Problems 1. Marx Inc. supplied the following data: Month Miles Total Cost January 60,000 $95,000 February 70,000 103,000 March 50,000 83,000 April 80,000 101,000 Use the high-low method, to calculate variable cost per unit, total fixed costs, and the cost equation (in good form). Choose March and April....lowest activity levels. VC per unit = [$101,000 ─ $83,000] / [80,000 ─ 50,000] = $0.60 per mile TC = VCx + FC $101,000 = $0.60*80,000 + FC FC = $53,000 TC = 0.60X + 53,000 2. Accustaff Company's high and low level of activity was 8,000 units during March and 3,000 units produced in August. Machine maintenance costs were $29,000 in March and $12,000 in August. Using the high-low method, how much will total maintenance cost be in January of the following year if production is expected to be 7,000 units? VC per unit = [$29,000 ─ $12,000] / [8,000 ─ 3,000] = $3.40 per unit TC = VCx + FC $29,000 FC = $1,800 = [8,000*$3.40] + FC TC at 7,000 units: TC = 7,000*$3.40 + $1,800 TC = $25,600 3. The following totals are available from accounting records of Steering Company in May when it sold 1,000 widgets with sales totaling $35,000: Fixed product costs $8,000 Variable operating costs $6,000 Variable product costs 12,000 Fixed operating costs 10,000 How much is contribution margin per unit? What information does this amount provide? [$35,000 ─ $12,000 ─ $6,000] / 1,000 = $17 per unit Steering Company has $17,000 available to cover fixed costs and to contribute to profit. How much is the gross profit ratio? What information does this amount provide? [$35,000 ─ $12,000 ─ $8,000] / $35,000 = 42.86% Steering Company has about 43 cents out of every sales dollar available to cover operating costs and to contribute to profit. 4. Clark Company produces flash drives for computers, which it sells for $20 each. Each flash drive costs $6 of variable costs to make. During April, 1,000 drives were sold. Fixed costs for March were $2 per unit for a total of $1,000 for the month. How much is the contribution margin ratio for April? CMR for April: [$20 - $6] / $20 = 70% Operating income? Operating income: [$20 - $6]*1,000 ─ $1,000 = $13,000 5. Two costs at Watson, Inc. appear below for specific months of operations. Delivery costs Utilities Month January February March January February March Which type of costs are these? Justify. Amount $42,000 42,000 42,000 Units Produced 40,000 60,000 54,000 $ 84,000 126,000 113,400 40,000 60,000 54,000 Delivery: Fixed cost since total cost at all 3 activity levels is the same total. Utilities: FC ruled out since total cost at both activity levels is different. VC per unit is $84,000/40,000 = $$2.10; and $126,000/60,000 = $2.10; and $113.400/54,000 = $2.10; Since VC per unit is the same for all activity levels, the cost is variable. 6. Regression output appears below. How much is the total expected cost is 3,100 units are produced and sold? Regression Statistics Multiple R 0.9565485 R Square 0.914985 Adjusted R Square 0.9064835 Standard Error Observations ANOVA 67.799432 12 df Regression Residual Total Intercept X Variable 1 SS MS F 1 49432.37 494732 107.6 10 45967.62 4596.7629 11 540700 Coefficients 847.98299 1.3150781 Standard Error 407 0.127 Pt Stat value 2.084 0.064 10.37 0.006 Significance F 1E-06 Lower 95% -58.8 1.033 Upper 95% 1755 1.598 y = 1.3150781*3,100 + 847.98299 = $4,925 7. Butts, Inc. collected the following production data for the past month: Units Produced 1,600 1,300 1,500 1,000 Total Cost $44,000 38,000 45,000 33,000 If the high-low method is used, what is the monthly total cost equation? [$44,000 - $33,000] / [1,600 - 1,000] = $18.33 per unit $44,000 = $18.33333*1,600 + FC FC = $14,667 TC = $18.33x + $14,667 8. Golden Company produced 1,000 items and had the following costs-Depreciation, $10,000; Materials, $8,000; Rent, $5,000, and Labor, $15,000. How much is variable cost per unit? [$8,000 + 15,000] / 1,000 = $23 per unit 9. Information concerning amounts for Bridges, Inc. appears below: January February Cost $100,000 120,000 Units 1,200 1,600 Lower 95.0% -58.8 1.033 U 95 1 1 March 90,000 1,100 April 85,000 1,250 May 110,000 1,300 Using the high-low method, what is the fixed portion of costs? [$120,000 - $90,000] / [1,600 - 1,100] = $60 per unit $120,000 = $60*1,600 + FC