Review Problem 5.9

Refer to the monthly production cost data for Alta Production, Inc., in Note 5.21 "Review Problem 5.5". Use the four steps of regression analysis described in this appendix to estimate total fixed costs and variable cost per unit. State your results in the equation form Y = f + vX.

Solution to Review Problem 5.9

Regression analysis performed using Excel results in the following output:

Thus the total cost equation is:

End-of-Chapter Exercises

Questions

1. What is a fixed cost? Provide two examples.
2. What is the difference between a committed fixed cost and a discretionary fixed cost? Provide examples of each.
3. What is a variable cost? Provide two examples.
4. What is a mixed cost? Provide two examples.
5. Describe the variables in the cost equation Y = f + vX.
6. How is the cost equation Y = f + vX used to estimate future costs?
7. Why is it important to identify how costs behave with changes in activity?
8. Review Note 5.11 "Business in Action 5.2" Why was the school district’s administration surprised to find out that cost savings from closing a school would be much lower than initially anticipated?
9. Explain how account analysis is used to estimate costs.
10. Describe the four steps of the high-low method and how these steps are used to estimate costs.
11. Why might the high-low method lead to inaccurate results?
12. Describe the five steps of the scattergraph method and how these steps are used to estimate costs.
13. How can the scattergraph method be used to identify unusual data points?
14. Describe how regression analysis is used to estimate costs.
15. How does the contribution margin income statement differ from the traditional income statement?
16. Review Note 5.27 "Business in Action 5.3" Which costs at Lowe’s are likely to be variable costs?
17. Describe the term relevant range. Why is it important to stay within the relevant range when estimating costs?
18. Explain how some costs can behave in a nonlinear way.

Brief Exercises

19. Planning at Bikes Unlimited. Refer to the dialogue at Bikes Unlimited presented at the beginning of the chapter. What is the first step to be taken by Susan and her accounting staff to help in estimating profit for August?

20. Identifying Cost Behavior. Vasquez Incorporated is trying to identify the cost behavior of the three costs that follow. Cost information is provided for three months.

    		Cost A		Cost B		Cost C
    Month	Units Produced	Total Costs	Cost per Unit	Total Costs	Cost per Unit	Total Costs	Cost per Unit
    1	1,500	$1,500	_____	$4,500	_____	$3,000	_____
    2	3,000	1,500	_____	5,250	_____	6,000	_____
    3	750	1,500	_____	3,750	_____	1,500	_____

    Required:

    1. Calculate the cost per unit, and then identify how the cost behaves for each of the three costs (fixed, variable, or mixed). Explain the reasoning for your answers.
    2. How does identifying cost behavior patterns help managers?

21. Account Analysis. Cordova Company would like to estimate production costs on an annual basis. Costs incurred for direct materials and direct labor are variable costs. The accounting records indicate that the following production costs were incurred last year for 50,000 units.

    Direct materials	$100,000
    Direct labor	$215,000
    Manufacturing overhead	$300,000 (20 percent fixed; 80 percent variable)

    Required:

    Use account analysis to estimate the fixed costs per year, and the variable cost per unit.

22. High-Low Method. The city of Rockville reported the following annual cost data for maintenance work performed on its fleet of trucks.

    Reporting Period (Year)	Total Costs	Level of Activity (Miles Driven)
    Year 1	$   750,000	225,000
    Year 2	850,000	240,000
    Year 3	1,100,000	430,000
    Year 4	1,150,000	454,000
    Year 5	1,250,000	560,000
    Year 6	1,550,000	710,000

    Required:

    1. Use the four steps of the high-low method to estimate total fixed costs per year and the variable cost per mile. State your results in the cost equation form Y = f + vX.
    2. What would the estimated costs be if the trucks drove 500,000 miles in year 7?

23. Scattergraph Method. Refer to the data in Brief Exercise 22 for the city of Rockville.

    Required:

    1. Use the five steps of the scattergraph method to estimate total fixed costs per year and the variable cost per mile. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
    2. What would the estimated costs be if the trucks drove 500,000 miles in year 7?

