Question

Please show work. Thank you

Practice Problem 1 Cost Behavior Standard Com Neptune Rentals offers a boat rental service. Consider the following costs of the company over the relevant range of 5,000 to 8,000 hours of operating time for its boats: Hours of Operating Time 6,000 7,000 5,000 8,000 Total costs: Variable costs $ 20,000 $168,000 $ $ no Fixed costs Total costs $188,000 Costs per hour: Variable cost Fixed cost Total cost per hour A Required: Compute the missing amounts, assuming that cost behavior patterns remain unchanged within the relevant range of 5,000 to 8,000 hours.

Answer 1

Variable Costs - Variable costs are those cost that varies with the level of production of goods or services produced. If level of production increases than total variable costs will increase and if level of production decreases total variable costs will decrease.The per unit variable costs remain same with the change in level of production cost. Examples of variable costs are direct materials, direct labors etc. Total variable cost = Total quantity of units produced * Variable cost per unit

Fixed Costs - Fixed costs are those costs which does not change with change in the level of production, i.e., these costs in total remains same with the increase or decrease in production within a relevant range but per unit fixed cost change with change in the level of production.

Hours of Operating time

   5,000 6,000 7,000 8,000

Total Costs:

Variable Costs $20,000 $24,000 $28,000 $32,000

(@ $4 per hour)

Fixed Costs    $168,000 $168,000 $168,000 $168,000

___________ _________ _________ ___________

Total Costs $188,000    $192,000 $196,000 $200,000

Costs per hour:

Variable Cost $4 $4 $4 $4

Fixed Cost $33.60 $28.00 $24.00 $21.00

___________ _________ _________ __________

Total cost per hour $37.60 $32.00 $28.00 $25.00

Calculations:

Total variable cost = Total quantity of units produced * Variable cost per unit

$20,000 = 5,000 units * Variable cost per unit

Variable cost per unit = $20,000/5,000 units = $4.00 per unit

Variable cost for different level of production(in total):

5,000 units = $20,000

6,000 units = $4.00 per unit * 6,000 units = $24,000

7,000 units = $4.00 per unit * 7,000 units = $28,000

8,000 units = $4.00 per unit * 8,000 units = $32,000

Fixed cost for different level of production(per unit):

Per unit fixed cost = Total fixed cots/Total number of units produced

5,000 units = $168,000/5,000 units = $33.60 per unit

6,000 units = $168,000/6,000 units = $28.00 per unit

7,000 units = $168,000/7,000 units = $24.00 per unit

8,000 units = $168,000/8,000 units = $21.00 per unit