Question

Account Analysis Method

Penny Davis runs the Shear Beauty Salon near a college campus. Several months ago, Penny used some unused space at the back of the salon and bought two used tanning beds. She hired a receptionist and kept the salon open for extended hours each week so that tanning clients would be able to use the benefits of their tanning packages. After three months, Penny wanted additional information on the costs of the tanning area. She accumulated the following data on four accounts:

		Wages		Supplies and Maintenance		Equipment Depreciation		Electricity		Tanning Minutes		Number of Visits
January		$1,759		$1,488		$162		$362		4,107		408
February		1,743		1,875		162		447		3,894		402
March		1,800		4,062		162		720		6,774		567

Penny decided that wages and equipment depreciation were fixed. She thought supplies and maintenance would vary with the number of tanning visits and that electricity would vary with the number of tanning minutes.

Required:

1. Calculate the average account balance for each account. Calculate the average monthly amount for each of the two drivers. (Round all answers to the nearest dollar or the nearest whole unit.) Use your rounded answers in all subsequent computations.

	Average Account Balance
Wages	$
Supplies & Maintenance	$
Equipment Depreciation	$
Electricity	$
Tanning Minutes
Number of Visits

2. Calculate fixed monthly cost and the variable rates for the account averages. Round your answers to the nearest cent and use your rounded answers in all subsequent computations.

Variable rate for supplies & maintenance	$ per visit
Variable rate for electricity	$ per minute
Fixed cost per month	$

Express the results in the form of an equation for total cost. (Round to the nearest cent.)

Cost

=

$

+

$ (visit)

+

$ (minute)

3. In April, Penny predicts there will be 381 visits for a total of 3,780 minutes. What is the total cost for April? If required, round your answer to the nearest dollar.
$________

4. Suppose that Penny decides to buy a new tanning bed at the beginning of April for $7,248. The tanning bed is expected to last four years and will have no salvage value at the end of that time.

What will be the new equation for total cost? If required, round your answers to the nearest cent.

Cost = $______ + $_______ (visit) + $__________ (minute)

What is the new expected cost in April based on the prediction provided in Requirement 3 (above)? When required, round your answer to the nearest dollar.
$___________

Answer 1

ANSWER

1.

	Average Account Balance
Wages	$ 1,767
Supplies and Maintenance	$ 2,475
Equipment Depreciation	$ 162
Electricity	$ 510
Tanning Minutes	4,925
Number of Visits	459

2.

Variable rate for Supplies and Maintenance ( $ 2,475/ 459 visits)	$ 5.39 per visit
Variable rate for Electricity ( $ 510/ 4,925 minutes)	0.10 per minute
Fixed Cost per month $ ( 1,767 + 162)	1,929

Cost Equation :

Cost

=

$ 1,929

+

$ 5.39 per visit

+

$ 0.10 per minute

3.

Total cost for April = $ 1,929 + $ 5.39 x 381 visits + $ 0.10 x 3,780 minutes = $ 4,360.59or $ 4,361..

4.

Monthly depreciation for new tanning bed = $ 7,248 / 48 = $ 151

Fixed cost per month = $ 1,929 + $ 151= $ 2,080

Cost = $ 2,080+ (381*$ 5.39 per visit) + (3780*$ 0.10 per minute.)

New expected cost for April = $ 4,512

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