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		$1,753		$1,437		$144		$362		4,128		423
February		1,671		1,926		144		441		3,975		402
March		1,818		4,044		144		684		6,642		555

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.) Use your rounded answers in all subsequent computations.

	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 342 visits for a total of 3,720 minutes. What is the total cost for April? If required, round your answer to the nearest dollar.
$

4. Suppose that Penny decides to buy a new tanning bed at the beginning of April for $9,552. 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	$ 1,747
Supplies and Maintenance	$ 2,469
Equipment Depreciation	$ 144
Electricity	$ 496
Tanning Minutes	4,915 minutes
Number of Visits	460 visits

2.

Variable rate for supplies and maintenance	$ 5.37 per visit
Variable rate for electricity	$ 0.10 per minute
Fixed Cost	$ 1,891

Cost = $ 1,891 + $ 5.37 per visit + $ 0.10 per minute.

3. Total cost for April : $ 4,144.

Total cost for April = $ 1,891 + $ 5.37 x 342 + $ 0.10 x 3,720 = $ 4,099.54 or $ 4,100

4. Cost = $ 2,090 + $ 5.37 per visit + $ 0.10 per minute

New expected cost in April = $ 4,299

Monthly depreciation on new bed = $ 9,552 / ( 4 x 12 ) = $ 199.

Total depreciation expense per month = $ 144 + $ 199 = $ 343.

Total fixed cost per month = $ 1,747 + $ 343 = $ 2,090.

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