24. Regression Analysis. Regression analysis was run using the data in Brief Exercise 22 for the city of Rockville. The output is shown here:

    	Coefficients
    y-intercept	441,013
    x variable	1.53

    Required:

    1. Use the regression output to develop the cost equation Y = f + vX by filling in the dollar amounts for f and v.
    2. What would the city of Rockville’s estimated costs be if its trucks drove 500,000 miles in year 7?

25. Contribution Margin Income Statement. Last year Pod Products, Inc., sold its product for $250 per unit. Production costs totaled $40,000 (25 percent fixed, 75 percent variable). Selling and administrative costs totaled $150,000 (10 percent fixed, 90 percent variable). Pod Products produced and sold 1,000 units last year.

    Required:

    Prepare a contribution margin income statement for Pod Products, Inc.

26. Relevant Range. Jersey Company produces jerseys for athletic teams, and typically produces between 1,000 and 5,000 jerseys annually. The accountant is asked to estimate production costs for this coming year assuming 9,000 jerseys will be produced.

    Required:

    What is meant by the term relevant range, and why is the relevant range important for estimating production costs for this coming year at Jersey Company?

Exercises: Set A

27. Identifying Cost Behavior. Zhang Corporation is trying to identify the cost behavior of the three costs shown. Cost information is provided for six months.

    		Cost 1		Cost 2		Cost 3
    Month	Units Produced	Total Costs	Cost per Unit	Total Costs	Cost per Unit	Total Costs	Cost per Unit
    1	18,000	$36,000	_____	$19,800	_____	$5,000	_____
    2	16,000	32,000	_____	19,200	_____	5,000	_____
    3	14,000	28,000	_____	18,200	_____	5,000	_____
    4	12,000	24,000	_____	16,800	_____	5,000	_____
    5	10,000	20,000	_____	14,500	_____	5,000	_____
    6	8,000	16,000	_____	12,000	_____	5,000	_____

    Required:

    1. Calculate the cost per unit, and then identify how the cost behaves (fixed, variable, or mixed) for each of the three costs. Explain the reasoning behind your answers.
    2. Why is it important to identify how costs behave with changes in activity?

28. Account Analysis. Baker Advertising Incorporated would like to estimate costs associated with its clients on an annual basis. Assume costs for supplies and advertising staff are variable costs. The accounting records indicate the following costs were incurred last year for 100 clients:

    Supplies	$  20,000
    Advertising staff wages (hourly employees)	$170,000
    Manager salary	$  90,000
    Building rent	$  56,000

    Required:

    1. Use account analysis to estimate total fixed costs per year, and the variable cost per unit. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
    2. Estimate the total costs for this coming year assuming 120 clients will be served.

29. High-Low Method. Castanza Company produces computer printers. Management wants to estimate the cost of production equipment used to produce printers. The company reported the following monthly cost data related to production equipment:

    Reporting Period (Month)	Total Costs	Machine Hours
    January	$   920,000	45,000
    February	600,000	25,000
    March	500,000	20,000
    April	1,100,000	90,000
    May	1,140,000	95,000
    June	620,000	30,000
    July	880,000	38,000
    August	910,000	48,000
    September	1,060,000	78,000
    October	960,000	51,000
    November	1,400,000	96,000
    December	980,000	54,000

    Required:

    1. Use the four steps of the high-low method to estimate total fixed costs per month and the variable cost per machine hour. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
    2. What would Castanza Company’s estimated costs be if it used 50,000 machine hours next month?
    3. What would Castanza Company’s estimated costs be if it used 15,000 machine hours next month? Why should you feel uncomfortable estimating costs for 15,000 machine hours?

30. Scattergraph Method. Castanza Company produces computer printers. Management wants to estimate the cost of production equipment used to produce printers. The company reported the following monthly cost data related to production equipment (this is the same data as the previous exercise):

    Reporting Period (Month)	Costs	Machine Hours
    January	$  920,000	45,000
    February	600,000	25,000
    March	500,000	20,000
    April	1,100,000	90,000
    May	1,140,000	95,000
    June	620,000	30,000
    July	880,000	38,000
    August	910,000	48,000
    September	1,060,000	78,000
    October	960,000	51,000
    November	1,400,000	96,000
    December	980,000	54,000

    Required:

    1. Use the five steps of the scattergraph method to estimate total fixed costs per month and the variable cost per machine hour. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
    2. What would Castanza Company’s estimated costs be if it used 50,000 machine hours next month?
    3. What would Castanza Company’s estimated costs be if it used 15,000 machine hours next month?

