Question 1. Over the past few decades, the cost structure of manufacturing companies has shifted. In the early 1900s, direct material costs were substantial while fixed costs represented a small fraction of total manufacturing costs. However, the cost structure has reversed and now fixed costs make up the majority of total manufacturing costs. What caused this to happen? What would explain the drastic change in cost structure?
Question 2. Two members of the management team were looking at the current cost structure and what would need to be considered in a future decision they were facing. One of the managers states, “only variable cost can be differential costs”. Do you agree with this statement? Explain. Give examples.
Question 3. Below are cost and measures of activity in a variety of organizations. Classify each cost as variable or fixed with respect to the indicated measure of activity by listing out the numbered item and a “V” for variable or an “F” for fixed cost. For example: 1F, 2F, etc.
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#
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COST
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Measure of Activity
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1
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The cost of x-ray film used in the radiology lab at Virginia Madison Hospital in Seattle
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Number of x-rays taken
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2
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The cost of advertising a rock concert in New York City
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Numbers of rock concert tickets sold
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3
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The cost of renting retail space for a McDonalds restaurant in Hong Kong.
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Total sales at the restaurant
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4
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The electrical cost of running a roller coaster at Magic Mountain
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Number of times the roller coaster is run
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5
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Property taxes paid by your local cinema theater
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Numbers of tickets sold
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6
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The cost of sales commissions paid to salespersons at a Nordstrom store
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Total sales at the store
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7
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Property insurance on a Coca- Cola bottling plant
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Number of cases of bottles produced
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8
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The costs of synthetic materials used to make a particular model of running shoe
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Number of shoes of that model produced
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9
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The costs of shipping Panasonic televisions to retail stores
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The number of televisions sold
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10
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The cost of leasing an ultrascan diagnostic machine at the American Hospital in Paris
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The number of patients who are scanned with the machine.
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Question 4. Northwest Hospital is a full service hospital that provides everything from major surgery and emergency room care to outpatient clinics. For each cost incurrent at Northwest Hospital, indicate whether it would most likely be a direct cost or an indirect cost of the specified cost object by listing the number and a “D” for direct or an “I” for indirect. For example: 1D, 2D, etc.
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#
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Cost
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Cost object
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1.
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The wages of pediatric nurses
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The pediatric department
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2.
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Prescription drugs
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A particular patient
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3.
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Heating the hospital
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The pediatric department
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4.
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The salary of the head of pediatrics
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The pediatric department
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5.
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The salary of the head of pediatrics
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A particular pediatric patient
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6.
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Hospital chaplain's salary
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A particular patient
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7.
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Lab tests by outside contractor
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A particular patient
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8.
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Lab tests by outside contractor
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A particular department
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Question 5. Northwest Hospital is a full service hospital that provides everything from major surgery and emergency room care to outpatients clinics. The hospital’s Radiology department is considering replacing an old inefficient x-ray machine with a state of the art digital x ray machine. The new machine would provide higher quality x rays in less time and at a lower cost per x-ray. It would also require less power an would use a color laser printer to produce easily readable x-ray images. Instead of investing funds in the new x-ray machine, the laboratory department is lobbying the hospitals management to buy a new DNA analyzer.
For each of the items below, indicate whether it should be considered a different cost (DC), an opportunity cost (OC) or a sunk cost (SC) in the decision to replace the old x ray machine with a new machine. If none of the categories apply for a particular item. Please put (NA) next to the number for “none apply”. Please list the number and the 2 digits abbreviation next to it so for example, 1.OC, 2. SC, etc.
1. Cost of old x ray machine
2. The salary of the head of radiology department
3. The salary of the head of the Pediatrics department.
4. Cost of the new color laser printer
5. Rent on the space occupied by Radiology .
6. The cost of maintaining the old machine
7. Benefits from a new DNA analyzer
8. Cost of electricity to run the x ray machines.
Question 6. Various costs associated with the operation of factories are given below. Classify each cost as either variable or fixed with respect to the number of units produced and sold. Also indicate whether each cost would typically be treated as a direct cost or an indirect cost with respect to units of product. List each numbered item with either a “V” for variable or an “F” for fixed AND either a “D” for direct cost or “I” for indirect cost so for example: 1. VD, 2. FI, etc.
1. Electricity to run production equipment
2. Rent on a factory building
3. Cloth used to make drapes
4. Production superintendents salary
5. Wages of laborers assembling a product
6. Depreciation of air purification equipment used to make furniture
7. Janitorial salaries
8. Peaches used in canning fruit
9. Lubricant for production equipment
10. Sugar used in soft drink production
11. Property taxes on the factory
12. Wages of workers painting a product
13. Depreciation on cafeteria equipment
14. Insurance on a building used in producing helicopters
15. Cost of rotor blades used in producing helicopters