Question

Make sure to read the activity notes before you attempt this activity. Detailed
instructions for completing the activity are included in the notes.
Make sure to work all the problems in this activity. The activity includes three
problems, each on a different worksheet (see the tabs below: Problem 1,
Problem 2, etc.)
Red Book Inc.
Book sales during the first four months of the year were:
	Month		# of Books Sold
	Jan		39
	Feb		88
	Mar		46
	Apr		65
Red management gathered the following information regarding the cost to sell
books:
	Cost of Wages	Cost of Insurance	Cost of Books	Cost of Rent
Jan	$        351	$     3,400	$        117	$        800
Feb	792	3,400	264	800
Mar	414	3,400	138	800
Apr	585	3,400	195	800
Problem 1
Determine the classification (variable or fixed) of each of the four types of cost.
Type of Cost		Classification
Cost of Wages		Variable
Cost of Insurance		fixed
Cost of Materials		Variable
Cost of Rent		fixed

Red Book Inc.
Problem 2
Prepare a cost equation for each type of cost (wages, insurance, books, and rent)
Type of Cost		Cost Equation
Cost of Wages
Cost of Insurance
Cost of Materials
Cost of Rent

Problem 3
Red Book management would like an estimate of total cost for the following activity levels
(combine the cost equations for each type of cost into a total equation)
Activity Level		Total Cost
22 books
53 books
82 books

Answer 1

Solution 1:

Cost classification:

Cost of wages = Variable

Cost of insurance = Fixed

Cost of books = Variable

Cost of Rent - Fixed

Solution 2:

Cost Equation:

Per unit cost of wages = $351/39 = $9 per book

Cost of wages = 0 + $9 X where x is nos of unit sold

Cost of insurance = $3,400 + 0X

Cost of Books = 0 + $3 X where x is nos of unit sold

Cost of Rent = $800 + 0X

Solution 3:

Total cost equation = ($0 + $3,400 + $ 0 + $800) + ($9 X + $0X + $3X + $0X)

= $4,200 + $12 X

Cost of 22 books = $4,200 + $12*22 = $4,464

Cost of 53 books = $4,200 + $12 * 53 = $4,836

Cost of 82 books = $4,200 + $12*82 = $5,184