Question One

House of Pianos, Inc., purchases pianos from a well-known manufacturer and sells them at the retail level. The pianos sell, on the average, for $3,300 each. The average cost of a piano from the manufacturer is $1,492. The costs that the company incurs in a typical month are presented below:

Costs		Cost Formula
Selling:
Advertising	$	955 per month
Delivery of pianos	$	61 per piano sold
Sales salaries and commissions	$	4,823 per month, plus 4% of sales
Utilities	$	633 per month
Depreciation of sales facilities	$	4,944 per month
Administrative:
Executive salaries	$	13,490 per month
Depreciation of office equipment	$	943 per month
Clerical	$	2,499 per month, plus $37 per piano sold
Insurance	$	719 per month

During November, the company sold and delivered 60 pianos.

Prepare a contribution format income statement for November.

Question Two

Armondo SA is an Argentinian manufacturing company whose total factory overhead costs fluctuate somewhat from year to year according to the number of machine-hours worked in its production facility. These costs (in Argentinian pesos) at high and low levels of activity over recent years are given below:

	Level of Activity
	Low		High
Machine-hours	47,700		63,600
Total factory overhead costs	248,560	pesos	277,180	pesos

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 47,700 machine-hours level of activity as follows:

Indirect materials (variable)	62,010	pesos
Rent (fixed)	135,000
Maintenance (mixed)	51,550
Total factory overhead costs	248,560	pesos

For planning purposes, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Estimate how much of the factory overhead cost of 277,180 pesos at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the 277,180 pesos cost consists of indirect materials and rent. Think about the behavior of variable and fixed costs.) (Do not round intermediate calculations.)

Using the high-low method, estimate a cost formula for maintenance. (X represent per machine-hour)

What total overhead costs would you expect the company to incur at an operating level of 52,470 machine-hours?

Question Three

Arnall Ltd., a British merchandising company, is the exclusive distributor of a product that is gaining rapid market acceptance. The companys revenues and expenses (in British pounds) for the last three months are given below:

Arnall Ltd. Comparative Income Statements For the Three Months Ended June 30
		April				May			June
Sales in units		1,800				3,200			4,800
Sales revenue		313,200				556,800			835,200
Cost of goods sold		120,600				214,400			321,600
Gross margin		192,600				342,400			513,600
Selling and administrative expenses:
Shipping expense		41,300				58,100			77,300
Advertising expense		70,000				70,000			70,000
Salaries and commissions		104,400				157,600			218,400
Insurance expense		9,900				9,900			9,900
Depreciation expense		42,300				42,300			42,300
Total selling and administrative expenses		267,900				337,900			417,900
Net operating income (loss)		(75,300)				4,500			95,700

(Note: Arnall Ltd.s income statement has been recast in the functional format common in the United States. The British currency is the pound, denoted by .)

Identify each of the companys expenses (including cost of goods sold) as either variable, fixed, or mixed. (Cost of goods sold, shipping expense, advertising expense, salaries and commissions, insurance expense, and depreciation expense)

Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense. (Enter mixed expenses in the order of company expenses provided under question.)

Redo the companys income statement at the 4,800-unit level of activity using the contribution format.

Question Four

Tristan Wire Company heats copper ingots to very high temperatures by placing the ingots in a large heat coil. The heated ingots are then run through a shaping machine that shapes the soft ingot into wire. Due to the long heat-up time, the coil is never turned off. When an ingot is placed in the coil, the temperature is raised to an even higher level, and then the coil is allowed to drop to the waiting temperature between ingots. Management needs to know the variable cost of power involved in heating an ingot and the fixed cost of power during waiting periods. The following data on ingots processed and power costs are available:

Month	Number of Ingots	Power Cost
January	111	$ 5,782
February	91	$ 4,782
March	81	$ 4,682
April	101	$ 5,282
May	131	$ 6,282
June	121	$ 5,882
July	71	$ 4,282
August	61	$ 3,482
September	44	$ 3,682
October	34	$ 2,208

Using the high-low method, estimate a cost formula for power cost. (X represents per ingot.) Express the formula in the form Y = a + bX.

Question Five

Harvest Companys total overhead cost at various levels of activity are presented below:

Month	Machine-Hours			Total Overhead Cost
March		53,000		$	190,500
April		43,000		$	166,500
May		63,000		$	214,500
June		73,000		$	238,500

Assume that the overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 43,000 machine-hour level of activity is as follows:

Utilities (variable)	$	51,600
Supervisory salaries (fixed)		49,000
Maintenance (mixed)		65,900
Total overhead cost	$	166,500

The company wants to break down the maintenance cost into its variable and fixed cost elements.

Estimate how much of the $238,500 of overhead cost in June was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $238,500 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs within the relevant range.) (Do not round intermediate calculations.)

Using the high-low method, estimate a cost formula for maintenance. (Round the "Variable cost per unit" to 2 decimal places.)

Express the companys total overhead cost in the form Y = a + bX. (Round the "Variable cost per unit" to 2 decimal places.)

What total overhead cost would you expect to be incurred at an activity level of 48,000 machine-hours? (Do not round intermediate calculations.)

Question Six

McKenzie Company has decided to use a contribution format income statement for internal planning purposes. The company has analyzed its expenses and has developed the following cost formulas:

Cost	Cost Formula
Cost of goods sold	$26 per unit sold
Advertising expense	$183,000 per quarter
Sales commissions	7% of sales
Administrative salaries	$93,000 per quarter
Shipping expense	?
Depreciation expense	$63,000 per quarter

Management has concluded that shipping expense is a mixed cost, containing both variable and fixed cost elements. Units sold and the related shipping expense over the last eight quarters are given below:

Quarter	Units Sold			Shipping Expense
Year 1:
First	29,000		$	173,000
Second	31,000		$	188,000
Third	36,000		$	230,000
Fourth	32,000		$	193,000
Year 2:
First	30,000		$	183,000
Second	33,000		$	198,000
Third	47,000		$	245,000
Fourth	44,000		$	221,000

Management would like a cost formula derived for shipping expense so that a budgeted contribution format income statement can be prepared for the next quarter.

Using the high-low method, estimate a cost formula for shipping expense based on the data for the last eight quarters above.

In the first quarter of Year 3, the company plans to sell 35,000 units at a selling price of $56 per unit. Prepare a contribution format income statement for the quarter.

Question Seven

Shulmans Company manufactures a beautiful bookcase that enjoys widespread popularity. The company has a backlog of orders that is large enough to keep production going indefinitely at the plant's full capacity of 3,900 bookcases per year. Annual cost data at full capacity follow:

Direct materials used (wood and glass)	$	431,000
Administrative office salaries	$	111,000
Factory supervision	$	67,000
Sales commissions	$	64,000
Depreciation, factory building	$	101,000
Depreciation, administrative office equipment	$	2,000
Indirect materials, factory	$	19,000
Factory labor (cutting and assembly)	$	87,000
Advertising	$	97,000
Insurance, factory	$	6,000
Administrative office supplies (billing)	$	4,000
Property taxes, factory	$	16,000
Utilities, factory	$	44,000

Enter the dollar amount of each cost item under the appropriate headings. Note that each cost item is classified in two ways: first, as either variable or fixed with respect to the number of units produced and sold; and second, as either a selling and administrative cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect.)

Compute the average product cost per bookcase. (Round your answer to nearest whole number.)