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Questions

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

subprocess?

A series of interrelated activities designed to enable the company to generate revenue is

known as what subprocess?

A series of interrelated activities designed to produce the goods a company sells is known

as what subprocess?

A cost that does not change in total as the amount of the activity driver changes

throughout the relevant range is known as what type of cost?

A cost that changes in direct proportion to the change in the amount of activity driver

throughout the relevant range is known as what type of cost?

A cost that varies, but not proportionately, to a change in activity throughout the relevant

range is known as what type of cost?

A revenue that changes in direct proportion to the change in the amount of activity driver

throughout the relevant range is known as what type of revenue?

A revenue that varies, but not proportionately, to a change in activity throughout the

relevant range is known as what type of revenue?

A revenue that does not change in total as the amount of the activity driver changes

throughout the relevant range is known as what type of revenue?

What is the span of operating activity that is considered normal for the company?

Exercises

E3.1

On December 28, 2006 Piedmont Supply Co. ships $155,000 of merchandise by common

carrier to the Maxwell Company. The terms of the sale are 3/15, n/45, FOB destination.

It takes 5 days for the merchandise to arrive at Maxwell Company. Both Piedmont

Supply Co. and Maxwell Company have December 31 year-ends. Can Piedmont Supply

Co. report this sale on its income statement for fiscal 2006? Why?

E3.2

Refer to E3.1. Can Maxwell Company recognize this purchase as inventory on its

balance sheet for fiscal 2003? Why?

E3.3

the discount is not taken, the invoice must be paid by what date?

E3.4

In addition to issuing its own charge cards to customers, Maxwell Company, a retail

store, accepts Visa and MasterCard. Assume Maxwell Company is charged a 2%

processing fee by both Visa and MasterCard. Maxwell bills its charge customers on the

second day of the month following the purchase. The following sales were made during

the month of June:

Cash sales

$52,975

Visa

$15,020

MasterCard

$10,114

Maxwells charge card

$19,063

What is the amount of cash Maxwell Company received during the month of June?

E3.5

Backpackers, Inc. manufactures packs for hiking and camping. The following is a list of

costs connected with making and selling the various packs. Assume that activity is

measured as the number of packs produced. Identify each of these costs as variable (V),

fixed (F), or mixed (M).

__________ A. Cost of fabric

__________ B. Rent on the factory building

__________ C. Cost of utilities

__________ D. Cost of leather for trim

__________ E. Cost of thread used to sew packs together

__________ F. Cost of shelving to store production supplies

__________ G. Supervisors salary

__________ H. Cost of zippers

__________ I. Wages of sales personnel (salary plus commission)

__________ J. Cost of delivery vehicle

E3.6

Computer Accessories Inc. incurred the following production costs to manufacture mouse

pads. Using the high/low cost estimation method, determine the cost equation.

Month

July

August

September

October

November

December

300,000

100,000

125,000

250,000

325,000

50,000

Production Costs

$29,383

$22,980

$23,975

$27,450

$29,726

$21,476

E3.7

Refer to E3.6. What are the estimated productions costs if Computer Accessories Inc.

produced 175,000 mouse pads?

E3.8

Refer to E3.6. These data were entered into a regression program, resulting in the

following output. Use this output to determine expected production costs if Computer

Accessories Inc. produces 350,000 mouse pads.

Intercept

X Coefficient

R Square

E3.9

19,973

.0307

.9981

Nail Care generated the following manicure revenue over the past 6 months. Use the

high/low method to predict revenue if 275 customers receive a manicure in a month.

Month

Number of Customers

320

200

50

125

210

300

July

August

September

October

November

December

Cost

$6,957

$4,450

$1,125

$2,850

$4,405

$6,250

E3.10 Refer to E3.9. These data were entered into a regression program, resulting in the

following output. Use this output to determine expected revenue if Nail Care has 350

customers one month.

Intercept

X Coefficient

R Square

141.5354

20.9052

.9961

Problems

P3.1

Floral Designs is a florist shop that provides delivery service within a 10-mile radius of

the shop. The owner is planning business operations for the coming year and is

considering the option of expanding the delivery area to a 15-mile radius. The following

information relates to the number of miles driven on deliveries and maintenance costs for

the delivery van for the past year.

Month

January

February

March

April

May

June

July

August

September

October

November

December

Miles Driven

112

705

135

187

600

375

225

262

120

105

300

525

Maintenance Cost

$129

$714

$137

$191

$650

$380

$227

$269

$121

$126

$345

$570

Required:

A.

Is the total maintenance cost a variable cost, a fixed cost, or a mixed cost? Why?

B.

Using the high/low cost estimation method, determine the variable cost per mile.

C.

Using the high/low cost estimation method, determine the total fixed cost per

month.

D.

E.

F.

P3.2

Estimate the monthly maintenance cost of the delivery van if Floral Designs

decides to expand its delivery area and 600 miles are driven per month.

Estimate the monthly maintenance cost of the delivery van if 400 miles are driven

per month.

Refer to P3.1. The following is the output of a regression analysis applied to these data.

Intercept

4.45584

X coefficient 1.042325

R square

.99402

Required:

A.

In this regression application what is the variable cost per mile?

B.

In this regression application what is the fixed cost per month?

C.

Using the results, determine the cost equation.

D.

Estimate the monthly maintenance cost of the van if 600 miles are driven per

month.

E.

Estimate the monthly maintenance cost of the van if 400 miles are driven per

month.

F.

Explain the significance of the R square in this analysis.

P3.3

Joe Smith operates a local delivery service to supplement his retirement income. Joe

charges a flat fee for deliveries plus an additional charge for each mile over 7 miles. Joe

gathered the following information on revenue generated by the delivery service for the

past year so he can estimate his revenue for the coming months.

Month

January

February

March

April

May

June

July

August

September

October

November

December

Revenue

$444

$506

$337

$230

$659

$218

$181

$140

$587

$710

$535

$653

Deliveries Made

20

22

15

11

30

9

8

7

27

40

25

30

Required:

A.

Determine the revenue formula using the high/low method.

B.

What is Joes estimated revenue per month if he makes 35 deliveries?

C.

What is Joes estimated revenue per month if he makes 45 deliveries?

P3.4

Refer to P3.3. Joe used the data he had gathered to run a regression analysis. The results

of this analysis are as follows:

Intercept

X coefficient

R square

39.08959

19.4874

.971519

Required:

A.

Determine the revenue formula using the linear regression output.

B.

What is Joes estimated revenue per month if he makes 35 deliveries?

C.

What is Joes estimated revenue per month if he makes 45 deliveries?

D.

Evaluate the strength of the regression analysis.

P3.5

Simmons Company received the following invoices, which were all dated April 1. Due

to a cash shortage in the month of April, Simmons can only pay up to $100,000 of

invoices.

Invoice

1

2

3

4

5

6

Amount

$33,020

$24,375

$13,200

$51,400

$34,320

$25,350

Terms

2/10, n/30

3/15, n/60

2/10, n/60

n/60

3/15, n/30

1/10, n/45

Required:

A.

Assuming no partial payments are allowed, determine the invoices Simmons

Company should pay this month (i.e., in the next 30 days). What will be the total

cash disbursements for the month of April?

B.

Would your answer to part (a) change if any of these suppliers charge a 3 percent

fee for overdue accounts?

Case

Select a company that is featured in this weeks issue of BusinessWeek. Based on your

knowledge of the company, describe its revenue, expenditure, and conversion (if applicable)

processes.

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