Question

Account Analysis Method

Penny Davis runs the Shear Beauty Salon near a college campus. Several months ago, Penny used some unused space at the back of the salon and bought two used tanning beds. She hired a receptionist and kept the salon open for extended hours each week so that tanning clients would be able to use the benefits of their tanning packages. After three months, Penny wanted additional information on the costs of the tanning area. She accumulated the following data on four accounts:

		Wages	Supplies and Maintenance	Equipment Depreciation	Electricity	Tanning Minutes	Number of Visits
	January	$1,750	$1,450	$150	$300	4,100	410
	February	1,670	1,900	150	410	3,890	380
	March	1,800	4,120	150	680	6,710	560

Penny decided that wages and equipment depreciation were fixed. She thought supplies and maintenance would vary with the number of tanning visits and that electricity would vary with the number of tanning minutes.

Required:

1. Calculate the average account balance for each account. Calculate the average monthly amount for each of the two drivers. (Round all answers to the nearest dollar or the nearest whole unit.)

	Average Account Balance
Wages	$
Supplies & Maintenance	$
Equipment Depreciation	$
Electricity	$
Tanning Minutes
Number of Visits

2. Calculate fixed monthly cost and the variable rates for the account averages. Round your answers to the nearest cent and use your rounded answers in all subsequent computations.

Variable rate for supplies & maintenance	$ per visit
Variable rate for electricity	$ per minute
Fixed cost per month	$

Express the results in the form of an equation for total cost. (Round to the nearest cent.)

Cost

=

$

+

$ (visit)

+

$ (minute)

3. In April, Penny predicts there will be 360 visits for a total of 3,700 minutes. What is the total cost for April? When required, round your answers to the nearest dollar.
$

4. Suppose that Penny decides to buy a new tanning bed at the beginning of April for $6,960. The tanning bed is expected to last four years and will have no salvage value at the end of that time.

What will be the new equation for total cost? If required, round your answers to the nearest cent.

Cost = $ + $ (visit) + $ (minute)

What is the new expected cost in April based on the prediction provided in Requirement 3 (above)? When required, round your answer to the nearest dollar.
$

Answer 1

1.

	Average Account Balance
Wages	$ 1,740
Supplies and Maintenance	$ 2,490
Equipment Depreciation	$ 150
Electricity	$ 463
Tanning Minutes	4,900
Number of Visits	450

2.

Variable rate for Supplies and Maintenance ( $ 2,490 / 450 visits)	$ 5.53 per visit
Variable rate for Electricity ( $ 463 / 4,900 minutes)	0.09 per minute
Fixed Cost per month $ ( 1,740 + 150)	1,890

Cost Equation :

Cost

=

$ 1,890

+

$ 5.53 per visit

+

$ 0.09 per minute

3. Total cost for April = $ 1,890 x $ 5.53 x 360 visits + $ 0.09 x 3,700 minutes = $ 4,213.80 or $ 4,214..

4. Monthly depreciation for new tanning bed = $ 6,960 / 48 = $ 145

Fixed cost per month = $ 1,890 + $ 145 = $ 2,035

Cost = $ 2,035 + $ 5.53 per visit + $ 0.09 per minute.

New expected cost for April = $ 4,359.