FC = $24,000 10. The following costs were incurred related to providing 80,000 car washes: Car wash labor $240,000 Electric power to move conveyor belt Soap, cloth, and 32,000 Depreciation supplies Water 28,000 Supervisory salaries $72,000 64,000 46,000 How much is the variable cost per car to the nearest whole cent? Car wash labor $ 240,000 Soap, cloth, and 32,000 supplies Water 28,000 Electric power to move conveyor belt 72,000 Total variable cost $372,000 Variable cost per unit = $372,000/80,000 = $ 4.65 11. Total costs amount to $6,000 when labor hours total 400, and $5,000 when labor hours total is 300. Using the high-low method, what would be the total cost when labor hours amount to 450 hours? [$6,000 - $5,000] / [400 - 300] = $10 per hour = variable cost Total cost = Variable cost + Fixed cost $6,000 = $10 (400) + FC; so FC = $2,000; $10(450) + $2,000 = $6,500 12. Page Company’s accountants provided the following information for its sales and production of one product: June 50,000 July 60,000 August 70,000 September 80,000 Volume direct labor-hours per month Total cost per month $15,000 $14,900 $18,000 $23,000 When using the high-low method, which month’s data will be used to estimate costs? October 90,000 $22,800 Choose June and October from the Units column. [$22,800 - $15,000] / [90,000 - 50,000] = $0.195 per unit TC = VC x + FC $15,000 = 0.195 (50,000) + FC, so FC = $5,250 How do the results using regression differ from those using the high-low method conceptually and why do they differ? Which is better? Regression uses all the data points (all 5 months) while high-low uses only the highest and lowest activity points. The high-low points can be outliers (extremes) that are not representative of the linear function, so the regression is more accurate as it reflects all activity. Draw a large scale scattergraph (the larger the scale, the more accurate). Write the cost equation based on your graph. Extending the trendline to the y-axis shows that the line crosses at about $3,300 (fixed costs). The variable cost is rise over run, in this case, approximately: $10,000/2,500 units = $4 per unit TC = 4.00x + 3,300 13. RMA Company’s accountants provided the following information: June July August September October Miles per month 13,000 9,000 9,500 11,500 14,000 Total cost per month $210,000 $164,000 $160,000 $180,000 $208,000 Use the high-low method for parts A, B, and C. A. Calculate the unit variable cost. ($208,000 - $164,000) / (14,000 - 9,000) = $8.80 per unit B. Calculate total fixed cost. TC = VC x + FC $164,000 = $8.80(9,000) + FC so FC = $84,800 C. Write the total cost equation: y = 8.80X + 84,800 14. Sale Company produced and sold 5,000 tuples. At this level of production, each unit has a selling price of $22, a variable cost of $10, and a fixed cost of $5. How much is the total cost if Sale produces and sells 4,000 tuples? Total fixed cost at 5,000 units = 5,000 x $5 = $25,000 Fixed cost is the same in total regardless of the number of units, so at 4,000 units, FC = $25,000. Total cost at 4,000 units: Variable cost = 4,000 x $10 = $40,000 Fixed cost = $25,000 Total cost = $65,000 15. Which of the following costs are variable? Cost 8,000 Units 10,000 Units 1 $100,000 $125,000 2 40,000 50,000 3 80,000 110,000 Costs 1 and 2 are variable since the cost per unit is the same at both levels. . Variable costs per unit are the same at any level of activity. Costs per unit are: Cost 1: $100,000/8,000 = $12.50 and $125,000/10,000 = $12.50 Cost 2: $40,000/8,000 = $5.00 and $50,000/10,000 = $5.00 Cost 3 is a mixed cost since the total cost is different, however, since the cost per unit is not the same at both levels, this is a mixed cost. Cost 3: $80,000/8,000 = $10.00 and $110,000/10,000 = $11.00 16. Acustaff Company's high and low level of activity was 10,000 units during March and 6,000 units produced in August. Machine maintenance costs were $24,000 in March and $19,000 in August. Using the high-low method, how much will total maintenance cost be in January of the following year if production is expected to be 8,250 units? Cost per unit using high-low method: [$24,000 - $19,000]/[10,000 - 6,000] = $1.25 per unit Total costs = VC + FC: $24,000 = (10,000*$1.25) + FC; so FC = $11,500 Total costs at 8,250 units = (8,250*$1.25) + $11,500 = $21,813 How does the concept of relevant range apply to this problem? The cost function is assumed to be linear in a company's relevant range...its normal level of operating activity. In this case, it appears that operating anywhere between 6,000 and 10,000 units. When operating outside this range, the company cannot expect the fixed and variable costs to behave the same as within the relevant range. 