Small Business Management

Inclass Questions – Module 4: Cost Behaviour

Question 1

Bondi Surf Company is a large retailer of surfboards. The company assembled the information shown
below for the quarter ended June 30, 2018:

Amount
Total sales revenue $800,000
Selling price per board 400
Variable selling expense per board 50
Variable administrative expense per board 20
Total fixed selling expense 150,000
Total fixed administration expense 120,000
Merchandise inventory, beginning balance 80,000
Merchandise inventory, ending balance 100,000
Merchandise purchases 320,000

Required:

1. Prepare a traditional income statement

2. Prepare a contribution format income statement
3. What was the contribution toward fixed expenses and profits for each surfboard sold during the
quarter?
Question 2

Davidson Engine Repairs provides maintenance and repair services for small engines. The repair shop
costs include the salaries for mechanics, insurance and depreciation on the repair equipment, materials
and parts used for the jobs, and utilities. The repair shop manager would like to develop a model for
predicting repair costs and over past 10 months has carefully recorded the total repair costs incurred,
along with the number of maintenance and repair jobs completed each month. The data are shown
below:

Month Jobs Repair Costs

January 220 $22,000
February 180 18,000
March 160 17,600
April 200 20,000
May 260 24,000
June 240 22,400
July 140 16,000
August 120 12,800
September 100 13,600
October 80 9,600

Required:

1. Using the high-low method, estimate a cost formula for repair costs.
2. What total repair cost would you expect to be incurred at an activity level of 110?
3. Now assume your manager wants to predict costs for a month where 500 jobs will be completed.
Should you use the formula development above to predict costs? Why or why not?
Question 3

REC Kayaks Inc. manufactures a single product. Selected data from the company’s cost the two recent
months are given below:

Level of Activity
November – Low April - High
Number of units produced 9,000 12,000
Cost of goods manufactured $285,000 $390,000
Work in process inventory, opening 14,000 22,000
Working process inventory, closing 25,000 15,000
Direct materials cost per unit 15 15
Direct labour cost per unit 6 6
Manufacturing overhead cost, total ? ?

The company’s manufacturing overhead cost consists of both variable and fixed cost elements. To have
data available for planning, management wants to determine how much of the overhead cost is variable
with units produced and how much ol it is fixed per year.

Required:

1. For both April and November, estimate the amount of manufacturing overhead cost added to
production. The company had no underapplied or overapplied overhead in the either month.
2. Using the high-low method, estimate a cost formula for manufacturing overhead.
3. If 10,000 units are produced during a month, what will the cost of goods manufactured be? Assume
the company’s opening WIP is $16,000 and the ending WIP is $19,000. Also assume there is no
under or over applied overhead cost for the month.