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Exam 3: Cost Behaviour: Analysis and Use

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Question 1

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The 4 x 4 Shop is a large retailer of equipment for pickup trucks.An income statement for the company's Bed Liner Department for the most recent quarter is presented below: The liners sell,on average,for $350 each.The department's variable selling expenses are $35 per liner sold.The remaining selling expenses are fixed.The administrative expenses are 25% variable and 75% fixed.The company purchases its liners from a supplier at a cost of $125 per liner. Required: Prepare an income statement for the quarter,using the contribution approach.

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Question 2

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Which costs will change with a decrease in activity within the relevant range?

A) Total fixed costs and total variable costs.
B) Unit fixed cost and total variable costs.
C) Unit variable cost and unit fixed cost.
D) Unit fixed cost and total fixed costs.

E) C) and D)
F) B) and C)

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Question 3

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Unified Parcel,Inc.operates a local parcel delivery service.The company keeps detailed records relating to operating costs of trucks,and has found that if a truck is driven 110,000 kilometres per year,the operating cost is 7.5 cents per kilometre.This cost increases to 8.75 cents per kilometre if a truck is driven 60,000 kilometres per year. Required: Estimate the cost formula for truck operating costs using the high-low method.

Suppose a firm reports the following results using the least-squares regression method: Y = $750 - $2.56X Y is the daily repair and maintenance cost and X is the daily units of production in hundreds.The daily observations were over a one-month period.The results do not make sense to the manager of the repair and maintenance department. Required: What is the most plausible explanation for the apparently meaningless results?

A cost formula may not be valid outside the relevant range of activity.

The concept of the relevant range does not apply to fixed costs.

At an activity level of 6,000 units,the cost for maintenance is $7,200;at 10,000 units,the cost for maintenance is $11,600.Using the high-low method,what is the cost formula for maintenance?

(Appendix 3A)The Stephens Leadership Centre provides training seminars in personal development and time management.The company is relatively new and management is seeking information regarding the Centre's cost structure.The following information has been gathered since the inception of the business in January of the current year: Required: a.Using the high-low method,estimate the variable cost per seminar and the total fixed cost per month. b.Using the least-squares regression method and the equations for a and b,estimate the variable cost per seminar and the total fixed cost per month.

Using the contribution approach,what is the operating income for the first quarter?

The following is Allison Corporation's contribution format income statement for December 2013: The company had no beginning or ending inventories.The company produced and sold 10,000 units in December 2013. Required: Assuming no change in either the cost structure or the average selling price,prepare a contribution format income statement for a January,2014 assuming production and sales of 7,500 units for Allison Corporation.

In describing the cost formula equation Y = a + bX,which of the following statements is correct?

What is the total fixed overhead cost for O'Donnell?

At a sales level of $300,000,James Company's gross margin is $15,000 less than its contribution margin,its operating income is $50,000,and its total selling and administrative expenses are $120,000.At this sales level,what is the company's contribution margin?

Which of the following is an example of a committed fixed cost?

What is the expected total administrative expense next month?

What are discretionary fixed costs?

What is the contribution margin for Crandall's Bookstore for the first quarter?

Using the high-low method,the estimated fixed cost per month for electricity is closest to which of the following?

Modern technology is causing shifts away from variable costs toward more fixed costs in many industries.

The high-low method is generally less accurate than the least-squares regression method for analyzing the behaviour of mixed costs.