17. Foress Company reported the following date for four months of 2004: Month Miles Total Cost January 60,000 $95,000 February 70,000 103,000 March 50,000 88,000 April 80,000 118,000 In applying the high-low method, how much is the variable cost per unit? First the high and low activity levels are chosen---50,000 and 80,000. The costs correlating to these levels are then chosen: [$118,000 - $88,000]/[80,000 - 50,000] = $1.00 per mile How much is the y-intercept value? y-intercept = fixed costs: $118,000 = $1*80,000 + FC;; FC = $38,000 Write the total cost equation in good form. TC = 1.00x + 38,000 18. The following costs were incurred related to providing 20,000 oil changes: Oil change labor $24,000 Electric power to pump oil Oil and filters 3,000 Depreciation Supplies 2,000 Supervisory salaries How much is the variable cost per oil change to the nearest whole cent? Identify the variable costs: $24,000 + $3,000 + $2,000 + $7,000 = $36,000 (all these costs increase when the number of oil changes increase.) VC per unit = $36,000/20,000 = $1.80 per oil change 19. Clinton Cookies bakes chocolate chip cookies and ships them to fast food restaurants for sale to customers. Clinton charges the restaurants $1.25 per cookie. The company has projected the following costs for sales of 3,000 and 4,000 cookies for the next month’s operation: Cost Items 3,000 cookies 4,000 cookies Cookie batter $ 600 $ 800 Baking 1,150 1,300 employees Packaging 450 600 Facilities 300 300 $7,000 2,000 6,000 Shipping charges 160 200 Marketing 420 420 Total costs $3,080 $3,620 Calculate the variable cost of each cookie and total fixed cost. Cookie batter Baking employees Packaging Facilities Shipping charges Marketing Total costs variable cost/unit 0.20 0.15 0.15 0.04 $ 0.54 $ fixed cost 700 300 40 420 1,460 $ $ Calculations of mixed costs: Baking: $1,300 - $1,150 4,000 - 3,000 = $0.15 per unit $1,300 = 0.154,000 + FC FC = $700 Shipping: $200 - $160 4,000 - 3,000 = $0.04 per unit $200 = .04*4,000 +FC FC = $40 20. Handley Company's activity for the first four months of 2004 is as follows: Machine Hours Electrical Cost January 4,000 $2,800 February 4,800 $3,500 March 4,600 $3,600 April 3,800 $3,000 May 4,400 $3,100 Using the high-low method, how much is the cost per machine hour? [$3,500 - $3,000]/[4,800 - 3,800] = $0.50; Note that the high and low amounts are chosen from the activity column (machines hours), then the corresponding costs are used. 21. Hank’s Toys used high-low data from March and May to determine its unit variable cost of $0.50. Month Units produced Total costs March 14,000 $25,600 May 18,000 27,600 If Hank produces 15,000 units in September, how much is its total cost expected to be? Variable rate = [$27,600 - $25,600]/[18,000 - 14,000] = $0.50 per unit $25,600 = $0.50(14,000) + FC; so FC = $18,600 TC = $18,600 + $0.50(15,000) = $26,100 22. Johnson Manufacturing paid $5,000 for materials, $4,000 for production labor, $3,500 depreciation of manufacturing equipment, $2,500 depreciation of office furniture, and $5,000 for sales salaries. What is the average cost per unit to produce 50 units? ($4,000 + $5,000 + $3,500)/50 units = $250 each 23. At Fruit Company, the total cost to produce 50,000 units is $750,000. Total fixed costs are $250,000. What is the expected cost to produce 48,000 units? VC = ($750,000 - $250,000) = $500,000 VC per unit = $500,000/50,000 = $10 Cost at 48,000 units = $10(48,000) + $250,000 = $730,000 24. At Richetti Company, the total variable cost to produce 15,000 units is $45,000. Total fixed costs are $21,000. What is the expected cost to produce 13,000 units? VC per unit = $45,000/15,000 = $3 per unit Total cost = variable cost + fixed costs = [$3*13,000] + $21,000 = $60,000 Note that product costs include both fixed and variable amounts. If the question asked for the incremental cost, then $39,000, the variable cost would be the answer, only if the difference in units was 13,000. 