Nike Wants To Develop A Cost Formula For Maintenance

Nike Company Wants To Develop a Cost Formula For Its Maintenance Costs

Nike Company wants to develop a cost formula for its maintenance costs to estimate such costs for the coming year. The following data are available: Month Direct Labor Hours Maintenance Costs Incurred January 4,000 $ 900 February 6,500 1,325 March 7,000 1,500 April 5,500 1,150 Using the high-low method, what is the cost formula for maintenance costs? a. $500 + $1.00 per direct labor hour b. $300 + $1.50 per direct labor hour c. $100 + $0.20 per direct labor hour d. $200 + $0.10 per direct labor hour 3. If sales are $80,000, variable costs are $50,000, and fixed costs are $20,000, the contribution margin ratio is a. 37.5% b. 12.5% c. 62.5% d. 25.0% 4. At the breakeven point a. Sales will be equal to variable costs plus target profit b. Sales will be equal to variable costs plus fixed costs c. Sales will be equal to fixed costs plus target profit d. Fixed costs will be equal to variable costs 5. An increase in the breakeven point can be caused by: a. an increase in desired profit. b. an increase in selling price per unit. c. an increase in variable cost per unit. d. a decrease in total fixed cost. EXTRA CREDIT (Worth 2 points) 4. Acme, Inc. manufactures pencils which sell for $7.50 each. Acme expects to sell 82,000 pencils next quarter. At this level of sales, variable expenses will total $184,500 and fixed expenses will total $242,130. How many pencils will Acme have to sell next quarter to breakeven? Hint: First determine the VC per unit. a. 32,284 pencils. b. 46,120 pencils. c. 56,884 pencils. d. 345,900 pencils.

Paper For Above instruction

The assignment encompasses analyzing cost behavior through various methods and calculating key financial metrics. Specifically, it involves applying the high-low method to develop a maintenance cost formula, calculating the contribution margin ratio, understanding the break-even point, and assessing how changes in costs or prices influence the break-even level. Additionally, the task requires calculating the breakeven sales volume for a product based on its fixed and variable costs to guide managerial decision-making.

In the context of Nike's effort to formulate a maintenance cost estimate for the upcoming year, the high-low method provides an effective approach for estimating mixed costs. Using the data provided—monthly direct labor hours and corresponding maintenance costs—the goal is to determine a cost equation of the form:

Maintenance Costs = Fixed Cost + (Variable Cost per Direct Labor Hour × Number of Hours)

By analyzing the highest and lowest activity months—March and January, respectively—we can estimate the variable cost per hour and the fixed cost component.

The high activity month, March, had 7,000 direct labor hours with maintenance costs of $1,500, while the low activity month, January, had 4,000 hours with costs of $900. The change in costs and hours between these months allows calculating the variable cost per hour:

Variable Cost per Hour = (Cost at high activity - Cost at low activity) / (Hours at high - Hours at low) = ($1,500 - $900) / (7,000 - 4,000) = $600 / 3,000 = $0.20 per hour.

Using either the high or low point, the fixed cost component can be calculated:

Fixed Cost = Total Cost - (Variable Cost per Hour × Hours) = $900 - ($0.20 × 4,000) = $900 - $800 = $100.

Thus, the estimated cost formula is:

Maintenance Costs = $100 + $0.20 per direct labor hour.

Matching this with the options provided, the correct choice is (c) $100 + $0.20 per direct labor hour.

For the contribution margin ratio, it is calculated as:

Contribution Margin Ratio = (Sales - Variable Costs) / Sales = ($80,000 - $50,000) / $80,000 = $30,000 / $80,000 = 0.375 or 37.5%.

Hence, the correct answer is (a) 37.5%.

Regarding the breakeven point, the definition is the level of sales where total revenues equal total expenses, meaning:

Sales = Variable Costs + Fixed Costs, or more specifically, total costs.

At breakeven, the target profit is zero, so sales cover exactly the sum of variable and fixed costs, which matches choice (b).

The factors affecting the breakeven point include changes to fixed costs, variable costs, sales price, and desired profit.

An increase in desired profit or variable costs per unit will increase the breakeven level, whereas an increase in the selling price per unit overall tends to decrease it, provided other factors remain constant.

Specifically, an increase in variable costs per unit (choice c) directly raises total costs for each unit sold, raising the break-even point, as more sales are needed to cover higher variable costs.

Similarly, increasing fixed costs also increases the breakeven point, but the question asks specifically about causes, so choice (c) is correct.

In the additional problem involving Acme pencils, the focus is calculating the breakeven point in units for a product selling at $7.50 per unit, with known variable and fixed costs.

The variable cost per unit is calculated as:

Variable Cost per unit = Total Variable Costs / Number of Units = $184,500 / 82,000 ≈ $2.25 per unit.

The contribution margin per unit is then:

Selling Price - Variable Cost = $7.50 - $2.25 = $5.25.

The breakeven volume in units is determined by dividing the total fixed costs by the contribution margin per unit:

Breakeven units = Fixed Costs / Contribution Margin per Unit = $242,130 / $5.25 ≈ 46,144 units.

Closest to option (b) 46,120 pencils, which is the correct answer based on rounded calculations.

This analysis provides essential insights for managerial decision-making, highlighting how cost behavior influences profitability and operational planning. Accurately estimating maintenance costs allows Nike to budget effectively, and understanding the contribution margin helps in pricing strategies and sales targets. Recognizing the factors that affect the break-even point supports efficient resource allocation and strategic initiatives aimed at profitability improvement.

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