31. Regression Analysis. Regression analysis was run for Castanza Company resulting in the following output (this is based on the same data as the previous two exercises):

    	Coefficients
    y-intercept	445,639
    x variable	8.54

    Required:

    1. Use the regression output given to develop the cost equation Y = f + vX by filling in the dollar amounts for f and v.
    2. What would Castanza Company’s estimated costs be if it used 50,000 machine hours next month?
    3. What would Castanza Company’s estimated costs be if it used 15,000 machine hours next month?

32. Contribution Margin Income Statement. Last month Kumar Production Company sold its product for $60 per unit. Fixed production costs were $40,000, and variable production costs amounted to $15 per unit. Fixed selling and administrative costs totaled $26,000, and variable selling and administrative costs amounted to $5 per unit. Kumar Production produced and sold 7,000 units last month.

    Required:

    1. Prepare a traditional income statement for Kumar Production Company.
    2. Prepare a contribution margin income statement for Kumar Production Company.
    3. Why do companies use the contribution margin income statement format?

33. Regression Analysis Using Excel (Appendix). Walleye Company produces fishing reels. Management wants to estimate the cost of production equipment used to produce the reels. The company reported the following monthly cost data related to production equipment:

    Reporting Period (Month)	Total Costs	Machine Hours
    January	$1,104,000	54,000
    February	720,000	30,000
    March	600,000	24,000
    April	1,320,000	108,000
    May	1,368,000	114,000
    June	744,000	36,000
    July	1,056,000	45,600
    August	1,092,000	57,600
    September	1,272,000	93,600
    October	1,152,000	61,200
    November	1,680,000	115,200
    December	1,176,000	64,800

    Required:

    1. Use Excel to perform regression analysis. Provide a printout of the results.
    2. Use the regression output to develop the cost equation Y = f + vX by filling in the dollar amounts for f and v.
    3. What would Walleye Company’s estimated costs be if it used 90,000 machine hours this month?

Exercises: Set B

34. Identifying Cost Behavior. Ivanov, Inc., is trying to identify the cost behavior of the three costs shown. Cost information is provided for six months.

    		Cost 1		Cost 2		Cost 3
    Month	Units Produced	Total Costs	Cost per Unit	Total Costs	Cost per Unit	Total Costs	Cost per Unit
    1	8,000	$10,000	_____	$24,000	_____	$32,000	_____
    2	10,000	10,000	_____	29,000	_____	40,000	_____
    3	12,000	10,000	_____	33,600	_____	48,000	_____
    4	14,000	10,000	_____	36,400	_____	56,000	_____
    5	16,000	10,000	_____	38,400	_____	64,000	_____
    6	18,000	10,000	_____	39,600	_____	72,000	_____

    Required:

    1. Calculate the cost per unit, and then identify how the cost behaves (fixed, variable, or mixed) for each of the three costs. Explain the reasoning behind your answers.
    2. Why is it important to identify how costs behave with changes in activity?

35. Account Analysis. Swim-Safe Company hires several instructors who provide weekly one-hour private swim lessons to individuals. The company would like to estimate costs associated with its swim lessons on a weekly basis. Assume costs for towels, snacks, drinks, and instructor wages are variable costs. The accounting records indicate the following costs were incurred last week for 250 customer lessons:

    Towels, snacks, drinks	$1,250
    Instructor wages (hourly employees)	$3,000
    Manager (owner) salary	$1,500
    Pool rental	$2,000

    Required:

    1. Use account analysis to estimate total fixed costs per week, and the variable cost per lesson. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
    2. Estimate the total costs for this coming week assuming 220 lessons will be provided.

