COST BEHAVIOR

Exercises

1. Variable Costs vs. Fixed Costs

Vhey Company manufactures and sells a single product. A partially completed schedule of costs over
a relevant range of 20 to 60 units produced each week is given below:

Units Produced
20 units 40 units 60 units
Total Costs
Variable Costs P 40 P 80 P 120
Fixed Costs P 600 P 600 P 600
Total Costs P 640 P 680 P 720

Per Unit Costs

Variable Costs P2 P2 P2
Fixed Costs P 30 P 15 P 10
Total Unit Costs P 32 P 17 P 12

Required:
1. Determine the correct amounts of those with question (?) mark.
2. Which specific costs remain constant over the relevant range?
Total Fixed Costs and Variable Costs per Unit
3. Which specific costs are directly related to production?
Total Variable Costs and Total Costs
4. Which specific costs are inversely related to production?
Fixed Costs per Unit and Total Unit Costs
5. Express the cost formula based on the line equation “Y = a + bX”.
Y = P 600 + P 2X
6. If Vhey plans to produce 30 units, how much are the expected total costs?
Y = P 600 + P 2(30)
Y = P 600 + P 60
Y = P 660

2. High-Low and Least-Squares Regression Method

The controller of Keisser Hospital would like to come up with a cost formula that links the Admission
Department cost to the number of patients admitted during a month. The Admission Department’s
costs and the number of patients admitted during the past six months follow:

X Y
Month Number of Patients Admission Department’s Cost (P)
July 19 15,200
August 18 15,600
September 11 13,200
October 69 87,000
 November 14 14,300
December 11 12,800

Required:
1. Determine the variable cost per unit under (1) high-low method and (2) least-squares method. P
300; P 310.14
2. Determine the monthly fixed costs under (1) high-low method and (2) least-squares method. P
9,500; P 9,691.96
3. Determine the monthly cost function under (1) high-low method and (2) least-squares method. Y
= P 9,500 + P 300X; Y = P 9,691.96 + P 310.14X
4. Estimated Admission Department’s cost assuming 17 patients will be admitted next month under
(1) high-low method and (2) least-squares method.
(1)
Y = P 9,500 + P 300(17)
Y = P 9,500 + P 5,100
Y = P 14,600

(2)
Y = P 9,691.96 + P310.14(17)
Y = P 9,691.96 + P 5,272.38
Y = P 14,964.34

Wrap-Up Exercises

1. Which of the following costs is most likely a variable cost?

a. P 4 per unit at 10 units; P 3 per unit at 20 units; P 2.67 per unit at 30 units
b. P 12 per unit at 10 units; P 6 per unit at 20 units; P 1 per unit at 30 units
c. P 7 per unit at 10 units; P 7 per unit at 20 units; P 7 per unit at 30 units
d. P 9 per unit at 10 units; P 6 per unit at 20 units; P 3 per unit at 30 units

2. A company has developed a production cost function for its lone product: Y = 20 + 5X, where X is
based on the number of labor hours. Based on a relevant range of 10 to 20 hours, what is the
estimated production cost at zero (0) labor?

a. P 20 (Note: If there is no relevant range.)

b. P 70
c. P 120
d. The exact amount cannot be determined without additional information

3. When compared to the high-low method, the graphic approach to cost estimation is usually

a. Less accurate.
b. More representative.
c. Equally representative.
d. Less representative.
4. What cost segregation method gives the most mathematically precise cost estimate?

a. High-Low Method
b. Least-Squares Method
c. Scattergraph Method
d. Calendar Method

END