activity was 150 hours. Costs for these two levels of activity usage are as follows: Required: 1. Classify each cost as fixed, variable, or mixed, using hours of professional service as the activity driver. 2. Use the high-low method to separate the mixed costs into their fixed and variable components. (Note: Round variable rates to two decimal places and fixed amounts to the nearest dollar.) 3. Luz Mondragon, the chief paraprofessional of the clinic, has estimated that the clinic will average 140 professional hours per month. If the clinic is to be operated as a nonprofit organization, how much will it need to charge per professional hour ? How much of this charge is variable? How much is fixed? (Note: Round answers to two decimal places.) 4. CONCEPTUAL CONNECTION Suppose the accounting center averages 170 professional hours per month. How much would need to be charged per hour for the center to cover its costs ? Explain why the per-hour charge decreased as the activity output increased. (Note: Round answers to two decimal places.)arrow_forward5 Revenue mix, new and upgrade customers. Zapo 1-2-3 is a top-selling spreadsheet product. Zapo is about to release Version 5.0. It groups its customers into two groups new customers and upgrade customers (those who previously purchased Zapo 1-2-3 Version 4.0 or earlier). Although the same physical product is provided to each customer group, sizable differences exist in their selling prices and variable marketing costs: Selling price Variable cost: Manufacturing Marketing New Customers $25 65 $210 90 a. New 50%/upgrade 50%. b. New 90% / upgrade 10% Upgrade Customers $120 $25 15 40 The fixed costs of Zapo 5.0 are $14,000,000. The planned revenue mix in units is 60% new customers and 40% upgrade customers. REQUIRED 1. What is the Zapo 1-2-3 Version 5.0 breakeven point in units, assuming that the planned 60/40 mix is maintained? 2. If the mix is maintained, what is the operating income when 200,000 units are sold? 3. Show how the breakeven point in units changes with the following…arrow_forwardBargain Rental Car wants to better understand the variable and fixed portions of its car washing costs. The company operates its own car wash facility that cleans each rental car before releasing it to another customer. Management believes the variable portion of its car washing costs relates to the number of rental returns. Accordingly, the following data have been compiled: Month January February March April May June July August September October November December Rental Returns 2,500 2,500 2,800 3,100 3,700 5,200 5,600 5,700 4,800 4,900 Fixed cost per month Variable cost per rental return 2,300 3,100 Exercise 5A-2 Part 2 (Algo) Car Wash Costs $ 11,800 $ 13,500 $ 12,600 $ 15,500 $ 17,000 $ 24,900 $ 23,000 $ 24,200 $ 23,600 $ 23,500 $ 11,500 $ 17,000 2. Using least-squares regression; estimate the variable cost per rental return and the monthly fixed cost incurred to wash cars. Note: Round Fixed cost to the nearest whole dollar amount and the Variable cost per unit to 2 decimal…arrow_forward
- Activity Rate Travel Deliveries $2 per mile driven. $ 50 per delivery $ 22 per phone call Customer service Two of the company's many customers include Customer A and Customer B. These two customers consumed the company's activities as follows: Total Expected Activity Customer A Customer B 250 5 12 Activity Cost Pool Travel (number of miles driven) Deliveries (number of deliveries) Customer service (number of phone calls) How much cost would be assigned from the Travel activity to Customer A? Multiple Choice $170 $60 $680 340 15 20arrow_forwardStrategy; Variable and Fixed Costs Zipcar (www.zipcar.com) is a car-sharing club founded inCambridge, Massachusetts, in 1999. The club members pay an annual fee and then have the opportunity to rent a small car (usually a subcompact; the models include the Toyota Prius) for a fixedhourly rate. Zipcar is located largely in select metropolitan areas such as Boston, San Francisco, andWashington, D.C. Members, called “Zipsters,” make reservations for a car on the Zipcar website andthen use an access card to open the vehicle. The vehicle has a “home base” parking spot where thedriver picks up and returns the vehicle. The club—which, as of early 2017, operates in more than500 cities and towns, at more than 600 college campuses, and 50 airports—has grown to more than1 million members since its initial public offering in April 2011.Required1. What are the fixed and variable costs for Zipcar?2. What are some of the competitive advantages and challenges of the Zipcar concept?arrow_forwardCost Behavior, High-Low Method, Pricing Decision Fonseca, Ruiz, and Dunn is a large, local accounting firm located in a southwestern city. Carlos Ruiz, one of the firm's founders, appreciates the success his firm has enjoyed and wants to give something back to his community. He believes that an inexpensive accounting services clinic could provide basic accounting services for small businesses located in the barrio. He wants to price the services at cost. Since the clinic is brand new, it has no experience to go on. Carlos decided to operate the clinic for 2 months before determining how much to charge per hour on an ongoing basis. As a temporary measure, the clinic adopted an hourly charge of $25, half the amount charged by Fonseca, Ruiz, and Dunn for professional services. The accounting services clinic opened on January 1. During January, the clinic had 120 hours of professional service. During February, the activity was 150 hours. Costs for these two levels of activity usage are as…arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningPkg Acc Infor Systems MS VISIO CDFinanceISBN:9781133935940Author:Ulric J. GelinasPublisher:CENGAGE L