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Case 5A-11 Mixed Cost Analysis and the Relevant Range LO5
The Ramon Company is a manufacturer that is interested in developing a cost formula to estimate the variable and fixed components of its monthly manufacturing
Last Year | This Year | |||||||
Machine | Overhead | Machine | Overhead | |||||
Month | Hours | Hours | Hours | Costs | ||||
January | 21,000 | $84,000 | 21,000 | $86,000 | ||||
February | 25,000 | $99,000 | 24,000 | $93,000 | ||||
March | 22,000 | $89,500 | 23,000 | $93,000 | ||||
April | 23,000 | $90,000 | 22,000 | $87,000 | ||||
May | 20,000 | $81,000 | 20,000 | $80,000 | ||||
June | 19,000 | $75,000 | 18,000 | $76,000 | ||||
July | 14,000 | $70,000 | 12,000 | $67,000 | ||||
August | 10,000 | $64,000 | 13,000 | $71,000 | ||||
September | 12,000 | $69,000 | 73,000 | $73,500 | ||||
October | 17,000 | $75,000 | 17,000 | $72,500 | ||||
November | 16,000 | $71,500 | 15,000 | $71,000 | ||||
December | 19,000 | $78,000 | 18,000 | $75,000 |
The company leases all of its manufacturing equipment. The lease arrangement calls for a flat monthly fee up to 19,500 machine-hours. If the machine-hours used exceed 19,500, then the fee becomes strictly variable with respect to the total number of machine-hours consumed during the month. Lease expense is a major element of overhead cost.<
Required:
Using the high-low method, estimate a
Prepare a scatter graph using all of the data for the two-year period. Fit a straight line or lines to the plotted points using a ruler. Describe the cost behavior pattern revealed by your scatter graph plot.
Assume a least-squares regression analysis using all of die given data points estimated the total fixed cost to be $40,102 and the variable cost to be $2.13 per machine-hour. Do you have any concerns about the accuracy of the high-low estimates that you have computed or the least-squares regression estimates that have been provided?
Assume that the company consumes 22,500 machine-hours during a month. Using the high-low method, estimate the total overhead cost that would be incurred at this level of activity. Be sure to consider only the data points contained in the relevant range of activity when performing your computations.
Comment on the accuracy of your high-low estimates assuming a least-squares regression analysis using only the data points in the relevant range of activity estimated the total fixed cost to be $10,090 and the variable cost to be $3.53 per machine-hour.
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MANAGERIAL ACCOUNTING
- Variable costing income statement and contribution margin analysis for a service company The actual and planned data for Underwater University for the Fall term were as follows: Actual Planned Enrollment 4,500 4,125 Tuition per credit hour 120 135 Credit hours 60,450 43,200 Registration, records, and marketing cost per enrolled student 275 275 Instructional costs per credit hour 64 60 Depreciation on classrooms and equipment 825,600 825,600 Registration, records, and marketing costs vary by the number of enrolled .students, while instructional costs vary by the number of credit hours. Depreciation is a fixed cost. A. Prepare a variable costing income statement showing the contribution margin and income from operations for the Fall term. B. Prepare a contribution margin analysis report comparing planned with actual performance for the Fall term.arrow_forwardVariable costs and activity bases in decision making The owner of Dawg Prints, a printing company, is planning direct labor needs for the upcoming year. The owner has provided you with the following information for next year's plans: Each color on the banner must be printed one at a time. Thus, for example, a four-color banner will need to be run through the printing operation four separate times. The total production volume last year was 600 banners, as shown below. The four-color banner is a new product offering for the upcoming year. The owner believes that the expected 600-unit increase in volume from last year means that direct labor expenses should increase by 100% (600 + 600). What do you think?arrow_forwardProduct costing and decision analysis for a service company Blue Star Airline provides passenger airline service, using small jets. The airline connects four major cities: Charlotte, Pittsburgh, Detroit, and San Francisco. The company expects to fly 170,000 miles during a month. The following costs are budgeted for a month: Fuel 2,120,000 Ground personnel 788,500 Crew salaries 850,000 Depreciation 430,000 Total costs 4,188,500 Blue Star management wishes to assign these costs to individual flights in order to gauge the profitability of its service offerings. The following activity bases were identified with the budgeted costs: Airline Cost Activity Base Fuel, crew, and depreciation costs Number of miles flown Ground personnel Number of arrivals and departures at an airport The size of the companys ground operation in each city is determined by the size of the workforce. The following data are available from corporate records for each terminal operation: Terminal City Ground Personnel Cost Number of Arrivals/Departures Charlotte 256,000 320 Pittsburgh 97,500 130 Detroit 129,000 150 San Francisco 306,000 340 Total 788,500 940 Three recent representative flights have been selected for the profitability study. Their characteristics are as follows: Description Miles Flown Number of Passengers Ticket Price per Passenger Flight 101 Charlotte to San Francisco 2,000 80 695,00 Flight 102 Detroit to Charlotte 800 50 441,50 Flight 103 Charlotte to Pittsburgh 400 20 382,00 Instructions 1. Determine the fuel, crew, and depreciation cost per mile flown. 2. Determine the cost per arrival or departure by terminal city. 3. Use the information in (1) and (2) to construct a profitability report for the three flights. Each flight has a single arrival and departure to its origin and destination city pairs.arrow_forward
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