Week 1 P2-17 P2-19 P2-21 P-24
Please complete the following problems:
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
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
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.
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
1. Using the high-low method, estimate a cost formula for power cost. Express the formula in the form Y = a + 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:
Month Machine-hours Total overhead cost
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:
Supervisory salaries(fixed) 60,000
Total overhead cost $170,200
The company wants to break down the maintenance cost into its variable and fixed cost elements.
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 Y = a + 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,LO3, LO6]
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
Administrative office salaries $110,000
Factory supervision $70,000
Sales commissions $60,000
Depreciation, factory building $105,000
Depreciation, administrative office equipment $2,000
Indirect materials, factory $18,000
Insurance, factory $6,000
Administrative office supplies(billing) $4,000
Property taxes, factory $20,000
Utilities, factory $45,000
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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