Accounting: Costs and Income Statements

Please see the attached file for the fully formatted problem(s).

Problem 5-15 Contribution Format versus Traditional Income Statement [LO4]
House of Organs, Inc., purchases organs from a well-known manufacturer and sells them at the retail level. The organs sell, on the average, for $2,500 each. The average cost of an organ from the manufacturer is $1,500.
House of Organs, Inc., has always kept careful records of its costs. The costs that the company incurs in a typical month are presented below in the form of a spreadsheet:

Costs Cost Formula
Selling:
Advertising $950 per month
Delivery of organs $60 per organ sold
Sales salaries and commissions $4,800 per month, plus 4% of sales
Utilities $650 per month
Depreciation of sales facilities $5,000 per month
Administrative:
Executive salaries $13,500 per month
Depreciation of office equipment $900 per month
Clerical $2,500 per month, plus $40 per organ sold
Insurance $700 per month
________________________________________

During November, the company sold and delivered 60 organs.

Requirement 1:
Prepare an income statement for November using the traditional format with costs organized by function.

House of Organs, Inc.
Income Statement
For the Month Ended November 30
__________ $ ____________
__________ ____________
__________ ____________
Selling and administrative expenses:
Selling expenses:
__________ $ ____________
__________ ____________
__________ ____________
__________ ____________
__________ ____________
Total selling expenses ____________
Administrative expenses:
__________ ____________
__________ ____________
__________ ____________
__________ ____________
Total administrative expenses ____________
Total selling and administrative expenses ____________
__________ $ ____________
________________________________________
Requirement 2:
Redo requirement 1 above, this time using the contribution format with costs organized by behavior. Show costs and revenues on both a total and a per unit basis down through contribution margin.

House of Organs, Inc.
Income Statement
For the Month Ended November 30

Total Per Unit
__________ $ ____________ $ ____________
Variable expenses:
__________ ____________ ____________
__________ ____________ ____________
__________ ____________ ____________
__________ ____________ ____________
Total variable expenses ____________ ____________
Contribution margin ____________ $ ____________
Fixed expenses:
__________ ____________
__________ ____________
__________ ____________
__________ ____________
__________ ____________
__________ ____________
__________ ____________
__________ ____________
Total fixed expenses ____________
__________ $ ____________
________________________________________

________________________________________

Problem 5-23 High-Low Method; Predicting Cost [LO1, LO3]
Echeverria SA is an Argentinian manufacturing company whose total factory overhead costs fluctuate somewhat from year to year according to the number of machine-hours worked in its production facility. These costs (in Argentinian pesos) at high and low levels of activity over recent years are given below:

Level of Activity
Low High
Machine-hours 60,000 80,000
Total factory overhead costs 274,000 pesos 312,000 pesos
________________________________________

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 60,000 machine-hours level of activity as follows:

Indirect materials (variable) 90,000 pesos
Rent (fixed) 130,000
Maintenance (mixed) 54,000
Total factory overhead costs 274,000 pesos
________________________________________

For planning purposes, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Requirement1:
Estimate how much of the factory overhead cost of 312,000 pesos at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the 312,000 pesos cost consists of indirect materials and rent. Think about the behavior of variable and fixed costs.)

Maintenance cost ____________ pesos

Requirement2:
Using the high-low method, estimate a cost formula for maintenance where X represents the per machine-hour. Round the variable portion of the formula to 2 decimal places.)

Y = ____________ pesos + ____________ peso X

Requirement3:
What total overhead costs would you expect the company to incur at an operating level of 65,000 machine-hours?

