WHEN ANSWERING THE FOLLOWING QUESTIONS SHOW THE EQUATION/CALCULATIONS USED TO FIND EACH ANSWER

1.	The Empire Hotel is a four-star hotel located in downtown Seattle.	

Required:	
For each of the following costs incurred at the Empire Hotel, indicate whether it would most likely be a direct cost or an indirect cost of the specified cost object.	
 	
	Cost	                         Cost Object             Direct cost/Indirect cost                     
	                                
Ex.	Room service beverages	A particular hotel guest	Direct cost    Direct
1.	The salary of the head chef	The hotel’s restaurant	
2.	The salary of the head chef	A particular restaurant customer	
3.	Room cleaning supplies	        A particular hotel guest	
4.	Flowers for the reception desk	A particular hotel guest	
5.	The wages of the doorman	A particular hotel guest	
6.	Room cleaning supplies	      The housecleaning department	
7.	Fire insurance on the hotel building	The hotel's gym	
8.	Towels used in the gym	              The hotel's gym	

Please fill out as a direct or indirect cost
2.
The Sorrento Hotel is a four-star hotel located in downtown Seattle. The hotel’s operations vice president would like to replace the hotel’s antiquated computer terminals at the registration desk with attractive state-of-the-art flat-panel displays. The new displays would take less space, would consume less power than the old computer terminals, and would provide additional security since they can only be viewed from a restrictive angle. The new computer displays would not require any new wiring. The hotel’s chef believes the funds would be better spent on a new bulk freezer for the kitchen.	

Required:	
Classify each item as a differential cost, an opportunity cost, or a sunk cost in the decision to replace the old computer terminals with new flat-panel displays. If none of the categories apply for a particular item, select "None"	

Item
Ex. Cost of electricity to run terminals		Differential Cost
1.	Cost of the new flat panel displays        ?
2.	Cost of the old computer terminals	   ?
3.	Rent on the space occupied by the registration desk   ?
4.	Wages of registration desk personel	?
5.	Benefits from a new freezer		?
6.	Costs of mainataining the old computer terminals	?
7.	Cost of removing the old computer terminals	?
8.	Cost of existing registration desk wiring		?

3.
Several years ago Medex Company purchased a small building adjacent to its manufacturing plant in order to have room for expansion when needed. Since the company had no immediate need for the extra space, the building was rented out to another company for rental revenue of $40,000 per year. The renter's lease will expire next month, and rather than renewing the lease, Medex Company has decided to use the building itself to manufacture a new product.	
Direct materials cost for the new product will total $40 per unit. It will be necessary to hire a supervisor to oversee production. Her salary will be $2,500 per month. Workers will be hired to manufacture the new product, with direct labor cost amounting to $18 per unit. Manufacturing operations will occupy all of the building space, so it will be necessary to rent space in a warehouse nearby in order to store finished units of product. The rental cost will be $1,000 per month. In addition, the company will need to rent equipment for use in producing the new product; the rental cost will be $3,000 per month. The company will continue to depreciate the building on a straight-line basis, as in past years. Depreciation on the building is $10,000 per year.	
Advertising costs for the new product will total $50,000 per year. Costs of shipping the new product to customers will be $10 per unit. Electrical costs of operating machines will be $2 per unit.	
To have funds to purchase materials, meet payrolls, and so forth, the company will have to liquidate some temporary investments. These investments are presently yielding a return of $6,000 per year..	
 	
Required:	
For each of the costs associated with the new product decision, indicate whether it would be variable or fixed. If it is a product cost, indicate whether it would be direct materials, direct labor or a manufacturing overhead cost. If it is not a product cost, indicate whether it is a period, opportunity or a sunk cost. Select "None" if none of the categories apply for a particular item. NOTE: Opportunity cost is a special category, and to avoid confusion, do not attempt to classify the cost in any other way except as an opportunity cost.	

Please fill out the cost behavior, product cost classification, and non product cost classificatioin for each element on the left
Name of the Cost	            Cost Behavior   Product Cost Classification	  Non-product Cost Classification
Rental revenue forgone, $40,000 per year         ?		?			?       	 		
Direct materials cost, $40 per unit		  ?		?			?	
Supervisor's salary, $2,500 per month		  ?		?			?	
Direct labor cost, $18 per unit	          ?		?			?		
Rental cost of warehouse, $1,000 per month      ?		?			?			
Rental cost of equipment, $3,000 per month      ?		?			?			

