Finance

Table of Contents
Introduction................................................................................................................................1
Question 01................................................................................................................................1
a) Estimation of the Behaviour of Ruskin and Associates Maintenance Costs.....................1
b) Predicted Maintenance Cost at 600 Hours of Activity.......................................................2
c) Variable cost per Hour and Fixed Cost per Hour at 600 Hours of Activity and Reasons
for Fixed Cost per Hour Being Misleading............................................................................3
Question 02................................................................................................................................3
a) Selling Price of the Company.............................................................................................3
b) Contribution Margin per Unit............................................................................................3
c) Breakeven Point in Units....................................................................................................3
d) Payment for the Advertising Campaign.............................................................................3
e) Units to be sold to earn a 50000 of Profit before Tax.......................................................4
f) Amount of Sales to Earn a Before Tax Return on Sales of 10%.........................................4
g) Units to be sold to make An After Tax Profit of 90000....................................................4
Conclusion..................................................................................................................................5
References..................................................................................................................................6
Appendix....................................................................................................................................6
Appendix 1.............................................................................................................................6

Introduction
This study is focused on developing understanding in different types of costs of a company
and its impact to different decisions. Therefore question 01 in high low method and the Y = a
+ b formula is used to identify costs. Hence costs at different levels of activities are
identified. Then question 02 will address the selling price per unit, contribution margin per
unit, breakeven point in units and several other questions.

Question 01
a) Estimation of the Behavior of Ruskin and Associates Maintenance Costs
According to Drury (2007: P. 610) the high low method consists of selecting the periods of
highest and lowest activity levels and comparing the changes in costs that result from these
two levels. Costs identified according to high/low method.

Variable cost per unit =

Costs at high level of activity - Cost at low level of

activity
High level of activity

4470 - 2820

520
7.5

Fixed cost =
=
=
=

Cost calculation according to the formula.

=

Y
a

=
=

the total cost

fixed cost per period
variable rate per unit of
activity

Low level of activity

- 300

Total cost at activity level 4470 (520 * 7.5 )

4470 3900
570

bx

Total variable cost

number of units of activity

Maintenance
Hours of
Cost
Maintenance
Service
January
480
4200
February
320
3000

* Application to the ratio is shown in the appendix 1.

Y

600

7.5x

As per Myers (2004: P. 100) the difference between total costs and total fixed costs is total
variable cost. Total variable cost is shown below.

Month

Maintenance Hours of
Fixed
Cost (Y)
Maintenance Cost
Service (x) (a)

January
February
March
April
May
June
July
August
September
October
November
December

4200
3000
3600
2820
4350
2960
3030
4470
4260
4050
3300
3160

480
320
400
300
500
310
320
520
490
470
350
340

600
600
600
570
600
635
630
570
585
525
675
610

Variable Total
Cost per Variable
hour (b) Cost (b)
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5

3600
2400
3000
2250
3750
2325
2400
3900
3675
3525
2625
2550

b) Predicted Maintenance Cost at 600 Hours of Activity

Maintenance
Cost (Y)
5070

Hours of
Maintenance
Service (x)

Fixed
Cost
(a)
600

570

Variable
Cost per
hour (b)
7.5

Total
Variable
Cost (b)
4500

* Fixed cost is assumed as 570 since this is the fixed cost of the highest level of activity.
2

c) Variable cost per Hour and Fixed Cost per Hour at 600 Hours of Activity and
Reasons for Fixed Cost per Hour Being Misleading
* Variable cost per hour is shown in part b).
Fixed cost per hour = 570/ 600 = 0.95
This could be misleading since the total fixed cost is an assumption.

Question 02
a) Selling Price of the Company
Selling price

=
=

500000
50000
10

b) Contribution Margin per Unit

Contribution Margin per Unit

125000
50000

2.5

c) Breakeven Point in Units

Breakeven point in units

=
=
=

Fixed Cost
Contribution margin per unit
60000
2.5
24000 units

d) Payment for the Advertising Campaign

Sales
Variable cost
Contribution margin
Advertising cost
Fixed cost
Profit before tax

540000
405000
135000
10000
60000
65000
3

Income tax (at 40%)

Net profit

26000
39000

It would have paid 10000.

e) Units to be sold to earn a 50000 of Profit before Tax

Sales
Variable cost
Contribution
margin
Fixed cost
Profit before tax
Income tax (at
40%)
Net profit

440000
330000
110000
60000
50000
20000
30000

Therefore it would have sold 44000 units.

f) Amount of Sales to Earn a Before Tax Return on Sales of 10%

Sales
Variable cost
Contribution
margin
Fixed cost
Profit before tax
Income tax (at
40%)
Net profit

400000
300000
100000
60000
40000
16000
24000

g) Units to be sold to make An After Tax Profit of 90000

Sales
Variable cost
Contribution
margin

840000
630000
210000
4

Fixed cost
Profit before tax
Income tax (at
40%)
Net profit

60000
150000
60000
90000

It would have sold 84000 units.

Conclusion
It can be concluded that the understanding of different cost types are essential in decision
making. Therefore these costs directly affect in the decision of selling price. Also company
can set various targets based on the identification of its cost behaviour. Breakeven number of
units is very important at least to focus on achieving a no profit or loss situation.
Percentage of tax and the fixed cost is unlikely to be changed. Hence the understanding of
this information directs the company towards accurate decision making.

References
Drury, C. (2007), Management and Cost Accounting, Cengage Learning EMEA, 7th Edition,
P. 610
Myers, D. (2004), Construction Economics, Taylor & Francis, P. 100

Appendix
Appendix 1
Y

bx

4200 =

480b

3000 =

320b

1
(a + 320b) - (a + 480b) =
a + 320b - a - 480b =
-160b
=
b
=

3000 - 4200
-1200
-1200
7.5

From 1
4200 =

4200 =
4200 =
a
=

a
a
600

+
+

480b
480 x
7.5
3600