Cost formulas, single and multiple activity drivers, correlation coefficient

Kimball Company has developed the following cost formulas:

Use of materials: Y _m = $84 X ; r = 0.94

Use of labor (direct): Y _l = $22 X ; r = 0.97

Overhead Activity: Y _o = $356,000 + $102 X ; r = 0.72

Sales activity: Y _s = $53,000 + $14 X ; r = 0.91

where

X = Direct labor hours

The company has a produce-on-demand policy and maintains very little, if any, finished goods inventory (therefore, units produced equal units sold). Each unit uses one hour of direct labor for production.

The president of the Kimball Company has recently implemented a policy that special orders will be accepted if they cover the costs that the orders cause. This policy was put in place because the Kimball industry is in a recession and the company is producing well below capacity (and expects to continue to do so for the next year). The president is willing to accept orders that minimally cover his variable costs so that the company can keep its employees and avoid layoffs. Also, any order above variable costs will increase the company's overall profitability.

Required:

1. Calculate the total unit variable cost. Suppose that Kimball has the opportunity to accept an order for 20,000 units at $232 per unit.

Answer rating: 100% (QA)

To calculate the total unit variable cost we need to add up the variable costs of materials labor and overhead activity Total unit variable cost Varia... View the full answer