Question

Cost Formulas, Single and Multiple Activity Drivers, Coefficient of Correlation

Kimball Company has developed the following cost formulas:

Material usage: Y_m = $84X;r = 0.94

Labor usage (direct): Y_l = $22X;r = 0.97

Overhead activity: Y_o = $356,000 + $102X; r = 0.72

Selling activity: Y_s = $53,000 + $14X; r = 0.91

where

X = Direct labor hours

The company has a policy of producing on demand and keeps very little, if any, finished goods inventory (thus, units produced equals units sold). Each unit uses one direct labor hour for production.

The president of Kimball Company has recently implemented a policy that any special orders will be accepted if they cover the costs that the orders cause. This policy was implemented because Kimball's industry is in a recession and the company is producing well below capacity (and expects to continue doing so for the coming year). The president is willing to accept orders that minimally cover their variable costs so that the company can keep its employees and avoid layoffs. Also, any orders above variable costs will increase overall profitability of the company.

Required:

1. Compute the total unit variable cost. Suppose that Kimball has an opportunity to accept an order for 20,000 units at $232 per unit.

Answer 1

Variable cost per unit $186.48

Working:

Size of the order =20,000 units

Direct labor hour per unit = 1 hour

Total direct labor hours required = 20,000 hours

Material usage = Ym = $84 X r = 0.94 , (X is the number of labor hours)

= $84 x 20,000 x 0.94 = $1,579,200

Direct labor usage = Yl = $22 X r=0.97

= $22 x 20,000 x 0.97 = $426,800

Variable overhead = $102 X , r = 0.72

=$102 x 20,000 x 0.72 = $1,468,800

Variable selling cost = $$14 X , r=0.91

=$14 x 20,000 x 0.91 = $254,800

Total variable cost :

Direct material =$1,579,200

Direct labor =$426,800

Variable overhead =$1,468,800

Variable selling expenses =$254,800

Total variable cost =$3,729,600

Production Quantity 20,000

Variable cost per unit $186.48