EXAMPLES FOR CHAPTER 6

67. Sunshine Valley Meat Company produces one of the best sausage products in Pennsylvania. The company's controller compiled the following information by analyzing the accounting records:

1. Meat costs the company $3.25 per pound of sausage produced.

2. Compensation of production employees is $2.25 per pound of sausage produced.

3. Supervisory salaries total $23,000 per month.

4. The company incurs utility costs of $9,000 per month plus $0.35 per pound of sausage produced.

5. Insurance and property taxes average $6,400 per month.

Required:

A. Classify each cost as variable, fixed, or semivariable.

B. Write a formula to express the behavior of the firm's production costs. (Use the form Y = a + bX, where X denotes the quantity of sausage produced.)

A. 1. Variable

2. Variable

3. Fixed

4. Semivariable

5. Fixed

B.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Bloom's: A, N

Difficulty: Medium

Learning Objective: 2

Learning Objective: 5

68. Viscount Corporation has a machining capacity of 200,000 hours per year. Utilization of capacity is normally 75%; it has been as low as 40% and as high as 90%. An analysis of the accounting records revealed the following selected costs:

Viscount uses the high-low method to analyze cost behavior.

Required:

A. Classify each of the costs as being either variable, fixed, or semivariable.

B. Calculate amounts for the two unknowns in the preceding table.

C. Calculate the total amount that Viscount would expect at a 75% utilization rate for Cost A, Cost B, and Cost C.

D. Develop an equation that Viscount can use to predict total cost for any level of hours within its range of operation.

A. Cost A: Fixed (same total amount at each level of activity)

Cost B: Variable (constant per-hour figures)

Cost C: Semivariable (changing total and per-hour figures)

B. Cost A: $440,000 (200,000 hours 90%) = $2.44...