Chapter 3

3-15
Big Thumbs Company manufactures portable flash drives for computers. Big Thum’s
incurs monthly depreciation costs of $15,000 on its plant equipment and monthly advertising costs of
$3,000 to place advertisements in magazines. Also, each drive requires materials and manufacturing
overhead resources. On average, the company uses 10,000 ounces of materials to manufacture 5,000
flash drives per month. Each ounce of material
costs $3.00. In addition, manufacturing overhead resources are driven by machine hours. On
average, the company incurs $22,500 of manufacturing overhead resources to produce 5,000 flash
drives per month.
Required:
1. Create a formula for the monthly cost of flash drives for Big Thumbs.
2. If the department expects to manufacture 6,000 flash drives next month, what is the expected fixed
cost (assume that 6,000 units is within the company’s current relevant range)? Total variable cost? Total
manufacturing cost (i.e., both fixed and variable)?
1/ We have:
Output 5,000.00
Depreciation costs $ 15,000.00
Advertising costs 3,000.00
Materials used 30,000.00
Manufacturing overhead 22,500.00
Variable rate = Materials used/ Output 6.00
Total cost = (variable rate x out put) + FC
Variable rate= $6.00
FC= $40,500.00
Total cost = $40,500 + ($6 x output)

2/ 6,000 flash drives
What is the expected fixed cost = $40,500.00
Total variable cost = $6 x 6,000 = $36,000
Total manufacturing cost = $36,000 + $40,500 = $76,500
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3-16
Pizza Vesuvio makes specialty pizzas. Vesuvio’s controller wants to calculate the fixed and variable costs
associated with labor used in the restaurant. Data for the past eight months were collected:
Month Labor Cost ($) Employee Hours
January 7,000 360
February 8,140 550
March 9,010 585
April 9,787 610
May 8,490 480
June 2,450 350
July 9,490 570
August 7,531 310
Required:
Using the high-low method, calculate the fixed cost of labor, calculate the variable rate per employee
hour, and construct the cost formula for total labor cost.
We have the high point and the low point:
January 7,000 360
April 9,787 610

Variable rate = (9,787 – 7,000)/(610 – 360) = $11.15 per employee hours
Fixed cost = Total cost – (Variable rate x employee hours)
Fixed cost = 9,787 – (11.15 x 610) = $2,986.72
Formula of the total cost = $2,986.72 + ($11.15 x employee hours)
------------------------------------------
3-19
Refer to the Pizza Vesuvio company information in Cornerstone Exercise 14-16. Coefficients shown by a
regression program for this data are:
Intercept 1,145
X Variable 13.82
Required:
Use the results of regression to make the following calculations:
1. Calculate the fixed cost of labor and the variable rate per employee hour.
2. Construct the cost formula for total labor cost.
3. Calculate the budgeted cost for next month, assuming that 675 employee hours are budgeted.
Round answers to the nearest dollar.
We have:
Total cost = $1,145 + (13.82 x employee hours)
The budgeted cost for next month:
Total cost = $1,145 + (13.82 x employee hours) = $10,474
-----------------------------------------------------------
3-27
Ben Palman owns an art gallery. He accepts paintings and sculpture on consignment and then receives
20 percent of the price of each piece as his fee. Space is limited, and there are costs involved, so Ben is
careful about accepting artists. When he does accept one, he arranges for an opening show (usually for
three hours on a weekend night) and sends out invitations to his customer list. At the opening, he serves
wine, soft drinks, and appetizers to create a comfortable environment for prospective customers to view
the new works and to chat with the artist. On average, each opening costs $500. Ben has given as many
as 20 opening shows in a year. The total cost of running the gallery, including rent, furniture and
fixtures, utilities, and a part-time assistant, amounts to $80,000 per year.
Required:
1. Assume that the cost driver is number of opening shows. Develop the cost formula for the gallery’s
costs for a year.
2. Using the formula developed in Requirement 1, what is the total cost for Ben in a year with 12
opening shows? With 14 opening shows?
1/ We have:
Total cost= Fixed cost + (Variable rate x output)
Fixed cost= $500.00
Total cost= $80,000.00
Variable rate= (Total cost - FC)/output
Variable rate= $3,975.00
Formula: Total cost = $500 + ($3,975 x output)
2/ If 12 opening shows in a year, total cost:
Total cost = $500 + ($3,975 x 12) = $48,200
---------------------------------------
3-28
Luisa Crimini has been operating a beauty shop in a college town for the past 10 years. Recently, Luisa
rented space next to her shop and opened a tanning salon. She anticipated that the costs for the tanning
service would primarily be fixed but found that tanning salon costs increased with the number of
appointments. Costs for this service over the past eight months are as follows:
Month Tanning Appointments Total Cost ($)
January 700 1,758
February 2,000 2,140
March 3,100 2,790
April 2,500 2,400
May 1,500 1,800
June 2,300 2,275
July 2,150 2,200
August 3,000 2,640
Required:
1. Which month represents the high point? The low point?
2. Using the high-low method, compute the variable rate for tanning. Compute the fixed cost per
month.
3. Using your answers to Requirement 2, write the cost formula for tanning services.
4. Calculate the total predicted cost of tanning services for September for 2,500 appointments
using the formula found in Requirement 3. Of that total cost, how much is the total fixed cost for
September? How much is the total predicted variable cost for September?
1/ Month represents the high point? The low point?
We have:
Low in January 700.00 $1,758.00
High in March 3,100.00 $2,790.00
2/ Variable rate for tanning?
Variable rate = ($2,790.00 – $1,758.00)/( 3,100 – 700) = 0.43 per appointment

