Problem 11-22      Cost behavior and averaging

Carlia Weaver has decided to start Carlia Cleaning, a residential house cleaning service company. She is able to rent cleaning equipment at a cost of $750 per month. Labor costs are expected to be $75 per house cleaned and supplies are expected to cost $6 per house.

Required

a.     Determine the total expected cost of equipment rental and the expected cost of equipment rental per house cleaned, assuming that Carlia Cleaning cleans 10, 20, or 30 houses during one month. Is the cost of equipment a fixed or a variable cost?

b.     Determine the total expected cost of labor and the expected cost of labor per house cleaned, assuming that Carlia Cleaning cleans 10, 20, or 30 houses during one month. Is the cost of labor a fixed or a variable cost?

c.     Determine the total expected cost of supplies and the expected cost of supplies per house cleaned, assuming that Carlia Cleaning cleans 10, 20, or 30 houses during one month. Is the cost of supplies a fixed or a variable cost?

d.     Determine the total expected cost of cleaning houses, assuming that Carlia Cleaning cleans 10, 20, or 30 houses during one month.

 

e.     Determine the expected cost per house, assuming that Carlia Cleaning cleans 10, 20, or 30 houses during one month. Why does the cost per unit decrease as the number of houses increases?

f.     If Ms. Weaver tells you that she prices her services at 25% above cost, would you assume that she means average or actual cost? Why?

Q187

Problem 11-23   Context-sensitive nature of cost behavior classifications

Pacific Bank’s start-up division establishes new branch banks. Each branch opens with three tell- ers. Total teller cost per branch is $90,000 per year. The three tellers combined can process up to 90,000 customer transactions per year. If a branch does not attain a volume of at least 60,000 transactions during its first year of operations, it is closed. If the demand for services exceeds 90,000 transactions, an additional teller is hired, and the branch is transferred from the start-up division to regular operations.

Required

a.     What is the relevant range of activity for new branch banks?

b.     Determine the amount of teller cost in total and the teller cost per transaction for a branch that processes 60,000, 70,000, 80,000, or 90,000 transactions. In this case (the activity base is the number of transactions for a specific branch), is the teller cost a fixed or a variable cost?

c.      Determine the amount of teller cost in total and the teller cost per branch for Pacific Bank, assuming that the start-up division operates 10, 15, 20, or 25 branches. In this case (the ac- tivity base is the number of branches), is the teller cost a fixed or a variable cost?