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		$1,837		$1,422		$159		$350		4,089		423
February		1,722		1,872		159		420		3,954		375
March		1,824		4,083		159		687		6,795		573

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 360 visits for a total of 3,630 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 $8,592. 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

Solution

Penny Davis Shear Beauty Salon

1. Calculation of the average account balances for each account and cost driver:

Wages – (1,837 + 1,722 + 1,824)/3 = $1,794

Supplies and Maintenance = (1,422 + 1,872 + 4,083)/3 = $2,459

Equipment Depreciation = $159

Electricity = (530 +420 +687)/3 = $546

Tanning minutes = (4,089 + 3,954 + 6,795)/3 = 4,946 minutes

Number of visits = (423 + 375 + 573)/3 = 457 visits

2. Calculation of fixed monthly costs and variable rates for the account averages:

Variable rate for supplies and maintenance   $2,459/457 visits = $5.38 per visit

Variable rate for electricity = $546/4,946 minutes = $0.11 per minute

Fixed cost per month –

Wages $1,794

Equipment depreciation $159

Fixed cost per month = $1,953

Express results in the form of an equation for total cost –

Cost = $ + $ (visit) + $ (minute)

Cost = $1,953 + $5.38 x visit + $0.11 x minute

3. Total cost for April –

Visits = 360

Minutes = 3,630

Total cost = $1,953 + ($5.38 x 360 visits) + ($0.11 x 3,630 minutes)

= $1,953 + $1,936.80 + $399.30 = $4,289

Total cost for April = $4,289

4. Assuming purchase of new tanning bed –

The new fixed cost would include monthly depreciation of the tanning bed.

Annual Depreciation on new tanning bed = (8,592)/4 = $2,148

Monthly depreciation = $2,148/12 = $179

New fixed cost = $1,953 + 179 = $2,132

New equation for total cost = $2,132 + $ (visits) + $ (minute)

New expected cost in April for the prediction of 360 visits and 3,630 minutes –

Total cost = $2,132 + $5.38 (360) + $0.11 (3,630)

= $2,132 + 1,936.80 + $399.30 = $4,468.10

Expected cost in April = $4,468 (rounded off)