36. High-Low Method Quality Tools. Quality Tools Incorporated would like to estimate costs associated with its sales personnel. Salespeople are paid a salary plus commission. Commission rates vary among products and are based on sales dollars. The company reported the following monthly cost data related to sales personnel:

    Reporting Period (Month)	Total Costs	Sales Amount
    January	$710,000	$13,800,000
    February	695,000	13,600,000
    March	765,000	15,100,000
    April	650,000	12,000,000
    May	775,000	15,500,000
    June	750,000	14,700,000
    July	715,000	14,500,000
    August	680,000	13,100,000
    September	830,000	16,500,000
    October	815,000	16,000,000
    November	800,000	15,600,000
    December	690,000	13,200,000

    Required:

    1. Use the four steps of the high-low method to estimate total fixed costs per month and the variable cost per sales dollar. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
    2. What would Quality Tools’ estimated costs be if it had sales of $12,500,000 next month?
    3. What would Quality Tools’ estimated costs be if it had sales of $20,000,000 next month? Why should you feel uncomfortable estimating costs for $20,000,000 in sales?

37. Scattergraph Method. Quality Tools Incorporated would like to estimate costs associated with its sales personnel. Salespeople are paid a salary plus commission. Commission rates vary among products and are based on sales dollars. The company reported the following monthly cost data related to sales personnel (this is the same data as the previous exercise):

    Reporting Period (Month)	Total Costs	Sales Amount
    January	$710,000	$13,800,000
    February	695,000	13,600,000
    March	765,000	15,100,000
    April	650,000	12,000,000
    May	775,000	15,500,000
    June	750,000	14,700,000
    July	715,000	14,500,000
    August	680,000	13,100,000
    September	830,000	16,500,000
    October	815,000	16,000,000
    November	800,000	15,600,000
    December	690,000	13,200,000

    Required:

    1. Use the five steps of the scattergraph method to estimate total fixed costs per month and the variable cost per sales dollar. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
    2. What would Quality Tools’ estimated costs be if it had sales of $12,500,000 next month?
    3. What would Quality Tools’ estimated costs be if it had sales of $20,000,000 next month?

38. Regression Analysis. Regression analysis was run for Quality Tools Incorporated resulting in the following output (this is based on the same data as the previous two exercises):

    	Coefficients
    y-intercept	129,188
    x variable	0.04

    Required:

    1. Use the regression output given to develop the cost equation Y = f + vX by filling in the dollar amounts for f and v.
    2. What would Quality Tools’ estimated costs be if it had sales of $12,500,000 next month?
    3. What would Quality Tools’ estimated costs be if it had sales of $20,000,000 next month?

39. Contribution Margin Income Statement, Service Company. Last month Seafood Grill had total sales of $200,000. Food preparation and service costs totaled $90,000 (20 percent fixed, 80 percent variable). Selling and administrative costs totaled $30,000 (70 percent fixed, 30 percent variable).

    Required:

    1. Prepare a traditional income statement for Seafood Grill.
    2. Prepare a contribution margin income statement for Seafood Grill.
    3. Why do companies use the contribution margin income statement format?

40. Regression Analysis Using Excel (Appendix). Cain Company produces calculators. Management wants to estimate the cost of production equipment used to produce the calculators. The company reported the following monthly cost data related to production equipment:

    Reporting Period (Month)	Total Costs	Machine Hours
    January	$1,250,000	59,000
    February	990,000	33,000
    March	850,000	28,000
    April	1,580,000	120,000
    May	1,670,000	126,000
    June	1,050,000	40,000
    July	1,360,000	51,000
    August	1,400,000	70,000
    September	1,550,000	105,000
    October	1,500,000	67,000
    November	1,860,000	128,000
    December	1,480,000	71,000

    Required:

    1. Use Excel to perform regression analysis. Provide a printout of the results.
    2. Use the regression output to develop the cost equation Y = f + vX by filling in the dollar amounts for f and v.
    3. What would Cain Company’s estimated costs be if it used 110,000 machine hours this month?

Problems

41. Cost Behavior. Assume you are a consultant performing work for two different companies. Each company has asked you to help them identify the behavior of certain costs.

