Question

1.   Estimating Fixed and Variable Cost Per Unit Using Regression

The management of Rutledge Corporation would like to better understand the behavior of the

company's warranty costs. Those costs are listed below for a number of recent months:       

		Product Returns	Warranty Cost
	March.....................	30	$3,648
	April.......................	37	$4,074
	May........................	43	$4,460
	June........................	41	$4,330
	July.........................	32	$3,756
	August....................	48	$4,782
	September..............	35	$3,932
	October..................	33	$3,823

            Management believes that warranty cost is a mixed cost that depends on the number of product returns.      

            Required: Estimate the variable cost per product return and the fixed cost per month using the least-squares regression method.

2.   Traditional and Contribution Income Statements

Novakovich Inc., a manufacturing company, has provided the following financial data for January:    

	Sales......................................................	$430,000
	Variable production expense................	$84,000
	Variable selling expense.......................	$16,000
	Variable administrative expense...........	$28,000
	Fixed production expense.....................	$102,000
	Fixed selling expense............................	$44,000
	Fixed administrative expense...............	$121,000

            The company had no beginning or ending inventories.

            Required:

a.      Prepare an income statement in good form for January using the traditional approach.

b.     Prepare an income statement in good form for January using the contribution approach.            

3. Estimating Fixed and Variable Costs Using High-Low Method

The management of Dethlefsen Corporation would like to have a better understanding of the behavior of its inspection costs. The company has provided the following data:    

		Direct Labor-Hours	Inspection Cost
	January..................	5,089	$33,122
	February................	5,042	$32,929
	March....................	5,026	$32,870
	April......................	5,073	$33,065
	May.......................	5,029	$32,906
	June.......................	5,040	$32,913
	July........................	5,070	$33,050
	August...................	5,027	$32,875
	September..............	4,995	$32,746

            Management believes that inspection cost is a mixed cost that depends on direct labor-hours.    

            Required: Estimate the variable cost per direct labor-hour and the fixed cost per month using the high-low method. Show your work!

Answer 1

Please refer the following image for the solution:  

Answer PARTI Fixed cost per month Variable cost per product return $ $ 1,723.79 63.59 per product $430,000 $ 186,000 $ 244,000 х S.no 1 Answer PART II Novakovich Inc. Traditional Income Statement Sales Less : Cost of Goods Sold ($84,000 + $ 102,000) Gross Margin Selling and Administrative Expenses: Selling Expenses ($16,000+ $44,000) $ 60,000 Administrative Expenses ($28,000+ $121,000) $ 149,000 Total Selling and Administrative Expenses Net Operating Income 900 2 3 1369 1849 1681 у 30 $ 3,648 37 $ 4,074 43 $ 4,460 41 $ 4,330 32 $ 3,756 48 $ 4,782 35 $ 3,932 33 $ 3,823 299 $ 32,805 4 ху 109440 150738 191780 177530 120192 229536 137620 126159 1,242,995 $ 209,000 $ 35,000 5 1024 6 7 2304 1225 1089 11,441 8 Total Varaible cost per unit (b) n* (Exy) - (Ex)(Ey) n(Ex?) - (Ex) Novakovich Inc. Contribution Income Statement Sales $430,000 Less : Variable expenses Variable production expense $ 84,000 Variable Selling Expenses $ 16,000 Variable Administrative Expenses $ 28,000 $ 128,000 Contribution margin $ 302,000 Less : Fixed expenses Fixed production expense $ 102,000 Fixed Selling Expenses $ 44,000 Fixed Administrative Expenses $ 121,000 $ 267,000 Net Operating Income $ 35,000 Fixed cost (a) (Ey) - b(Ex) n n = 8 Ex= Ey = Ex= Exy = 299 Product Return $ 32,805 Warranty cost 11,441 1,242,995 Answer PART III Variable cost per unit (b) $ 8 * (1,242,995) - (299) * (32,805) 8* (11,441) - (299) Fixed cost per month Variable cost per direct labour 12,766.00 4.00 per direct labour hour $ 9,943,960 - 9,808,695 91,528 - 89,401 Direct Labour Hours High activity Level 5,089 Low activity Level 4,995 Inspection Cost $ 33,122 $ 32,746 135,265 2127 $ 63.59 per product Variable Cost Change in Cost / Change in activity ($33,122 - $32,746)/(5,089 - 4,995) $ 4 Fixed cost (a) Fixed Cost 32,805 - (63.59 * 299) 8 $ 13,790 8 $ 1,723.79 Total cost - Variable cost $32,746 - ($4*4,995) $ 12,766