Reference no: EM133023966

Question - Explanation of Problem - Hernandez Systems began business on January 1 of the current year, producing a single product that is popular with home builders. Demand was very strong, allowing the company to sell its entire manufacturing output of 80,000 units. The following unit costs were incurred:

Manufacturing costs:

Direct materials $15

Direct labor $8

Variable overhead $11

Fixed overhead $6

Selling and administrative costs:

Variable $5

Fixed $2

Hernandez anticipates an increase in productive output to 100,000 units and sales of 95,000 units in the next accounting period. The company uses appropriate drivers to determine cost behavior and estimates.

Required to solve -

A. Assuming that present cost behavior patterns continue, compute the total expected costs in the upcoming accounting period.

B. Jan Compton is about to prepare a graph that shows the unit cost behavior for variable selling and administrative cost. If the graph's horizontal axis is volume and the vertical axis is dollars, briefly describe what Compton's graph should look like.

C. Determine whether the following costs are variable or fixed in terms of behavior:

1. Yearly lease payments for a state-of-the-art cutting machine.

2. A fee paid to a consultant who provided advice about quality issues. The fee was based on the number of consulting hours provided.

3. Cost of an awards dinner for "star" salespeople.