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# Find cost behavior (fixed, variable, mixed) from budget

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For this year, production and sales are based on 4,000 units per year:
Building depreciation \$200,000/yr.
Machine operators \$100,000/yr.
Management staff \$400,000/yr.
Direct materials \$4,000,000/yr.
Other expenses that seem to vary based on production levels \$3,000,000/yr.
Other expenses that don't seem to vary \$1,300,000/yr.
Selling price per unit \$5,000/unit

Utilities:
Some utilities relate to the heat and light of the building, but others are required during the manufacturing process only. Using the high-low method:
When there is no production, utility costs are \$20,000/month
When production levels reached 4,000 units/month, utility costs totaled \$40,000/month

Which of these 8 cost categories above are fixed, mixed (semi-variable or semi-fixed) and which are variable? Why is this?
Ignoring utility costs altogether, compute the contribution margin per unit, in dollars and in percentage and the break-even in sales.
Ignoring utility costs altogether, how many units must be sold each month to achieve a target profit of \$10,000? At what sales level do they achieve this target profit?

In year 2, they will add \$300,000/yr. in added administrative expenses. Ignoring utility costs, how many additional units must be sold just to pay for this added expense?

#### Solution Summary

Your tutorial attached in Excel shows how to analyze these costs, which are variable, fixed and mixed and then creates a contribution margin analysis, breakeven, target profit and incremental fixed costs analysis.

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## Cost Behavior, High-low Method, Pricing Decision

Since the clinic is brand new, it has no experience to go on. Carlos decided to operate the clinic for two months before determining how much to charge per hour on an ongoing basis. As a temporary measure, the clinic adopted an hourly charge of \$25, half the amount charged by Fonseca, Ruiz, and Dunn for professional services.
The accounting services clinic opened on January 1. During January, the clinic had 120 hours of professional service. During February, the activity was 150 hours. Costs for these two levels of activity usage are as follows

120 Professional Hours 150 Professional Hours
Salaries:
Senior accountant \$2500 \$2500
Office assistant \$1200 \$1200
Internet and software subs. \$700 \$850
Consulting by Senior Partner \$1200 \$1500
Depreciation (equipment) \$2400 \$2400
Supplies \$905 \$1100
Rent (office) \$2000 \$2000
Utilities \$332 \$365

2. Use the high-low method to separate the mixed costs into their fixed and variable components. (Note: Round variable rates to two decimal places and fixed amounts to the nearest dollar.)

Components
Mixed Cost Variable Rate Fixed Amount
Internet and software subscriptions \$ \$
Supplies \$ \$
Utilities \$ \$

3. Luz Mondragon, the chief paraprofessional of the clinic, has estimated that the clinic will average 140 professional hours per month. If the clinic is to be operated as a nonprofit organization, how much will it need to charge per professional hour? Round answer to two decimal places.
\$ per professional hour
How much of this charge is variable? Round answer to two decimal places.
\$ per professional hour
How much is fixed? Round answer to two decimal places.
\$ per professional hour

4. Conceptual Connection: Suppose the accounting center averages 170 professional hours per month. How much would need to be charged per hour for the center to cover its costs? Round answer to two decimal places.
\$ per professional hour.

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