Question

E5-2 Determining Cost Behavior and Calculating Expected Cost [LO 5-1]

Morning Dove Company manufactures one model of birdbath, which is very popular. Morning Dove sells all units it produces each month. The relevant range is 0–1,800 units, and monthly production costs for the production of 1,400 units follow. Morning Dove’s utilities and maintenance costs are mixed with the fixed components shown in parentheses.   

Production Costs	Total Cost
Direct materials	$	2,100
Direct labor		7,300
Utilities ($100 fixed)		560
Supervisor’s salary		3,000
Maintenance ($340 fixed)		470
Depreciation		850

Required:
1. Identify each cost as variable, fixed, or mixed, and express each cost as a rate per month or per unit (or combination thereof). (Round your per unit value to 2 decimal places.)



2. Determine the total fixed cost per month and the variable cost per unit for Morning Dove. (Round your variable cost per unit to 2 decimal places.)



3. State Morning Dove’s linear cost equation for a production level of 0–1,800 units. Enter answer as an equation in the form of y = a + bx. (Round your variable cost per unit to 2 decimal places.)



4. Calculate Morning Dove’s expected total cost if production increased to 1,600 units per month. Enter answer as an equation in the form of y = a + bx. (Round Variable cost per unit to 2 decimal places.)

Answer 1

1.

Production Costs	Cost Behaviour	Fixed	+	Variable	Working
Direct materials	Variable	$0 per month	+	$1.50 per unit	($2100/1400)
Direct labor	Variable	$0 per month	+	$5.21 per unit	($7300/1400)
Utilities	Mixed	$100 per month	+	$0.33 per unit	($560 - $100)/1400
Supervisor's salary	Fixed	$3000 per month	+	$0 per unit
Maintenance	Mixed	$340 per month	+	$0.09 per unit	($470 - $340)/1400
Depreciation	Fixed	$850 per month	+	$0 per unit

2. Total fixed cost per month = $100 + $3000 + $340 + $850 = $4290

Variable cost per unit = $1.50 + $5.21 + $0.33 + $0.09 = $7.13

3. y = $4290 + $7.13x

4. Total cost = $4290 + ($7.13 x 1600) = $4290 + $11408 = $15698