Question

Exercise 18-5 The controller of Hall Industries has collected the following monthly expense data for use in analyzing the cost behavior of maintenance costs. Total Maintenance Costs Total Machine Hours Month January February March April May June $2,640 3,000 3,600 4,500 3,200 4,620 3,500 4,000 6,000 7,900 5,000 8,000 udy

Answer 1

18-5) For calculating fixed cost per month and variable cost per hour, we need to use high low method.

Variable cost per hour is equal to difference between highest and lowest cost from the given data divided by difference between the respective hours or units.

The highest activity is in the month of June (i.e. 8,000 machine hrs) and the lowest activity is in the month of January (i.e. 3,500 machine hrs).

Variable cost per hour = ($4,620 - $2,640)/(8,000 hrs - 3,500 hrs)

= $1,980/4,500 hrs = $0.44 per hour

Fixed Cost per month = Total cost in June - (Machine hrs*Variable cost per hour)

= $4,620 - (8,000 hrs*$0.44)

= $4,620 - $3,520 = $1,100 per month

Therefore using high low method, variable cost per hour is $0.44 per hour and fixed cost is $1,100 per month.

18-8) Total Fixed Cost per month = Depreciation+Advertising+Insurance

= $1,400+$200+$2,000 = $3,600 per month

Total Variable cost per lawn = Weed and feed materials+Direct labor+Fuel

= $12+$10+$2 = $24 per lawn

Contribution Margin per lawn = Service charge - Total variable cost per lawn

= $60 - $24 = $36 per lawn

Break Even Point in Units = Total Fixed cost/Contribution margin per lawn

= $3,600/$36 per lawn = 100 units

Break Even Point in Dollars = Break Even Point in units*Service Charge per unit

= 100 units*$60 per unit = $6,000

Therefore break even point in units is 100 and break even point in dollars is $6,000.