25. Duffy Company produced and sold 10,000 nits. At this level of production, the selling price per unit is $10, the variable cost per unit is $4, and the fixed cost per unit is $2. How much is the total cost per unit if management produces and sells 12,500 units? Fixed costs cost $2 per unit when the company produces and sells 10,000 units....giving a total fixed cost of $20,000. No matter how many units are produced and sold, fixed costs don't change...they remain at $20,000. Variable costs: $4 x 12,500 = $50,000 Fixed costs 20,000 Total costs at 12,500 units $70,000 Cost per unit: $70,000/12,500 = $5.60 26. At Adeniran Company, the material and labor cost to produce 800 units is $5,000. Total fixed costs are $6,000. What is the expected cost to produce 900 units? VC per unit = $5,000/800 = $6.25; At 900 units: [$6.25 x 900] + $6,000 = $11,625 27. PoolCo provided the following information for its pool cleaning business for selected months: Pools cleaned Total cost January 21,000 $194,000 February 25,000 $ 210,000 March 18,000 $164,500 April 18,600 $160,000 May 23,200 $180,000 June 24,600 $208,000 Management has also provided the following output from Excel. Answer the questions that follow. SUMMARY OUTPUT Statistics Multiple R 0.8390729 R Squre 0.7907020 Adjusted R 074883756 StandardErr 1074.5169 Observation 6 ANVA Regression Residual Total df SS 18342980 4177859.4 2298208333 MS 13642904 115444632.4 F 15.9745075 Sgnifiance 0.016286429 Std Error t Stat P-value Lowe 95% Uper 95 Lwer 95% 4757.0882 3495830797 1.366114712 0.243667124 49302.76423 144816.8819 49302.7 6.364705882 1.595798475 3.988414566 0.016286429 1.934059018 10.79535275 1.93405 1 4 5 Coefficints Intrcept X Variable 1 A. Based on the regression: 1. How much is the variable cost per unit? $6.36 . If 22,000 pools were cleaned during July, what would be the total cost? Y = 6.36X + 47,757 = ($6.364705882*22,000) + 4,757.0882 = $144,781 B. Use the high-low method to: 1. Calculate the variable cost per unit. High and low points highlighted (select high and low activity levels, then corresponding amounts) [$210,000 - $164,500] / [25,000 - 18,000] = $6.50 per unit 2. Determine total fixed costs if 21,500 pools are cleaned during a month. TC = VC x + FC 210,000 = 6.50 (25,000) + FC, so FC = $47,500 Note that FC are the same at every activity level 3. Write the cost equation in proper form. y = 6.50X + 47,500 28. The following regression output was generated by Casio Enterprises based on deliveries made and the related costs incurred for each. SUMMARY OUTPUT Regression Statistics 0.8253 Multiple R 58 0.6812 R Square 16 Adj 0.6566 RSquare 95 Standard 39.3589 Error 22 Observati 1 ons 5 ANOVA df Regressi on 1 Residual 13 Total 14 SS 43,034. 71 20,138. 62 63,173. 33 Coefficie nts 262.2198 72 Std Error 101.80 7352 t Stat 2.6267 25 Pvalue 0.020 917 Lower 95% 47.4784 60 Upper 95% 487.361 284 Lower 95% 47.478 460 Upper 95% 487.361 284 35.58346 15 6.10 2342 5.270 675 0.000 151 18.9801 54 45.346 770 18.980 154 45.346 770 Intercept X Variable 1 MS 43,034 .71 1,549. 12 F 27.780 017 Sig F 0.0001 51 Answer the questions that follow Do not round in the interim. Use proper decimal notation. 1. Based on the regression, write the cost equation in good form: TC = 35.69X + 262 2. If Casio makes 19 deliveries, how much is the expected cost? TC = $35.5834615*19 + $262.219872 = $938 Multiple Choice 1. What type of information does the high-low method usually produce? a. A reasonable estimate of variable and fixed costs b. A very precise estimate of the behavior of the costs c. A very conservative estimate of costs for analysis purposes d. A exact calculation of variable and fixed costs to be incurred None of the methods product an exact cost calculation. 2. Which one of the following is a relatively accurate method of analyzing cost behavior that relies on an analysis of all cost levels? A. Regression analysis B. Relevant range approach C. Scatter diagram approach D. High-low analysis 3. Information concerning amounts for Bridges, Inc. appears below: Costs Units January $100,000 1,200 February 120,000 1,600 March 90,000 1,100 April 85,000 1,250 May 110,000 1,300 Using the high-low method, what periods would be used? A. February and April B. March and February C. March and April D. Either February and March or February and April Select the months with the highest and lowest activity levels. 