    Required:

    1. Identify each of the following costs for Hwang Company, a producer of ski boats, as variable (V), fixed (F), or mixed (M):

       1. _____Salary of production manager
       2. _____Materials required for production
       3. _____Monthly rent on factory building
       4. _____Hourly wages for assembly workers
       5. _____Straight-line depreciation for factory equipment
       6. _____Annual insurance on factory building
       7. _____Invoices sent to customers
       8. _____Salaries and commissions of salespeople
       9. _____Salary of chief executive officer
       10. _____Company cell phones with first 50 hours free, then 10 cents per minute

    2. Identify each of the following costs for Rainier Camping Products, a maker of backpacks, as variable (V), fixed (F), or mixed (M):

       1. _____Hourly wages for assembly workers
       2. _____Fabric required for production
       3. _____Straight-line depreciation on factory building
       4. _____Salaries and commissions of salespeople
       5. _____Lease payments for factory equipment
       6. _____Company cell phones with first 80 hours free, then 8 cents per minute
       7. _____Invoices sent to customers
       8. _____Salary of production manager
       9. _____Salary of controller (accounting)
       10. _____Electricity for factory building
    3. How might the managers of these companies use the cost behavior information requested?

42. Account Analysis and Contribution Margin Income Statement. Madden Company would like to estimate costs associated with its production of football helmets on a monthly basis. The accounting records indicate the following production costs were incurred last month for 4,000 helmets.

    Assembly workers’ labor (hourly)	$70,000
    Factory rent	3,000
    Plant manager’s salary	5,000
    Supplies	20,000
    Factory insurance	12,000
    Materials required for production	20,000
    Maintenance of production equipment (based on usage)	18,000

    Required:

    1. Use account analysis to estimate total fixed costs per month and the variable cost per unit. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
    2. Estimate total production costs assuming 5,000 helmets will be produced and sold.
    3. Prepare a contribution margin income statement assuming 5,000 helmets will be produced, and each helmet will be sold for $70. Fixed selling and administrative costs total $10,000. Variable selling and administrative costs are $8 per unit.

43. High-Low, Scattergraph, and Regression Analysis; Manufacturing Company. Woodworks, Inc., produces cabinet doors. Manufacturing overhead costs tend to fluctuate from one month to the next, and management would like to accurately estimate these costs for planning and decision-making purposes.

    The accounting staff at Woodworks recommends that costs be broken down into fixed and variable components. Because the production process is highly automated, most of the manufacturing overhead costs are related to machinery and equipment. The accounting staff believes the best starting point is to review historical data for costs and machine hours:

    Reporting Period (Month)	Total Costs	Machine Hours
    January	$278,000	1,550
    February	280,000	1,570
    March	266,000	1,115
    April	290,000	1,700
    May	262,000	1,110
    June	269,000	1,225
    July	275,000	1,335
    August	286,000	1,660
    September	250,000	1,000
    October	253,000	1,020
    November	260,000	1,025
    December	281,000	1,600

    These data were entered into a computer regression program, which produced the following output:

    	Coefficients
    y-intercept	210,766
    x variable	45.31

    Required:

    1. Use the four steps of the high-low method to estimate total fixed costs per month and the variable cost per machine hour. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
    2. Use the five steps of the scattergraph method to estimate total fixed costs per month, and the variable cost per machine hour. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
    3. Use the regression output given to develop the cost equation Y = f + vX by filling in the dollar amounts for f and v.
    4. Use the results of the high-low method (a), scattergraph method (b), and regression analysis (c), to estimate costs for 1,500 machine hours. (You will have three different answers—one for each method.) Which approach do you think is most accurate and why?
    5. Management likes the regression analysis approach and asks you to estimate costs for 5,000 machine hours using this approach (the company plans to expand by opening another facility and hiring additional employees). Calculate your estimate, and explain why your estimate might be misleading.

44. High-Low, Scattergraph, and Regression Analysis; Service Company. Sanchez Accounting Company prepares tax returns for individuals. Marie Sanchez, the owner, would like an accurate estimate of the company’s costs for planning and decision-making purposes. When Marie asks you to devise a way to estimate costs on a monthly basis, you recall the importance of breaking costs into fixed and variable components. Because the company’s costs are driven primarily by the number of tax returns prepared, you decide to use historical data for costs and tax returns prepared:

    Reporting Period (Month)	Total Costs	Returns Prepared
    January	$157,000	315
    February	145,000	300
    March	167,500	375
    April	163,000	325
    May	120,000	250
    June	112,000	210
    July	138,000	280
    August	100,000	190
    September	108,000	205
    October	115,000	245
    November	136,000	265
    December	126,000	255

    You enter these data into a computer regression program and get the following results:

    	Coefficients
    y-intercept	24,626
    x variable	401.86

    Required:

