Cost Behavior, High-Low Method, Pricing Decision

Fonseca, Ruiz, and Dunn is a large, local accounting firm located in a southwestern city. Carlos Ruiz, one of the firm's founders, appreciates the success his firm has enjoyed and wants to give something back to his community. He believes that an inexpensive accounting services clinic could provide basic accounting services for small businesses located in the barrio. He wants to price the services at cost.

Since the clinic is brand new, it has no experience to go on. Carlos decided to operate the clinic for two months before determining how much to charge per hour on an ongoing basis. As a temporary measure, the clinic adopted an hourly charge of $25, half the amount charged by Fonseca, Ruiz, and Dunn for professional services.

The accounting services clinic opened on January 1. During January, the clinic had 120 hours of professional service. During February, the activity was 150 hours. Costs for these two levels of activity usage are as follows:

				120 Professional Hours			150 Professional Hours
Salaries:
Senior accountant					$2,500		$2,500
Office assistant					1,200		1,200
Internet and software subscriptions					700		850
Consulting by senior partner					1,200		1,500
Depreciation (equipment)					2,400		2,400
Supplies					905		1,100
Administration					500		500
Rent (offices)					2,000		2,000
Utilities					332		365

Required:

1. Classify each cost as fixed, variable, or mixed, using hours of professional service as the activity driver.

Salaries:
Senior accountant	Fixed cost
Office assistant	Fixed cost
Internet and software subscriptions	Mixed cost
Consulting by senior partner	Mixed cost
Depreciation (equipment)	Fixed cost
Supplies	Mixed cost
Administration	Fixed cost
Rent (offices)	Fixed cost
Utilities	Mixed cost

2. Use the high-low method to separate the mixed costs into their fixed and variable components. (Note: Round variable rates to two decimal places and fixed amounts to the nearest dollar.)

	Components
Mixed Cost	Variable Rate	Fixed Amount
Internet and software subscriptions	$	$
Supplies	$	$
Utilities	$	$

3. Luz Mondragon, the chief paraprofessional of the clinic, has estimated that the clinic will average 140 professional hours per month. If the clinic is to be operated as a nonprofit organization, how much will it need to charge per professional hour? Round answer to two decimal places. $per professional hour

How much of this charge is variable? Round answer to two decimal places. $per professional hour

How much is fixed? Round answer to two decimal places. $per professional hour

4. Conceptual Connection: Suppose the accounting center averages 170 professional hours per month. How much would need to be charged per hour for the center to cover its costs? Round answer to two decimal places. $per professional hour