T-131 Probset # 1

Chapter 2-16
Total costs & unit costs. A student association has hired a musical group for a
graduation party. The cost will be fixed amount of $4,000.
Required:
1. Supposed 500 people attend the party. What will be the total cost of the
musical group? The unit cost per person?
2. Suppose 2, 000 people attend. What will be the total cost of the musical
group? The unit costs per person?

Chapter 2-17
Total costs & unit costs. Nathan Brown is a well-known motivational speaker. The
St. George Speakers Bureau wants Brown to be the sole speaker at an all-day
seminar. Browns agent offers St. George the choice of 3 possible fee arrangements:
Schedule 1: $8,000 fee
Schedule 2: $20 per person + $2,000 fixed fee
Schedule 3: $50 per person
Each attendee will be charged a $200 fee for the all-day seminar.
Required:
1. What is St. Georges fixed cost and variable cost for hiring Brown under each
alternative schedule?
2. For each schedule, compute the total cost and unit cost per seminar attendee
of:
a. 50 attendees
b. 200 attendees
c. 500 attendees
Comment on the results.

Chapter 10-33
Data collection issues, use of high-low method: Robin Green, financial analyst
at Central Railroad, is examining the behavior of monthly transportation costs for

1
 budgeting purposes. Transportation costs at Central Railroad are the sum of two
types of costs: (a) Operating costs (labor, fuel and so on) and (b) maintenance costs
(overhaul of engines & track, and so on). Green collects monthly data on (a), (b),
and track miles hauled. Track miles hauled are the miles clocked by the engine that
pulls the rail cars. Monthly observations for the most recent years are:

Month Operating Maintenance Total Track Miles

Costs Costs Transportation Hauled
(1) (2) Costs
(3) = (1) + (2)
January $ 471 $437 $ 908 3, 420
February 504 388 892 5,310
March 609 343 952 5,410
April 690 347 1,037 8, 440
May 742 294 1, 036 9,320
June 774 211 985 8,910
July 784 176 960 8,870
August 986 210 1, 196 10, 980
September 895 282 1, 177 4, 980
October 651 394 1, 045 5, 220
November 481 381 862 4, 480
December 386 514 900 2, 980

Central Railroad earns its greatest revenues carrying agricultural commodities such
as wheat and barley.
Required:
1. Present plots of the monthly data underlying each of the following cost
functions:
a. Operating Costs = a + (b x Track miles hauled)
b. Maintenance Costs = a + (b x Track miles hauled)
c. Total transportation Costs = a + (b x track miles hauled)
Comment on the patterns in the three plots.
2. Estimate the three cost functions in requirement 1 using the high-low
method. Comment on the estimated cost functions.
3. Green anticipates 6, 000 track-miles hauled each month next year. What total
transportation costs should Green budget for next year?

Chapter 10-34

2
High low and regression approaches. The Carpi Corporation wishes to set a
flexible budget for its power costs, which are primarily a function of machine hours
worked. Data for the first 4 periods follows:
Period Power Costs (y) Machine Hours (x)
1 $300 200
2 450 300
3 370 100
4 500 400

Required:

1. Plot the relationship between power costs and machine hours.

2. Compute the constant and slope coefficient b of the function y= + bX
using:
a. The high low approach; and
b. The regression approach.

Comment on the results