    1. Use the four steps of the high-low method to estimate total fixed costs per month and the variable cost per tax return prepared. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
    2. Use the five steps of the scattergraph method to estimate total fixed costs per month and the variable cost per tax return prepared. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
    3. Use the regression output given to develop the cost equation Y = f + vX by filling in the dollar amounts for f and v.
    4. Use the results of the high-low method (a), scattergraph method (b), and regression analysis (c) to estimate costs for 290 tax returns. (You will have three different answers—one for each method.) Which approach do you think is most accurate, and why?
    5. Marie likes the regression analysis approach and asks you to estimate costs for 800 tax returns using this approach (she plans to expand by opening another office and hiring additional employees). Calculate your estimate, and explain why your estimate might be misleading.

45. High-Low, Scattergraph, Regression Analysis, and Contribution Margin Income Statement. Eye Care, Inc., provides vision correction surgery for its patients. You are the accountant for Eye Care, and management has asked you to devise a way of accurately estimating company costs for planning and decision-making purposes. You believe that reviewing historical data for costs and number of surgeries is the best starting point. These data are as follows:

    Reporting Period (Month)	Total Costs	Number of Surgeries
    January	$208,000	54
    February	205,000	52
    March	217,000	55
    April	200,000	50
    May	232,000	62
    June	230,000	60
    July	226,000	57
    August	235,000	63
    September	252,000	71
    October	250,000	70
    November	245,000	66
    December	244,000	65

    You enter these data into a computer regression program and get the following results:

    	Coefficients
    y-intercept	75,403
    x variable	2,536.77

    Required:

    1. Use the four steps of the high-low method to estimate total fixed costs per month, and the variable cost per surgery. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
    2. Use the five steps of the scattergraph method to estimate total fixed costs per month, and the variable cost per surgery. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
    3. Use the regression output given to develop the cost equation Y = f + vX by filling in the dollar amounts for f and v.
    4. Use the results of the high-low method (a), scattergraph method (b), and regression analysis (c), to estimate costs for 70 surgeries. (You will have three different answers—one for each method.) Which approach do you think is most accurate and why?
    5. Assume Eye Care charges $4,000 for each surgery performed. Use the regression analysis cost information (for 70 surgeries) to prepare a contribution margin income statement. (Hint: You will only have one line item for variable costs and one line item for fixed costs.)

46. Regression Analysis Using Excel (Appendix). Metal Products, Inc., produces metal storage sheds. The company’s manufacturing overhead costs tend to fluctuate from one month to the next, and management would like an accurate estimate of these costs for planning and decision-making purposes.

    The company’s accounting staff recommends that costs be broken down into fixed and variable components. Because the production process is highly automated, most of the manufacturing overhead costs are related to machinery and equipment. The accounting staff agrees that reviewing historical data for costs and machine hours is the best starting point. Data for the past 18 months follow.

    Reporting Period (Month)	Total Overhead Costs	Total Machine Hours
    January	$695,000	3,875
    February	700,000	3,925
    March	665,000	2,788
    April	725,000	4,250
    May	655,000	2,775
    June	672,500	3,063
    July	687,500	3,338
    August	715,000	4,150
    September	625,000	2,500
    October	632,500	2,550
    November	650,000	2,563
    December	702,500	4,000
    January	730,000	4,025
    February	735,000	4,088
    March	697,500	2,900
    April	762,500	4,425
    May	687,500	2,888
    June	705,000	3,188

    Required:

    1. Use Excel to perform regression analysis. Provide a printout of the results.
    2. Use the regression output given to develop the cost equation Y = f + vX by filling in the dollar amounts for f and v.
    3. Use the results of the regression analysis to estimate costs for 3,750 machine hours.
    4. Management is considering plans to expand by opening several new facilities and asks you to estimate costs for 22,000 machine hours. Calculate your estimate, and explain why this estimate may be misleading.
    5. What can be done to improve the estimate made in part d?

One Step Further: Skill-Building Cases

47. Internet Project: Variable and Fixed Costs. Using the Internet, find the annual report of one retail company and one manufacturing company. Print out each company’s income statement. (Hint: The income statement is often called the statement of operations or statement of earnings.)

