Cost Behavior Exercises

Exercise-1: Zerbel company, a wholesaler of large, custom-built air conditioning units for commercial buildings,
has noticed considerable fluctuation in its shipping expense from month to month , as shown below:

Month Units supplied Total shipping expense

January 4 $2,200
February 7 3,100
March 5 2,600
April 2 1,500
May 3 2,200
June 6 3,000
July 8 3,600

Req.1. Using the high –low point method, estimate the cost formula for shipping expense.

2. Prepare a scatter graph, using the data given above. Plot cost on vertical axis and activity on
the horizontal axis.fit a straight line to your plotted points using a ruler.

Exercise-2: Refer to the data for Zerbel company in Exercise -1

Req.1.Using the least square regression method, estimate the cost formula for shipping expense.

Exercise-3: Parker company manufactures and sells a single product. A partially completed schedule of the
company’s total and per unit costs over a relevant range of 60,000 to 70,000 units produced and sold each year is
given below:

Units produced and sold

60,000 80,000 100,000
Total cost:
Variable costs $1,50,000 ? ?
Fixed costs 3,60,000 ? ?
Total costs $5,10,000 ? ?
Cost per unit:
Variable costs ? ? ?
Fixed costs ? ? ?
Total cost per unit ? ? ?

Req:

1. Complete the schedule of the company’s total and unit costs above.
2. Assume that the company produces and sells 90,000 units during a year. The selling price is $7.50 per unit.
Prepare an income statement in the contribution format for the year.

Exercise-4: Speedy parcel service operates a fleet of delivery trucks in a large metropolitan area. A careful study
by the company’s cost analyst has determined that if a truck is driven 120,000 miles during a year, the average
operating cost is 11.6 cents per mile. If a truck is driven only 80,000, miles during a year, the average operating cost
increase to 13.6 cents per mile.
Req:

1. Using the high –low method, estimate the variable and fixed cost elements of the annual cost
of truck operation.
 2. Express the variable and fixed costs in the form y = a + bx

3. If a truck were driven 100,000 miles during a year, what total cost would you expect to be incurred ?

Exercise-5: Hakki shop. Inc. is a large retailer of water sports equipment. An income statement for the company’s
surfboard department for a recent quarter is presented below:

THE HAKKI SHOP, INC.

Income statement-surfboard department
For the quarter ended may 31
Sales $ 800,000
Less cost of goods sold 300,000
Gross margin 500,000
Less operating expenses:
Selling expenses 250,000
Administrative expenses 160,000 410,000
Net operating income $ 90,000

The surf boards sell, on the average, for $ 400 each. The department’s variable selling expenses are $50 per
surfboard sold. The remaining selling expenses are fixed. The administrative expenses are 25% variable and 75%
fixed. The company purchases its surfboards from a supplier at a cost of $150 per surfboard.

Req:
1. Prepare an income statement for the quarter using the contribution approach.
2. What was the contribution toward fixed expenses and profits from each surfboard sold during the quarter ?

Exercise-6:
Frankel Ltd. an American merchandising firm, is the exclusive distributor of a product that is gaining rapid market
acceptance. The company’s revenues and expenses for the last three months are given below:
FRANKEL LTD.
Comparative income statement for the three months ended June 30
April May June
Sales in units 3,000 3,750 4,500
Sales revenue $420,000 $525,000 $630,000
Less: Cost of goods sold 168,000 210,000 252,000
Gross margin 252,000 315,000 378,000
Less :Operating expenses
Shipping expense 44,000 50,000 56,000
Advertising expense 70,000 70,000 70,000
Salaries and commissions 107,000 125,000 143,000
Insurance expense 9,000 9,000 9,000
Depreciation expense 42000 42,000 42,000

Total operating expense 272,000 296,000 320,000

Net operating income ( loss) $(20000) $19,000 $58,000
Req:
1. Identify each of the company’s expense (including cost of goods sold) as either variable, fixed or mixed.
2. Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost
formula for each mixed expense.
3. Redo the company’s income statement at the 4,500 unit level of activity using the contribution format.

Self- Study Questions:

A. The administrator of Azalea Hills Hospital would like a cost formula linking the administrative costs involved in admitting
patients to the number of patients admitted during a month. The Admitting Department’s costs and the number of patients
admitted during the immediately preceding eight months are given in the following table:
Required:
1. Use the high-low method to estimate the fixed and variable components of admitting costs.
2. Express the fixed and variable components of admitting costs as a cost formula in the form Y = a + bx .

B. Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand
is $1,200 and the variable cost per cup of coffee served is $0.22.
Required:
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 off the cost of a cup of coffee to the nearest tenth of a cent.

2. Does the average cost per cup of coffee served increase, decrease, or remain the same as the number of cups of coffee served in a
week increases? Explain.

C. The following data relating to units shipped and total shipping expense have been assembled by Archer Company, a wholesaler of
large, custom-built air-conditioning units for commercial buildings:

Required:
1. Using the high-low method, estimate a cost formula for shipping expense.
2. The president of the company has no confidence in the high-low method and would like you to check your results using a scatter
graph.
a. Prepare a scatter graph, using the data given above. Plot cost on the vertical axis and activity on the horizontal axis. Use a ruler
to fit a straight line to your plotted points.
b. Using your scatter graph, estimate the approximate variable cost per unit shipped and the approximate fixed cost per month with
the quick-and-dirty method.
3. What factors, other than the number of units shipped, are likely to affect the company’s total shipping expense? Explain.

D. Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven
105,000 kilometers during a year, the average operating cost is 11.4 cents per kilometer. If a truck is driven only 70,000 kilometers
during a year, the average operating cost increases to 13.4 cents per kilometer. (The Singapore dollar is the currency used in
Singapore.)

Required:
1. Using the high-low method, estimate the variable and fixed cost elements of the annual cost of the truck operation.
2. Express the variable and fixed costs in the form Y=a +bx.
3. If a truck were driven 80,000 kilometers during a year, what total cost would you expect to be incurred?