4. The cost estimation method that uses all relevant data points is A. regression analysis B. scatter graphs C. high-low method D. A, B, and C E. Both A and C Scatter-graphs involve graphing data points and eye-balling a line through points, however, the line doesn't go through all the points. Account analysis involves using judgment about which costs are variable and which are fixed and adding them together for one period. The high low method uses on the largest and the smallest activity level. 5. Which of the following best describes the relationship between total fixed costs and total variable costs, as total volume decreases? A. Total fixed costs stays the same and total variable costs stays the same. B. Total fixed costs decreases and total variable costs stays the same. C. Total fixed costs stays the same and total variable costs decrease. D. Total fixed costs decrease and total variable costs decrease. Note that total fixed costs stays the same no matter what happens to activity. 6. Saylor, Inc. provided the following results: 2003 2002 Units 2,600 3,000 Total $17,550 $20,250 Cost What form of cost behavior is represented by the above results? A. Fixed Cost B. Opportunity Cost C. Mixed Cost D. Variable Cost $17,500/2,600 = $6.75 per unit; $20,250/3,000 = $6.75 per unit. Since unit cost is the same, this is a variable cost. 7. What is the best explanation for the use of regression analysis by accountants? A. Regression analysis provides the exact measure of variable costs. B. Regression analysis is more difficult to use than the high-low method. C. Regression analysis provides an estimate based upon statistical measures. D. Regression analysis produces a graph that is just as accurate as a manually prepared graph. Regression analysis is an estimation of costs, not an exact measure, though it it much more accurate than a manual graph or the high-low method. 8. A significant weakness of the high-low method is that A. a significant amount of management expertise is necessary to break out the variable and fixed costs. B. the two data points that are used may not be representative of the general relation between cost and activity. C. the calculations are so complex that a computer is usually necessary in order to get accurate results. D. monthly data must be collected for at least three years before the method can be used. Answer A applies to the account analysis method. Answer C likely applies to regression analysis. 9.When units produced and total production costs are graphed, the result is called A. incremental analysis. B. a profit graph. C. a scatter graph D. a CVP analysis graph A CVP graph is more than only production costs. It represents the components of the income statement. 10. What is cost behavior? a. The way management chooses to estimate its costs b. The method used to allocate costs to products c. How a cost is used in setting selling prices d. The manner in which a cost changes as the related activity changes 11. Costs that remain constant in total dollar amount as the level of activity changes and cost that remains constant per unit in dollar amount as the level of activity changes are called (respectively) a. fixed costs and variable costs b. mixed costs and fixed costs c. mixed costs and variable costs d. variable costs and fixed costs Mixed costs are those that contain both fixed and variable components. 12. Which of the following describes the behavior of the fixed cost per unit? a. Decreases with decreasing production b. Decreases with increasing production c. Remains constant with changes in production d. Increases with increasing production Note that it is asking about 'per unit'. e.g., if rent is $800 per month, the cost for one person is $800 per person, the cost for two people is $400 per person, and so on....on a decreasing basis. 13. A mixed cost A. fluctuates between fixed to variable from period to period. B. changes in proportion to changes in volume both in unit and in total. C. includes both a variable cost component and a fixed cost. D. is omitted from CVP analysis since it does not fit either fixed or variable categories. To include in a CVP analysis, we must break out the fixed and variable portions. 