				           Cost Behavior   Product Cost Classification  Non-product Cost Classification					
Depreciation of the building, $10,000 per year		?		?			?		
Advertising cost, $50,000 per year	             ?		?			?		
Shipping cost, $10 per unit			?		?			?		
Electrical costs, $2 per unit				?		?			?		
Return earned on investments, $6,000 per year		?		?			?	

4. 
Haaki Shop, Inc., is a large retailer of surfboards. The company assembled the information shown below for the quarter ended May 31:	

 	Amount	
  Total sales revenue	$	800,000   	
  Selling price per surfboard	$	400   	
  Variable selling expense per surfboard	$	50   	
  Variable administrative expense per surfboard	$	20   	
  Total fixed selling expense	$	150,000   	
  Total fixed administrative 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 for the quarter ended May 31.	

Haaki Sop, Inc
Traditional Income statement (selling and administrative expenses included)

2.	Prepare a contribution format income statement for the quarter ended May 31	

Haaki Shop, Inc.
Contribution Format Income Statement (Variable expenses included) with fixed expenses as well

3.
What was the contribution toward fixed expenses and profits for each surfboard sold during the quarter?
  
Contribution of each surfboard was ?-

5.

Speedy Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by the company’s cost analyst has determined that if a truck is driven 120,000 miles during a year, the average operating cost is 11.6 cents per mile. If a truck is driven only 80,000 miles during a year, the average operating cost increases to 13.6 cents per mile.

Required:	

1.& 2.	
Using the high-low method, estimate the variable and fixed cost elements of the annual cost of truck operation. (Round the "Variable cost per mile" to 3 decimal places.)	

 	

                                             Miles                        Total Annual
                                             Driven                         Cost
High level of activity

Low level of activity

Change                                        0$                                0

Variable cost per mile                                                       per unit

Fixed cost per year

	

Required:	
6.

Frankel Ltd., a British merchandising company, is the exclusive distributor of a product that is gaining rapid market acceptance. The company’s revenues and expenses (in British pounds) for the last three months are given below:	

Frankel Ltd.
Comparative Income Statements
For the Three Months Ended June 30	

 	
April	

 	
May	

June	

  Sales in units	
 	
3,000  	

 	
3,750  	

4,500  	

 	

 	

	

	

  Sales revenue	
 	
£ 420, 000  	

 	
 £ 525,000  	

  £ 630,000  	

  Cost of goods sold	
 	
168,000  	

 	
210,000  	

252,000  	

 	

 	

 	

  Gross margin	
 	
252,000  	

 	
315,000  	

378,000  	

 	

 	

 	

  Selling and administrative expenses:	

 	

 	

 	

       Shipping expense	
 	
44,000  	

 	
50,000  	

56,000  	

       Advertising expense	
 	
70,000  	

 	
70,000  	

70,000  	

       Salaries and commissions	
 	
107,000  	

 	
125,000  	

143,000  	

       Insurance expense	
 	
9,000  	

 	
9,000  	

9,000  	

       Depreciation expense	
 	
42,000  	

 	
42,000  	

42,000  	

 	

 	

 	

  Total selling and administrative expenses	
 	
272,000  	

 	
296,000  	

320,000  	

 	

 	

 	

  Net operating income (loss)	
 	
£  (20,000)	

 	
£  19,000  	

£  58,000  	

 	

 	

	

	

   
(Note: Frankel Ltd.’s income statement has been recast in the functional format common in the United States. The British currency is the pound, denoted by £.)	

Required:	

1.	
Identify each of the company’s expenses (including cost of goods sold) as either variable, fixed, or mixed	

Expenses	                         Classification
Cost of goods sold	
Shipping expense     	
Advertising expense	
Salaries and commissions	
Insurance expense	
Depreciation expense		 	

2. 
Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense.
  Variable Cost    Fixed Cost		Formula
	Per unit				y=	+
	Per unit				y=	+

2.	
Redo the company’s income statement at the 4,500-unit level of activity using the contribution format

Frankel Ltd.
Contribution Format Income Statement
For the Month Ended June 30

Variable Expense
1.
2.
3.
4.
5.
6.
Fixed Expense
1.
2.
3.
4.
5.
6.