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 0–1,700 units, and monthly production costs for the production of 1,200 units follow. Morning Dove’s utilities and maintenance costs are mixed with the fixed components shown in parentheses.   

Production Costs	Total Cost
Direct materials	$	1,900
Direct labor		7,300
Utilities ($130 fixed)		550
Supervisor’s salary		2,900
Maintenance ($320 fixed)		530
Depreciation		800

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 0–1,700 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 1,400 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

• All working forms part of the answer
• Requirement 1

Production Costs	Total Cost for 1200 units	Nature	Variable cost per unit	Fixed Cost cost per month
Direct materials	$             1,900.00	Variable cost [per unit]	$                    1.58 per unit [1900/1200]
Direct labor	$             7,300.00	Variable cost [per unit]	$                     6.08 per unit [7300/1200]
Utilities ($130 fixed)	$                550.00	Mixed Cost	$                     0.35 per unit [ (550 – 130)/1200]	$             130.00 per month
Supervisor’s salary	$             2,900.00	Fixed cost [per month]		$          2,900.00 per month
Maintenance ($320 fixed)	$                530.00	Mixed Cost	$                     0.18 per unit [ (530 – 320)/1200]
Depreciation	$                800.00	Fixed cost [per month]		$              800.00 per month
TOTAL	$          13,980.00		$                     8.19 per unit	$          3,830.00 per month

• Requirement 2

Total variable cost = $ 8.19 per unit

Total Fixed cost = $ 3,830 per month

• Requirement 3

Equation: Y = a + bx

Equation: Y = $ 3,830 + $ 8.19x

• Requirement 4

Equation: Y = $ 3,830 + $ 8.19x

Y = 3830 + (8.19 x 1400)

Y = 3830 + 11,466

Y = $ 15,296

Total cost for 1400 units = $ 15,296