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Cost classification and cost formula

Chillicothe Meat Company produces one of the best sausage products in southern Ohio. The company's controller used the account-classification method to compile the following information.

a. Depreciation schedules revealed that monthly depreciation on buildings and equipment is $19,000.
b. Inspection of several invoices from meat packers indicated that meat costs the company $1.10 per pound of sausage produced.
c. Wage records showed that compensation for production employees costs $.70 per pound of sausage produced.
d. Payroll records showed that supervisory salaries total $10,000 per month.
e. Utility bills revealed that the company incurs utility costs of $4,000 per month plus $.20 per pound of sausage produced.

1. Classify each cost item as variable, fixed, or semi-variable.
2. Write a cost formula to express the cost behavior of the firm's production costs (Use Y=a+bX where Y denotes production cost and X denotes the quantity of sausage produced.

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Solution Preview

Fixed costs do not change with production and variable costs change
1. a is fixed per month
b. ...

Solution Summary

The solution explains how to classify costs as fixed or variable and then to develop the total cost formula