The Case
Blackheath Manufacturing Company, is a company that manufactures a single product named ¡§Great Heath.¡¨ The company recently hired a new cost accountant, Lee High, who intends to conduct a new cost analysis over a period of three production weeks. Lee wanted to better identify the fixed, variable, and semi-variable costs associated with production of ¡¥Great Heath.¡¦ Once these costs were categorized Lee could determine how this would effect the cost of goods sold. Lee could then develop what the break- even volume that could be generated from a changing volume of sales. The case shows the assumptions that Lee High made with respect to variable as versus fixed costs in determining the cost of goods sold per unit . Lee High …show more content…
His cost analysis is below:
Variable cost per unit = ƒ´Cost/ƒ´Activity or 560/200=2.8
And
Fixed cost per unit = Total Cost ¡V Variable Cost Element
Or
2390 (Week 3 cost of goods sold) ¡V (2.8 X 600) = $710/500 Units = 1.42
*500 Units of production was the arbitrary average Lee assigned in calculations.
Fixed admin and selling costs = $781/500 = $1.56
Added commission costs to sales force @ 7.00 X 10% = $.70
Added amount for conflict in figures = $.12
Break even per unit cost = $6.60

The decision rules that Lee created were based upon this $6.60 break even point figure. However, his failure to include the ¡§other expenses¡¨ missed the mixed and fixed costs that were included in that amount. Our model takes all expenses into consideration.
Total expenses for the 3 weeks can be determined as follow, Week 1= $2891, Week 2=$3241, and Week 3=$3591. All of the expenses help us to see what were the actual costs utilized in production. The difference in net income helped us to determine, that as income rose each week, there was a difference of $350. This assists us in determining what the variable costs per unit were. Because production rose each week 100 units between weeks 1 to 2 and 2 to 3, we can determine from this that variable cost will increase on a per unit basis of $3.50. The cost analysis method through which we determined our results utilized the ¡¥least-squares regression method.¡¦ Through linear regression we have