Question

o cwl SA 20 A student association has hired a musical group for a graduation party. The cost will be a fixed amount of $4,800 Required 1. Suppose 400 people attend the party. What will be the total cost of the musical group? What will be the unit cost per person? 2. Suppose 4,000 people attend the party. What will be the total cost of the musical group? What will be the unit cost per person? 3. For prediction of total costs, should the manager of the party use the unit cost in requirement 1 or the unit cost in requirement 2? What is the major lesson of this problem? Requirement 3. For prediction of total costs, should the manager of the party use the unit cost in requirement 1 of the unit cost in requirement 2? What is the major lesson of this problem? For prediction of total costs should the manager of the party use the unit cast in requirement 1 or the unit cost in requrement 2? OA. The manager of the party should not use either unit cost because the total costs are not affected by the attendance. OB. The manager of the party should use the unit cost from requirement 2 because each guest of the party does not have to pay as much and the musical group will still play O C. The manager of the party should use the unit cost from requirement 1 because an overestimate of cost is better than an underestimate OD. The manager of the party could use both unit costs because both values are legitimate and can be used at any time. What is the major lesson of this problem? 3 O A Changes in the number of cost driver units affect total variable costs and total fixed costs OB. Changes in the number of cost driver units affect total variable costs but do not affect total fixed costs OC. Changes in the number of cost driver units do not affect both total variable costs and total fixed costs OD. Changos in the number of cost driver units do not affect total variable costs but affect total food costs Click to select your answer(s).

Answer 1

1.         Total cost, $4,800. Unit cost per person, $4,800 ÷ 400 = $12.00

2.         Total cost, $4,800. Unit cost per person, $4,800 ÷ 4,000 = $1.20

3.         The main lesson of this problem is to alert the student early in the course to the desirability of thinking in terms of total costs rather than unit costs wherever feasible. Changes in the number of cost driver units will affect total variable costs but not total fixed costs. In our example, it would be perilous to use either the $12.00 or the $1.20 unit cost to predict the total cost because the total costs are not affected by the attendance. Instead, the student association should use the $4,800 total cost. Obviously, if the musical group agreed to work for, say $4.80 per person, such a unit variable cost could be used to predict the total cost.