14. Why do management accountants use regression analysis and the high-low method? A. To verify actual costs incurred during the period. B. To determine the profitability of a company or division C. To calculate break even amounts D. To estimate the relation between cost and activity While a company may ultimately want to determine profitability or calculate break even points, these methods help estimate the fixed and variable costs. 15. Why is identification of a relevant range important? A. It is required under GAAP. B. Cost behavior outside of the relevant range is not linear, which distorts CVP analysis. C. It directly impacts the number of units of a product a customer buys. D. It is a cost that is incurred by a company that must be accounted for. Since CVP is for management purposes and not required under GAAP, relevant range has no role in external GAAP reporting. 16. For what purpose is the high low method primarily used? A. To analyze the behavior of fixed costs B. To separate mixed costs into the fixed and variable portions C. To analyze the behavior of variable costs D. To determine how much to price products Answer: B is the best answer since that is what regression and the high-low method do. Before these methods can be performed, answer A must occur. 17. What is a relevant range of activity? A. The geographical locations in which the company operates B. The activity level at which profits are maximized C. The levels of activity over which the company expects to operate D. The level of activity in which all costs are constant This is the range we expect variable costs per unit and fixed costs in total to stay the same. 18. In cost analysis, what does the term "cost" mean? A. It includes all fixed and variable costs of products, but excludes period costs. B. It includes all costs which are part of cost of goods sold, plus variable operating expenses. C. It includes all manufacturing costs and operating expenses. D. It includes only manufacturing costs. Manufacturing costs are product costs which include both fixed and variable. Operating expenses are period costs which include both fixed and variable. Cost includes both of these. 19. If a company identifies it has a mixed cost, which one of the following is a reasonable option? a. It should break it into a variable cost element and a fixed cost element. b. It should consider it to be a fixed cost. c. It should consider it to be a variable cost. d. It should omit the cost from the analysis. 20. Which of the following is most likely a mixed cost? a. Car rental fee b. Storage unit rent c. Equipment depreciation d. Direct labor Storage unit for one particular unit (i.e., at a relevant range) is fixed. Depreciation is fixed. Direct labor is variable. Car rental fees such as Enterprise Car Rental can often charge a flat fee per day, plus a cost per mile. 21. Why is the high-low method frequently not as accurate as regression analysis? a. It assumes managers have classified costs correctly. b. It uses analytical techniques which are questionable. c. It assumes that costs behave linearly. d. It uses extreme points which may not be representative of the rest of the data. All estimation methods assume managers have classified costs correctly into fixed and variable categories that behave linear. 22. In cost analysis, what does the term "cost" mean? a. It includes all fixed and variable costs of products. b. It includes all costs which are part of cost of goods sold. c. It includes manufacturing costs plus selling and administrative expenses. d. It includes all manufacturing costs. Cost means total costs, which include both fixed and variable. Since CVP analysis has a goal of determining activity levels to reach desired profit levels, a determination of net income is necessary. Net income calculates profits after ALL costs....both product and period are subtracted. 