Chris Quill asks you to analyze the operating cost of his lawn services business. He has bought the needed equipment with a cash payment of $90,000. Upon your recommendation, he agrees to adopt straight-line depreciation. The equipment has an expected life of four years and no salvage value.
Mr. Quill pays his workers $20 per lawn service. Material costs, including fertilizer, pesticide, and supplies, are expected to be $10 per lawn service.
Required
a. Determine the total cost of equipment depreciation and the average cost of equipment depreciation per lawn service, assuming that Mr. Quill provides 40, 50, or 60 lawn services during one month. Is the cost of equipment a fixed or a variable cost?
b. Determine the total expected cost of labor and the average expected cost of labor per lawn service, assuming that Mr. Quill provides 40, 50, or 60 lawn services during one month. Is the cost of labor a fixed or a variable cost?
c. Determine the total expected cost of materials and the average expected cost of materials per lawn service, assuming that Mr. Quill provides 40, 50, or 60 lawn services during one month. Is the cost of fertilizer, pesticide, and supplies a fixed or a variable cost?
d. Determine the total expected cost per lawn service, assuming that Mr. Quill provides 40, 50, or 60 lawn services during one month.
e. Determine the average expected cost per lawn service, assuming that Mr. Quill provides 40, 50, or 60 lawn services during one month. Why does the cost per unit decrease as the number of lawn services increases?
f. If Mr. Quill tells you that he prices his services at 30 percent above cost, would you assume that he means average or actual cost? Why?