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Chapter 2

# COMMERCE 2AB3 Chapter Notes - Chapter 2: Direct Labor Cost, Kilogram, Variable Cost

Department
Commerce
Course Code
COMMERCE 2AB3
Professor
Mohamed Shehata
Chapter
2

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Question 1
Select the graph that matches the numbered manufacturing cost data. Indicate by letter which of
the graphs best fits each of the situations or items described.
The vertical axes of the graphs represent total dollars of cost, and the horizontal axes represent
production output during a calendar year. In each case, the zero point of dollars and production is
at the intersection of the two axes. The graphs may be used more than once.
1. Annual depreciation of equipment, where the amount of depreciation charged is computed
by the machine-hours method.
2. Electricity bill a flat fixed charge, plus a variable cost after a certain number of kilowatt-
hours are used, where the quantity of kilowatt-hours used varies proportionately with the
quantity of production output.
3. City water bill which is computed as follows:
First 1,000,000 or less \$1,000 flat fee
Next 10,000 litres \$0.003 per litre used
Next 10,000 litres \$0.006 per litre used
Next 10,000 litres \$0.009 per litre used
And so on And so on
The litres of water used vary proportionately with the quantity of production output.
4. Cost of lubricant for machines, where cost per unit decreases with each kilogram of
lubricant used (for example, if one kilogram is used, the cost is \$10; if two kilograms are
used, the cost is \$19.98; if three kilograms are used, the cost is \$29.94) with a minimum cost
per kilogram of \$9.20.
5. Annual depreciation of equipment, where the amount is computed by the straight-line
method. When the depreciation rate was established, it was anticipated that the obsolescence
factor would be greater than the wear-and-tear factor.
6. Rent on a manufacturing plant donated by the city, where the agreement calls for a fixed fee
payment unless 200,000 labour-hours are worked, in which case no rent need be paid.
7. Salaries of a repair personnel, where one person is needed for every 1,000 machine-hours or
less (that is, 0 to 1,000 hours requires one person; 1,001 to 2,000 hours requires two people,
etc.).
8. Cost of direct materials used (assume no quantity discounts).
9. Rent on a manufacturing plant donated by the county, where the agreement calls for rent of
\$100,000 reduced by \$1 for each direct manufacturing labour-hour worked in excess of
200,000 hours, but a minimum rental fee of \$20,000 must be paid.
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