Question

Tom's Shoe Repair provides a variety of shoe repair services. Analysis of monthly costs revealed the following cost formulas when direct labor hours are used as the basis of cost determination:

Supplies: y=$0+$4.00X

Production supervision and direct labor: y=$500+$7.00X

Utilities: y=$350+$5.40X

Rent: y=$450+$0.00X

Advertising: y=$75+$0.00X

a. Prepare a flexible budget 250, 300, 350, and 400 direct labor hours.

b. Calculate a total cost per direct labor at each level of activity.

c. Tom's employees usually work 350 direct labor hours per month. The average shoe repair requires 1.25 labor hours to complete. Tom wants to earn a 40 percent margin on his cost. What should be the average charge per customer, rounded to the nearest dollar to achieve Tom's profit objective?

*Don not use excel or any other software to solve this problem

Answer 1

Tom’s Shoe Repair

1. Flexible Budget 250, 300, 350 and 400 direct labor hours:

Tom's Shoe Repair
Flexible Budget
at Multiple Levels of Direct Labor Hours
Direct labor hours	250	300	350	400
Variable Costs:
Supplies at $4 per DLH	$1,000	$1,200	$1,400	$1,600
Production supervision and direct labor at $7 per DLH	$1,750	$2,100	$2,450	$2,800
Utilities at $5.40	$1,350	$1,620	$1,890	$2,160
Total variable cost	$4,100	$4,920	$5,740	$6,560
Fixed Costs:
Production supervision and direct labor	$500	$500	$500	$500
Utilities	$350	$350	$350	$350
Rent	$450	$450	$450	$450
Advertising	$75	$75	$75	$75
Total fixed cost	$1,375	$1,375	$1,375	$1,375
Total Cost	$5,475	$6,295	$7,115	$7,935

1. Calculation of total cost per direct labor hour at each level of activity:

Level of Activity	Total Cost	Total Cost per DLH
250 DLH	$5,475	$21.90
300 DLH	$6,295	$20.98
350 DLH	$7,115	$20.33
400 DLH	$7,935	$19.84

1. Determination of the average charge per customer, to achieve Tom’s profit objective:

At 350 DLH activity, the total cost per DLH = $20.33

Average shoe repair time = 1.25 hours

Average shoe repair cost = $20.33 x 1.25 = $25.41

Margin on cost at 40% -

Equation to arrive at the average charge per customer,

Average charge = total cost per DLH + Gross Margin

= $25.41 + (0.4 x Average Charge)

0.6 x Average Charge = $25.41

Average Charge = 25.41/0.60 = $42.35

Gross margin = 42.35 – 25.41 = $16.94

Hence, average charge per customer to achieve 40% gross margin = $42.35