Exercise 3-1 Fixed and Variable Cost Behavior [LO1]

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.

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 average cost per cup of coffee
to 3 decimal places. Omit the "$" sign in your response.)

Cups of Coffee Served in a Week

2,000 2,100 2,200

Fixed cost $ 1,200 $ 1,200 $ 1,200

Variable cost 440 462 484

Total cost $ 1,640 $ 1,662 $ 1,684

Average cost per cup of coffee served $ 0.82 $ 0.791 $ 0.765

(Average cost per cup of coffee served = Total cost ÷ cups of coffee served in a week)

Requirement 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?

Ans: The average cost of a cup of coffee declines as the number of cups of coffee served
increases because the fixed cost is spread over more cups of coffee.
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Exercise 3-2

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Exercise 3-4 Contribution Format Income Statement [LO4]

The Alpine House, Inc., is a large retailer of winter sports equipment. An income statement
for the company's Ski Department for a recent quarter is presented below:

The Alpine House, Inc.

Income Statement—Ski Department
For the Quarter Ended March 31

Sales $ 150,000

Cost of goods sold 90,000

Gross margin 60,000

Selling and administrative expenses:

30,00
Selling expenses $
0

10,00
Administrative expenses 40,000
0

Net operating income $ 20,000

Skis sell, on the average, for $750 per pair. Variable selling expenses are $50 per pair of
skis sold. The remaining selling expenses are fixed. The administrative expenses are 20%
variable and 80% fixed. The company does not manufacture its own skis; it purchases
them from a supplier for $450 per pair.

Requirement 1:

Prepare a contribution format income statement for the quarter. (Omit the "$" sign in
your Response.)

The Alpine House, Inc.

Income Statement—Ski Department
For the Quarter Ended March 31

Sales $ 150000

Variable expenses:

Cost of goods sold $ 90000

Selling expenses 10000

Administrative expenses 2000 102000

Contribution margin 48000

Fixed expenses:

Selling expenses 20,000

Administrative expenses 8000 28,000

Net operating income $ 20,000

Requirement 2:

For every pair of skis sold during the quarter, what was the contribution toward covering fixed
expenses and toward earning profits? (Omit the "$" sign in your response.)

Contribution margin per pair

240

Since 200 pairs of skis were sold and the contribution margin totaled $48,000 for the quarter, the
contribution of each pair of skis toward covering fixed costs and toward earning of profits was
$240 ($48,000 ÷ 200 pairs = $240 per pair). Another way to compute the $240 is:

Selling price per pair $ 750

Variable expenses:

Cost per pair $ 450

Selling expenses 50

Administrative expenses

($2,000 ÷ 200 pairs) 10 510

Contribution margin per pair $ 240

Exercise 3-7 Cost Behavior; High-Low Method [LO1, LO3]

 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.)

Requirement 1:

Using the high-low method, estimate the variable and fixed cost elements of the annual
cost of the truck operation. (Round the variable cost per kilometer to 3 decimal places.
Omit the "$" sign in your response.)

Variable cost per kilometer $ 0.074

Fixed cost per year $ 4,200

Working:

Total
Kilometers Annual
Driven Cost*

High level of
105,000 $ 11,970
activity

Low level of activity 70,000 9,380

Change 35,000 $ 2,590

* 105,000 kilometers × $0.114 per kilometer =

 $11,970

70,000 kilometers × $0.134 per kilometer =

$9,380

Variable cost per kilometer:

Fixed cost per year:

Total cost at 105,000 kilometers

11,970

Less variable portion:

105,000 kilometers × $0.074 per kilometer

7,770

Fixed cost per year

4,200
Requirement 2:

Express the variable and fixed costs in the form Y = a + bX.(Round the variable cost per
kilometer to 3 decimal places. Omit the "$" sign in your response.)

4,200

0.074

Requirement 3:

If a truck were driven 80,000 kilometers during a year, what total cost would you expect to be
incurred? (Omit the "$" sign in your response.)

Total annual cost $ 10,120

Working:

Fixed cost $ 4,200

Variable cost: 5,920

 80,000 kilometers × $0.074 per
kilometer

Total annual cost $ 10,120

Problem3-11:

#1 Fixed (F), Variable (V), or Mixed (M)

Cost of Goods Sold ____V__ Depreciation-Sales Facilities

__F____

Advertising ____F___ Executive Salaries

__F____

Sales Salaries and Comm. ____M__ Insurance

__F____

Delivery of Pianos ____V__ Clerical

__M____

Utilities ____F___ Depreciation – Office Equip.

__F_____

#2 Income Statement – Traditional Format

Total

Sales (40 x 3,125) $

125,000

Less: Cost of Goods Sold (40 x 2,450) _

98,000_____

Gross Profit 27,000

Less: Operating Expenses

Advertising $ 700
 Delivery Expense ( 30 x 40) 1,200

Depreciation (800 + 300) 1,100

Insurance 400

Office (Clerical) (1,000 + 800) 1,800

Salaries and Other Compensation (3,450 + 10,000) 13,450

Utilities _________ 350_

Total Operating Expenses $

__19,000_____

Net Operating Income $

8,000

============

--------------------------------------------------------------------------------------------------------------------------------------

#3 Income Statement – Contribution Format

Per

Total Unit
(Pianos)

Sales $ 125,000 3,125

Less: Variable Expenses

Cost of Goods Sold 98,000 2,450

Sales Commissions 10,000 250

Delivery Expense 1,200 30

Clerical _____ 800______ ____ 20______

Total Variable Expenses 110,000 2,750

 Contribution Margin $ 15,000 375

Less: Fixed Expenses

Advertising 700

Sales Salaries 950

Utilities 350

Depreciation (Both Accounts) 1,100

Executive Salaries 2,500

Insurance 400

Clerical ______1,000______

Total Fixed Expenses 7,000

Net Operating Income $ 8,000

==============

Exercise 3-17

No answer