QUIZ TOPIC 6 : COST BEHAVIOR

 QUIZ AA025 ACCOUNTING 2

TOPIC 6 : COST BEHAVIOR

QUESTION

Meow Company manufactures and sells cat food products. Monthly income statements for two activity levels are provided below: 

	Product 1	Product 2
Number of units	20,000 unit	30,000 unit
	RM	RM
Revenue	150,000	225,000
Cost of goods sold	60,000	90,000
Gross margin	90,000	135,000
Salaries and commissions	20,000	25,000
Advertising expenses	30,000	30,000
Administrative expenses	12,500	12,500
Total operating expenses	62,500	67,500
Operating Income	27,500	67,500

REQUIRED:

a)   Identify the variables costs, fixed cost and mixed costs.

b)   Use the high-low method to separate the total costs in this company (overall) into variable and fixed components.

c)   Develop a cost function to express the cost behavior of Meow Company.

d)   Determine the total costs if the company produces 10,000 and 40,000 unit of cat food products.

 

ANSWER

a) 

b)   

Variable cost per unit (b)       

= 157,500 – 122,500

     30,000 – 20,000

= RM3.50

Fixed cost      

= RM157,500 – RM3.50 (30,000)

= RM52,500 

or

Fixed cost      

= RM122,500 – RM3.50 (20,000)

= RM52,500

 

c)         Cost function:

        

        Y = RM52,500 + RM3.50x

 

d)        Total costs of 10,000 and 40,000 units of cat food products.

        Y    = RM52,500 + RM3.50 (10,000) 

               = RM87,500

        Y     = RM52,500 + RM3.50 (40,000)

                = RM192,500