Question

Developing an Equation from Average Costs
Paradise Pub is a high-end dog hotel located in New York. Assume that in March, when dog-days occupancy was at an annual low of 500 days, the average cost per dog-day was $26. In July, when dog-days were at a capacity level of 4,500, the average cost per dog-day was $10.

(a) Develop an equation for monthly operating costs. (Let X = dog-days per month)
Total cost = $Answer

+ $Answer

* X

(b) Determine the average cost per dog-day at an annual volume of 28,000 dog-days. (Round to the nearest cent.)
$Answer

High-Low Cost Estimation
Assume the local YRC Worldwilde delivery service hub has the following information available about fleet miles and operating costs:

Year	Miles	Operating Costs
2017	556,000	$175,600
2018	684,000	214,000

Use the high-low method to develop a cost-estimating equation for total annual operating costs. (Let X = annual fleet miles.)

Total annual costs = Answer

+ Answer * X

Automatic versus Manual Processing
Image Solutions operates a printing service for customers with digital cameras. The current service, which requires employees to download photos from customer cameras, has monthly operating costs of $7,000 plus $0.30 per photo printed. Management is evaluating the desirability of acquiring a machine that will allow customers to download and make prints without employee assistance. If the machine is acquired, the monthly fixed costs will increase to $13,000 and the variable costs of printing a photo will decline to $0.05 per photo.

(a) Determine the total costs of printing 20,000 and 50,000 photos per month.

Units	Current Process	Proposed Process
20,000	$Answer	$Answer
50,000	$Answer	$Answer

(b) Determine the monthly volume at which the proposed process becomes preferable to the current process.
Answer units

Unit- and Batch-Level Cost Drivers
KC, a fast-food restaurant, serves fried chicken, fried fish, and french fries. The managers have estimated the costs of a batch of fried chicken for KC's all-you-can-eat Friday Fried Fiesta. Each batch must be 50 pieces. The chicken is precut by the chain headquarters and sent to the stores in 10-piece bags. Each bag costs $4. Preparing a batch of 50 pieces of chicken with KC's special coating takes one employee two hours. The current wage rate is $9 per hour. Another cost driver is the cost of putting fresh oil into the fryers. New oil, costing $6.50, is used for each batch.

Round answers to two decimal places, when applicable.

(a) Determine the cost of preparing one batch of 50 pieces.
$Answer

(b) If management projects that it will sell 150pieces of fried chicken, determine the total batch and unit costs.
Batch cost $Answer

Unit cost $Answer

(c) If management estimates the sales to be 350 pieces, determine the total costs.
$Answer

(d) How much will the batch costs increase if the government raises the minimum wage to $10 per hour?
$Answer

(e) If management decided to increase the number of pieces in a batch to 100, determine the cost of preparing 350 pieces. Assume that the batch would take twice as long to prepare, and management wants to replace the oil after 100 pieces are cooked.
$Answer

Answer 1

Answer to Question 1:

Low level of dog-days occupancy = 500
Average cost per dog-day = $26

Lowest operating cost = Low level of dog-days occupancy * Average cost per dog-day
Lowest operating cost = 500 * $26
Lowest operating cost = $13,000

High level of dog-days occupancy = 4,500
Average cost per dog-day = $10

Highest operating cost = Low level of dog-days occupancy * Average cost per dog-day
Highest operating cost = 4,500 * $10
Highest operating cost = $45,000

Variable Cost per dog-day = (Highest operating cost - Lowest operating cost) / (High level of dog-days occupancy - Low level of dog-days occupancy)
Variable Cost per dog-day = ($45,000 - $13,000) / (4,500 - 500)
Variable Cost per dog-day = $8.00

Fixed operating cost = Highest operating cost - High level of dog-days occupancy * Variable Cost per dog-day
Fixed operating cost = $45,000 - $8.00 * 4,500
Fixed operating cost = $9,000

Answer a.

Equation for monthly operating costs = Fixed operating cost + Variable Cost per dog-day * Number of dog-days
Equation for monthly operating costs = $9,000 + $8.00 * X

Answer b.

Number of dog-days = 28,000

Total operating costs = $9,000 + $8.00 * 28,000
Total operating costs = $233,000

Average cost per dog-day = Total operating costs / Number of dog-days
Average cost per dog-day = $233,000 / 28,000
Average cost per dog-day = $8.32