SHERIDAN

XHIBIT 2 Estimated Cost of Carpet 104 at Various Production Volumes (first 6 months of 1983)
Volume (square yards)
65,000 87,000 110,000 150,000
V Raw Materials 0.52 0.52 0.52 0.52
V Material Spoilage 0.052 0.051 0.049 0.049
V Direct Labour 1.026 0.989 0.979 0.962
Department Overhead:
V Direct 0.142 0.136 0.131 0.13
F Indirect 1.2 0.891 0.709 0.52
V General Overhead 0.308 0.297 0.294 0.289
Factory Cost 3.248 2.884 2.682 2.47
M Selling & Administrative 2.111 1.875 1.743 1.606
Total Cost 5.359 4.759 4.425 4.076
+Material handlers, supplies, repairs, power, fringe benefits.
*Supervision, equipment depreciation, heat and light
‡ 30 percent of direct labour 137,215 163,125 191,730 240,900
§65 percent of factory cost
TEST FOR VARIABLE, FIXED AND MIXED ELEMENTS OF COSTS
V Direct 9,230 11,832 14,410 19,500
F Indirect 78,000 77,517 77,990 78,000
V General Overhead 20,020 25,839 32,340 43,350
M Selling & Administrative 137,215 163,125 191,730 240,900
244,465 278,313 316,470 381,750

Levels of Activity 65,000 87,000 110,000 150,000

Variable Costs
Raw Materials 0.52 0.52 0.52 0.52
Material Spoilage 0.052 0.051 0.049 0.049
Direct Labour 1.026 0.989 0.979 0.962
Direct 0.142 0.136 0.131 0.13
General Overhead 0.30 0.30 0.30 0.30
Selling Overhead 1.28 1.28 1.28 1.28
3.32 3.276 3.259 3.241

EVALUATION OF ALTERNATIVES
Activity Level 65,000 150,000
OPTIONS Selling Price I Selling Price II
Selling Price 5.20 3.90
Variable Overhead Cost 3.32 3.32
Contribution/Unit 1.88 0.58

Total Contribution 122,200 87,000

Operating Statement
Activity Level 65,000 150,000
Selling Price 5.20 3.90
$ $
 Sales 338,000 585,000
Variable Cost 215,800 498,000
Contribution 122,200 87,000

WORKINGS
Step 1 Calculation Variable Selling Overhead Cost/Unit
Using High & Low Method High Low Change

Selling Overhead Cost $336,380 $137,215 $199,165

Activity Levels 220,000 65,000 155,000

Variable Selling Ohd Cost/Unit $1.28

Step 2 Separation of Fixed Selling Overhead Cost from Mixed Costs at High Level of Activity
Total Cost = Fixed Cost + Variable Cost
Y = a + b(x)
Total Selling Overhead Cost = Fixed Cost + Variable Cost
$336,380 = Fixed Cost + $1.28 (220,000)
Fixed Cost = $336,380 - $282,686.00
Fixed Selling Overhead Cost = $53,694.00

EVALUATION OF DECISION
Option 1 Option 2
Activity Level 150,000 65,000
Selling Price 3.90 5.20

$ $
Sales $585,000.00 $338,000.00
Less: Variable Costs
Raw Materials 0.52 $78,000.00 $33,800.00
Material Spoilage 0.052 $7,800.00 $3,380.00
Direct Labour 1.026 $153,900.00 $66,690.00
Direct 0.142 $21,300.00 $9,230.00
General Overhead 0.30 $45,000.00 $19,500.00
Selling Overhead 1.28 $192,000.00 $83,200.00
Total Variable Costs $498,000.00 $215,800.00

Total Contribution $87,000.00 $122,200.00

Less: Fixed Overhead Costs
Indirect Overhead Costs $78,000.00 $78,000.00
Fixed Selling Overhead Cost $53,694.00 $53,694.00
Operating Profits ($44,694.00) ($9,494.00)

DECISION:
Sheridan should maintain its price of $5.20 since it will generate a higher contribution than if price is
reduced to $3.90.
rst 6 months of 1983)

185,000 220,000
0.52 0.52
0.051 0.052
0.975 0.997

0.13 0.13
0.422 0.355
0.293 0.299
2.391 2.353
1.554 1.529
3.945 3.882

287,490 336,380

XED ELEMENTS OF COSTS

24,050 28,600
78,070 78,100
54,205 65,780
287,490 336,380
443,815 508,860

185,000 220,000

0.52 0.52
0.051 0.052
0.975 0.997
0.13 0.13
0.30 0.30
1.28 1.28
3.256 3.279