# Week 1 p2-17 p2-19 p2-21 p-24

Week 1 P2-17 P2-19 P2-21 P-24

1.    Problem 2-17 – Echeverria SA

2.    Problem 2-19 – Sebolt Wire Company
3.    Problem 2-21 – Golden Company
4.    Problem 2-24 – Heritage Company

PROBLEM 2-17 High-Low Method; Predicting Cost [LO3,LO4]

Echeverria SA is an Argentinan manufacturing company whose total factory overhead costs fluctuate somewhat from year to year according to the number of machine-hours worked in its production facility. These costs (in Argentinian pesos) at high and low levels of activity over recent years are given below:

Level of Activity

Low high

Machine hours 60,000 80,000

Total factory overhead cost 274,000pessos 312,000pessos

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 60,000 machine-hours level of activity as follows:

Indirect materials(variable) 90,000 Pessos

Rent(fixed) 130,000

Maintenance(mixed) 54,000

Total factory overhead costs 274,000 pessos

For planning purposes, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1. Estimate how much of the factory overhead cost of 312,000 pesos at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the 312,000 pesos cost consists of indirect materials and rent.
Think about the behavior of variable and fixed costs.)
2. Using the high-low method, estimate a cost formula for maintenance.
3. What total overhead costs would you expect the company to incur at an operating level of 65,000 machine-hours?

PROBLEM 2-19 High-Low and Scattergraph Analysis [LO4]

Sebolt Wire Company heats copper ingots to very high temperatures by placing the ingots in a large heat coil. The heated ingots are then run through a shaping machine that shapes the soft ingot into wire. Due to the long heat-up time, the coil is never turned off. When an ingot is placed in the coil, the temperature is raised to an even higher level, and then the coil is allowed to drop to the “waiting” temperature between ingots. Management needs to know the variable cost of power involved in heating an ingot and the fixed cost of power during “waiting” periods. The following data on ingots processed and power costs are available:

Month Number of ingots Power cost

January 110 \$5,500

February 90 \$4,500

March 80 \$4,400

April 100 \$5,500

May 130 \$6,000

June 120 \$5,600

July 70 \$4,000

August 60 \$3,200

September 50 \$3,400

October 40 \$2,400

Required:

1. Using the high-low method, estimate a cost formula for power cost. Express the formula in the form bX.
2. Prepare a scattergraph by plotting ingots processed and power cost on a graph. Draw a straight line though the two data points that correspond to the high and low levels of activity. Make sure your line intersects the Y-axis.
3. Comment on the accuracy of your high-low estimates assuming a least-squares regression analysis estimated the total fixed costs to be \$1,185.45 per month and the variable cost to be \$37.82 per ingot. How would the straight line that you drew in requirement 2 differ from a straight line that minimizes the sum of the squared errors?

PROBLEM 2-21 High-Low Method; Predicting Cost [LO3,LO4]

Golden Company’s total overhead cost at various levels of activity are presented below:

March 50,000 \$194,000

April 40,000 \$170,200

May 60,000 \$217,800

June 70,000 \$241,600

Assume that the overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 40,000 machine-hour level of activity is as follows:

Utilities(variable) \$52,000

Supervisory salaries(fixed) 60,000

Maintenance(mixed) 58,200

The company wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1. Estimate how much of the \$241,600 of overhead cost in June was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the \$241,600 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs within the relevant range.)
2. Using the high-low method, estimate a cost formula for maintenance.
3. Express the company’s total overhead cost in the form bX
4. What total overhead cost would you expect to be incurred at an activity level of 45,000 machine-hours?

PROBLEM 2-24 Cost Classification and Cost Behavior [LO2,LO3LO6]

Heritage Company manufactures a beautiful bookcase that enjoys widespread popularity. The company has a backlog of orders that is large enough to keep production going indefinitely at the plant’s full capacity of 4,000 bookcases per year. Annual cost data at full capacity follow:

Direct materials used (wood and glass) \$430,000

Factory supervision \$70,000

Sales commissions \$60,000

Depreciation, factory building \$105,000

Indirect materials, factory \$18,000

Insurance, factory \$6,000

Property taxes, factory \$20,000

Utilities, factory \$45,000

Required:

1. Prepare an answer sheet with the column headings shown below. Enter each cost item on your answer sheet, placing the dollar amount under the appropriate headings. As examples, this has been done already for the first two items in the list above. Note that each cost item is classified in two ways: first, as either variable or fixed with respect to the number of units produced and sold; and second, as either a selling and administrative cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect as shown.)

Cost behaviour Selling for administrative cost Product cost

Cost item Variable Fixed Direct Indirect*

Materials used \$430,000 \$430,000

Salaries \$110,000 \$110,000

*To units of product

2. Total the dollar amounts in each of the columns in (1) above. Compute the average product cost per bookcase.

3. Due to a recession, assume that production drops to only 2,000 bookcases per year.
Would you expect the average product cost per bookcase to increase, decrease, or remain unchanged? Explain. No computations are necessary.
4. Refer to the original data. The president’s next-door neighbor has considered making himself a bookcase and has priced the necessary materials at a building supply store. He has asked the president whether he could purchase a bookcase from the Heritage Company “at cost,” and the president has agreed to let him do so.
a. Would you expect any disagreement between the two men over the price the neighbor should pay? Explain. What price does the president probably have in mind? The neighbor?
b. Because the company is operating at full capacity, what cost term used in the chapter might be justification for the president to charge the full, regular price to the neighbor and still be selling “at cost”? Explain.

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