    Required:

    1. Review each income statement, and provide an analysis of which operating costs are likely to be variable and which are likely to be fixed. Include copies of both income statements when submitting your answer.
    2. How would you expect a retail company’s mix of variable and fixed operating costs to differ from that of a manufacturing company?
    3. How might the managers of these companies use cost behavior information?

48. Group Activity: Identifying Variable and Fixed Costs. To complete the following requirements, form groups of two to four students.

    Required:

    1. Each group should select a product that is easy to manufacture.
    2. Prepare a list of materials, labor, and other resources needed to make the product.
    3. Using the list prepared in requirement b, identify whether the costs associated with each item are variable, fixed, or mixed.
    4. As a manager for this company, why would you want to know whether costs are variable, fixed, or mixed?

49. Cost Behavior at Best Buy. The following condensed income statement is for Best Buy Co., Inc., a large retailer of consumer electronics.

    

    Required:

    Assume that cost of goods sold comprises only variable costs, and selling and administrative expenses are all fixed costs. Also assume that Best Buy expects sales to grow by 10 percent for the year ended March 3, 2012.

    1. Calculate expected operating income for the year ended March 3, 2012 assuming the company is still within the relevant range of activity.
    2. Calculate the expected percent increase in operating income from the year ended February 26, 2011, to the year ended March 3, 2012.
    3. Why is the percent increase in operating income higher than the percent increase in sales?
    4. Is the assumption that all selling and administrative expenses are fixed a reasonable assumption? Explain.

50. Fixed Costs at United Airlines. Review Note 5.4 "Business in Action 5.1".

    Required:

    1. What is meant by the term fixed cost?
    2. Which costs at United Airlines were identified as fixed costs?
    3. How might United Airlines reduce its fixed costs? Be specific.

Comprehensive Case

51. Ethics: Manipulating Data to Establish a Budget (Appendix). Healthy Bar, Inc., produces energy bars for sports enthusiasts. The company’s fiscal year ends on December 31. The production manager, Jim Wallace, is establishing a cost budget for the production department for each month of this coming quarter (January through March). At the end of March, Jim will be evaluated based on his ability to meet the budget for the three months ending March 31. In fact, Jim will receive a significant bonus if actual costs are below budgeted costs for the quarter.

    The production budget is typically established based on data from the last 18 months. These data are as follows:

    Reporting Period (Month)	Total Overhead Costs	Total Machine Hours
    July	$695,000	3,410
    August	700,000	3,454
    September	665,000	2,453
    October	725,000	3,740
    November	655,000	2,442
    December	672,500	2,695
    January	687,500	2,937
    February	715,000	3,652
    March	625,000	2,200
    April	632,500	2,244
    May	650,000	2,255
    June	702,500	3,520
    July	730,000	3,542
    August	735,000	3,597
    September	697,500	2,552
    October	762,500	3,894
    November	687,500	2,541
    December	705,000	2,805

    You are the accountant who assists Jim in preparing an estimate of production costs for the next three months. You intend to use regression analysis to estimate costs, as was done in the past. Jim expects that 3,100 machine hours will be used in January, 3,650 machine hours in February, and 2,850 machine hours in March.

    Jim approaches you and asks that you add $100,000 to production costs for each of the past 18 months before running the regression analysis. As he puts it, “After all, management always takes my proposed budgets and reduces them by about 10 percent. This is my way of leveling the playing field!”

    Required:

    1. Use Excel to perform regression analysis using the historical data provided.

       1. Submit a printout of the results.
       2. Use the regression output to develop the cost equation Y = f + vX by filling in the dollar amounts for f and v.
       3. Calculate estimated production costs for January, February, and March. Also provide a total for the three months.

    2. Use Excel to perform regression analysis after adding $100,000 to production costs for each of the past 18 months, as Jim requested.

       1. Submit a printout of the results.
       2. Use the regression output to develop the cost equation Y = f + vX by filling in the dollar amounts for f and v.
       3. Calculate estimated production costs for January, February, and March. Also provide a total for the three months.
    3. Why did Jim ask you to add $100,000 to production costs for each of the past 18 months?
    4. How should you handle Jim’s request? (If necessary, review the presentation of ethics in Chapter 1 "What Is Managerial Accounting?" for additional information.)