Compute the fixed cost per month?
Fixed cost = Total cost – (Variable rate x appointment)
Fixed cost = $2,790 – (0.43 x 3,100) = $1,457
3/ The cost formula
Total cost = $1,457 + (0.43 x appointment)
4/ Cost of tanning services for September
Total cost = $1,457 + (0.43 x 2,500) = $2,532
Fixed cost = $1,457
Variable cost = $1,075

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3-15

Depreciation costs $ 15,000.00

Advertising costs 3,000.00

Materials used 30,000.00

Manufacturing overhead 22,500.00

Variable rate = Materials used/ Output 6.00

Total cost = (variable rate x out put) + FC

Variable rate= $6.00

Total cost = $40,500 + ($6 x output)

What is the expected fixed cost = $40,500.00

Total variable cost = $6 x 6,000 = $36,000

Total manufacturing cost = $36,000 + $40,500 = $76,500

Month Labor Cost ($) Employee Hours

January 7,000 360

February 8,140 550

March 9,010 585

April 9,787 610

May 8,490 480

June 2,450 350

July 9,490 570

August 7,531 310

We have the high point and the low point:

January 7,000 360

April 9,787 610

Fixed cost = Total cost – (Variable rate x employee hours)

Fixed cost = 9,787 – (11.15 x 610) = $2,986.72

Formula of the total cost = $2,986.72 + ($11.15 x employee hours)

Use the results of regression to make the following calculations:

2. Construct the cost formula for total labor cost.

Total cost = $1,145 + (13.82 x employee hours)

The budgeted cost for next month:

Total cost = $1,145 + (13.82 x employee hours) = $10,474

Total cost= Fixed cost + (Variable rate x output)

Fixed cost= $500.00

Total cost= $80,000.00

Variable rate= (Total cost - FC)/output

Variable rate= $3,975.00

Formula: Total cost = $500 + ($3,975 x output)

2/ If 12 opening shows in a year, total cost:

Total cost = $500 + ($3,975 x 12) = $48,200

Month Tanning Appointments Total Cost ($)

January 700 1,758

February 2,000 2,140

March 3,100 2,790

April 2,500 2,400

May 1,500 1,800

June 2,300 2,275

July 2,150 2,200

August 3,000 2,640

1. Which month represents the high point? The low point?

1/ Month represents the high point? The low point?

Low in January 700.00 $1,758.00

High in March 3,100.00 $2,790.00

2/ Variable rate for tanning?

Variable rate = ($2,790.00 – $1,758.00)/( 3,100 – 700) = 0.43 per appointment

Fixed cost = Total cost – (Variable rate x appointment)

Fixed cost = $2,790 – (0.43 x 3,100) = $1,457

3/ The cost formula

Total cost = $1,457 + (0.43 x appointment)