23. Hanalia, Inc. provided the following results: 2004 2003 Units 2,400 3,000 Total $19,200 $24,000 Cost What form of cost behavior is represented by the above results? A. Fixed Cost B. Opportunity Cost C. Mixed Cost D. Variable Cost Cost per unit is the same for both levels of activity: 2004: $19,200/2,400 = $8 2003: $24,000/3,000 = $8 24. Which is true as it relates to fixed costs? A. Total fixed cost increases as production/sales increase B. Fixed cost per unit declines as production/sales increases. C. Fixed cost per unit increases as production/sales increases. D. Total fixed cost declines as production/sales increase As fewer units are produced/sold, the cost per unit goes up. Answers A and C are wrong because total fixed costs remain the same regardless of the activity level. 25. Why is determination of a relevant range important? A. Cost behavior outside of the relevant range is generally distorted. B. It directly impacts the direct cost allocated to a product or service. C. It is a relevant cost. D. GAAP requires companies to report this information. Managerial accounting is not a part of GAAP. Within the relevant range, the behavior of costs is assumed to be linear. 26. For what purpose is regression analysis used in accounting? A. To determine the break even point B. To estimate the behavior of costs C. To allocate costs to products, services, jobs, or departments. D. To determine how profitably the companies activities are. Then the costs can be used to predict future costs. 27. Which statement describes a fixed cost? A. It varies in total at every level of activity. B. The unit cost varies directly to the activity level. C. Its unit cost varies inversely to the level of activity. D. It remains the same per unit regardless of activity level. Answer D is wrong because fixed cost "per unit" declines as activity increases. Only fixed costs in total remain the same at different levels of activity. 28. Which one of the following would most likely be considered a mixed cost? a. Cost of using a copy machine c. Supervisory salaries b. Direct labor d. Direct materials Answers B and D are variable costs. Answer C is a fixed cost. 29. Why do managers use scattergraphs? A. To estimate the relation between cost and activity B. To verify actual costs incurred during the period C. To determine the profitability of a company or division D. To calculate break even amounts The relationship between cost and activity is how we determine which costs are fixed and variable. Once we determine which costs are fixed and variable, they can be used for a number of decisions, such as break even analysis, pricing products, budgets, etc. 30. When 200 gallons of ice cream are produced, the total cost is $200. When 300 gallons of ice cream are produced, the total cost is $250. Which of the following statements is true? A. This company has only fixed costs B. This company has only variable costs C. This company has both variable and fixed costs D. It is impossible to determine this company’s cost structure without more information. Since total costs are not the same at both 200 and 300 gallons, the costs are not fixed. The cost per units are $1 and $1.20 respectively, which means they are not variable in total. That leaves them at mixed costs which means a portion are fixed and a portion are variable. 31. Variable costs per unit A. can be estimated by using break even analysis. B. remain the same on a per unit basis when the level of activity changes. C. are represented by the slope of the total cost line. D. Both B and C are correct, but not A. E. A, B and C are correct. Break even analysis is used to predict cost behavior, not estimate costs. 32. Why must a company determine what its relevant range is? A. It directly impacts the indirect cost allocated to a product or service. B. It is a relevant cost. C. GAAP requires companies to report this information. D. Cost behavior outside of the relevant range is generally distorted 33. Which of the following statements is false regarding regression analysis? A. It is used to predict the fixed and variable components of a mixed cost. B. It is used to predict whether or not a cost is a product or period cost. C. It is usually more accurate than the high/low method. D. It uses statistical methods to fit a cost line through a number of data points. Since it uses all data points, it is more accurate than the high low method. It does not attempt to decide the function of a cost, i.e., product or period.