Question

Vaughan Company had the following costs at two different levels of activity: MH Used 8,000 MH 15,000 MH October September $ 40,000 Cost A $ 75,000 Cost B $ 68,000 $ 117,000 Cost C $ 32,000 $ 32,000 Which of the following statements are true? 1. Cost A and Care variable costs 2. In a month where 10,000 machine hours (MH) are expected to be used, Cost B would be estimated to be $85,000 3. In a month where 12,000 machine hours (MH) are expected to be used and Sales are expected to be $300,000, Vaughan would expect a total contribution margin of $156,000 4. Cost C is a fixed cost Statement #3 O All of the Statements are true Statement #4 O Both Statement #3 and #4 Both Statement #2 and #4 O Statement #2 O Statement #1

Answer 1

Cost A

Variable cost per unit = $75,000 - $40,000 / 15,000 - 8,000

Variable cost per unit = $35,000 / 7,000 = $5 per unit

Fixed costs = $75,000 - (15,000*$5)

Fixed costs = $75,000 - $75,000 = $0

Hence Cost A is a variable costs

Cost B:

Variable cost per unit = $117,000 - 68,000 / 15,000 - 8,000

Variable cost per unit = $49,000 / 7,000 = $7

Fixed costs = $117,000 - (15,000*$7)

Fixed costs = $117,000 - $105,000 = $12,000

Total costs = $12,000 + $7 * Number of machine hour used

Cost C:

Cost C is a fixed costs.

Option 1:

Cost A is variable cost and Cost C is fixed costs.

Hence statement is not true.

Option 2:

Total estimated cost of Cost B = $12,000 + $7*10,000

Total estimated cost of Cost B = $12,000 + 70,000 = $82,000

Hence statement is not true.

Option 3:

Sales	$300,000
Variable costs:
Cost A (12,000*$5)	60,000
Cost B (12,000*$7)	84,000
Contribution margin	$156,000

Hence statement is True

Option 4:

Cost C is a Fixed cost.

The statement is True

Hence option Both the statement #3 and #4 is True