Question

1. Buxton Office Supply Company has the following information available regarding costs and revenues for two recent months. Selling price is $20.

	March	April
Sales revenue	$60,000	$100,000
Cost of goods sold	-36,000	- 60,000
Gross profit	$24,000	$ 40,000
Less other expenses:
Advertising	$   600	$    600
Utilities	4,200	5,600
Salaries and commissions	3,200	4,000
Supplies (bags, cleaning supplies etc.)	320	400
Depreciation	2,300	2,300
Administrative costs	1,900	1,900
Total	-12,520	-14,800
Net income	$11,480	$25,200

Required:

a.	Identify each of the company's expenses (including cost of goods sold) as being either variable, fixed, or mixed.
b.	By use of the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense.
c.	What is the total cost equation?
d.	Estimate total cost if sales = $75,000.

Answer 1

Fixed costs are those costs which would remain the same in total irrespective of level of production or sales. It is a committed cost to be incurred by the firm whether it carries out operations or not. So, if this year's sales increases by $49,000, operating expenses will increase by contribution margin ratio times the sales. Variable costs are those costs which would remain the same per unit irrespective of level of production or sales. It is an unit cost to be incurred by the firm only when the firm carries out its business operation. Mixed costs are also called as semi variable costs which would remain the same in total upto a volume of production or sale and then start varying along with volume of production or sale. In other words, these costs are partially fixed and partially variable in nature. Therefore, % of sales 60.00% ($36000 / $60000] Cost Item: Classification: Cost of goods sold Variable (as % of sales remain the same) Advertising Fixed (as total cost doesn't change) Utilities Mixed (as both total cost & % of sales vary) Salaries and commissions Mixed (as both total cost &% of sales vary) Supplies (bags, cleaning supplies etc.) Mixed (as both total cost & % of sales vary) Depreciation Fixed (as total cost doesn't change) Administrative costs Fixed (as total cost doesn't change) March Total $36,000 $600 $4,200 $3,200 $320 $2,300 $1,900 7.00% 5.33% 0.53% ($4200 / $60000] ($3200 / $60000] ($320 / $60000] April % of Total sales $60,000 60.00% ($60000 / $100000] $600 No applicable as it is fixed cost $5,600 5.60% ($5600 / $100000] $4,000 4.00% ($4000 / $100000] $400 0.40% ($400 / $100000] $2,300 No applicable as it is fixed cost $1,900 No applicable as it is fixed cost

Cost Item Utilities Salaries and commissions Supplies (bags, cleaning supplies etc.) (a) Low $4,200 $3,200 $320 (b) High $5,600 $4,000 $400 (b)-(a) Difference $1,400 $800 $80 Variable Cost % 3.50% 2.00% 0.20% 5.70% Fixed Cost Variable at Low Cost at Low $2,100 $2,100 $2,000 $1,200 $200 $120 $4,300 $3,420 Fixed Cost Variable at High Cost at High $2,100 $3,500 [Ref: NOTE] $2,000 $2,000 [Ref: NOTE] $200 $200 [Ref: NOTE] $4,300 $5,700 Sales $60,000 $100,000 $40,000 NOTE: Variable cost % for Utilities, Diff. in cost / Diff. in sales = $1400 / 40000 = 3.5%; Variable cost % for Salaries and commissions, Diff. in cost / Diff. in sales = $800 / 40000 = 2%; Variable cost % for Supplies (bags, cleaning supplies etc.), Diff. in cost / Diff. in sales = $80 / 40000 = 0.2%. Fixed Cost at Low for Utilities, Total costs - Total variable costs = $4200 - ($60000 x 3.5%) = $2100; Fixed Cost at Low for Salaries and commissions, Total costs - Total variable costs = $3200 - ($60000 x 2%) = $2000; Fixed Cost at Low for Supplies (bags, cleaning supplies etc.), Total costs - Total variable costs = $320 - ($60000 x 0.2%) = $200; Variable cost at Low for Utilities = $4200 - $2100 = $2100; Variable cost at Low for Salaries and commissions = $3200 - $2000 = $1200; Variable cost at Low for Supplies (bags, cleaning supplies etc.) = $320 - $200 = $120;

Fixed Cost at High for Utilities, Total costs - Total variable costs = $5600 - ($100000 x 3.5%) = $2100; Fixed Cost at High for Salaries and commissions, Total costs - Total variable costs = $4000 - ($100000 x 2%) = $2000; Fixed Cost at High for Supplies (bags, cleaning supplies etc.), Total costs - Total variable costs = $400 - ($100000 x 0.2%) = $200. Variable cost at High for Utilities = $5600 - $2100 = $3500; Variable cost at High for Salaries and commissions = $4000 - $2000 = $2000; Variable cost at High for = $400 - $200 = $200; c) Total cost = Fixed costs + (Sales x Variable cost %) ==> Total cost = $4300 + (Sales x 5.70%) d) Therefore, for estimated sale of $75,000, total estimated cost shall be: Fixed costs Variable cost per hour Estimated sales Total estimated cost $4,300 5.70% $75,000 $8,575 [$4300 + ($75000 x 5.70%)]