Total overhead cost ____________ pesos

________________________________________

Problem 5-19 (Appendix 5A) Least-Squares Regression Method [LO5]
Sebolt Wire Company heats copper ingots to very high temperatures by placing the ingots in a large heat coil. The heated ingots are then run through a shaping machine that shapes the soft ingot into wire. Due to the long heat-up time, the coil is never turned off. When an ingot is placed in the coil, the temperature is raised to an even higher level, and then the coil is allowed to drop to the "waiting" temperature between ingots. Management needs to know the variable cost of power involved in heating an ingot and the fixed cost of power during "waiting" periods. The following data on ingots processed and power costs are available:

Month Ingots Power Cost
January 110 $ 5,500
February 90 $ 4,500
March 80 $ 4,400
April 100 $ 5,000
May 130 $ 6,000
June 120 $ 5,600
July 70 $ 4,000
August 60 $ 3,200
September 50 $ 3,400
October 40 $ 2,400
________________________________________

Requirement 1:
Using the least-squares regression method, estimate a cost formula for power cost, where "X" represents number of ingots processed. (Round the variable cost to the nearest cent and the fixed cost to the nearest dollar.

Y = $ ____________ + $ ____________ X

Requirement 2:
Which of the following statements are correct: (Select all that apply.)

(a) The quick-and-dirty scattergraph method is not imprecise.
(b) The high-low method is accurate only in those situations where the variable cost is truly constant, or where the high and the low points happen to fall on the correct regression line.
(c) The least squares regression method is generally considered to be the most accurate method of cost analysis.

________________________________________

Exercise 5-1 Fixed and Variable Cost Behavior [LO1]
Koffee Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $1,100 and the variable cost per cup of coffee served is $0.26.

Requirement 1:
Fill in the following table with your estimates of total costs and cost per cup of coffee at the indicated levels of activity for a coffee stand. (Round cost of a cup of coffee to 3 decimal places.

Cups of Coffee Served in a Week
1,800 1,900 2,000
Fixed cost $ ____________ $ ____________ $ ____________
Variable cost ____________ ____________ ____________
Total cost $ ____________ $ ____________ $ ____________
Cost per cup of coffee served $ ____________ $ ____________ $ ____________
________________________________________
Requirement 2:
Does the cost per cup of coffee served increase, decrease, or remain the same as the number of cups of coffee served in a week increases?

(a) Increases
(b) Decreases
(c) Remains the same

________________________________________

Exercise 5-5 (Appendix 5A) Least-Squares Regression [LO5]
EZ Rental Car offers rental cars in an off-airport location near a major tourist destination in Florida. Management would like to better understand the behavior of the company's costs. One of those costs is the cost of washing cars. The company operates its own car wash facility in which each rental car that is returned is thoroughly cleaned before being released for rental to another customer. Management believes that the costs of operating the car wash should be related to the number of rental returns. Accordingly, the following data have been compiled:

Month Rental Returns Car Wash Costs
January 2,310 $ 10,113
February 2,453 $ 12,691
March 2,641 $ 10,905
April 2,874 $ 12,949
May 3,540 $ 15,334
June 4,861 $ 21,455
July 5,432 $ 21,270
August 5,268 $ 19,930
September 4,628 $ 21,860
October 3,720 $ 18,383
November 2,106 $ 9,830
December 2,495 $ 11,081
________________________________________

Required:
Using least-squares regression, estimate the fixed cost and variable cost elements of monthly car wash costs. (Round your fixed cost to the nearest dollar amount and the variable cost element to the nearest cent.

Fixed cost $ ____________
Variable cost $ ____________

________________________________________

Exercise 5-11 Scattergraph Analysis; High-Low Method [LO2, LO3]
The number of X-rays taken and X-ray costs over the last nine months in Beverly Hospital are given below:

Month X-Rays Taken X-Ray Costs
January 6,250 $ 28,000
February 7,000 $ 29,000
March 5,000 $ 23,000
April 4,250 $ 20,000
May 4,500 $ 22,000
June 3,000 $ 17,000
July 3,750 $ 18,000
August 5,500 $ 24,000
September 5,750 $ 26,000
________________________________________

Requirement 1:
Using the high-low method, what X-ray costs would you expect to be incurred during a month in which 3,800 X-rays are taken?

Total cost $ ____________

Requirement 2:
Using the high-low method, what X-ray costs would you expect to be incurred during a month in which 4,300 X-rays are taken?

Total cost $ ____________

________________________________________

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