Buggs-Off Corporation produces and sells a line of mosquito repellants that are sold usually all year round. The product sells at $100 per box. The following cost data has been prepared for its estimated upper and lower limits of activity for the year ended December 31, 2020.

Lower Limit Upper Limit

Production (# of boxes) 4,000 6,000

Production Costs:

Direct Materials $60,000 $90,000

Direct Labour . 80,000 120,000

Overhead: Indirect Materials... 25,000 37,500

Indirect Labour . 40,000 50,000

Depreciation . 20,000 20,000

Selling & Administrative Expenses:

Sales Salaries 50,000 65,000

Office Salaries 30,000 30,000

Advertising 45,000 45,000

Other 15,000 20,000

Total $365,000 $477,500

Required:

a) Classify each cost element as either fixed, variable, or mixed

b) Calculate:

i) the variable production cost per unit and the total fixed production overhead.

ii) The total variable cost per unit and the total fixed costs Hint: Use the high-low method to separate mixed costs into their fixed and variable components.

c) Assuming sales of 5,000 units, prepare a contribution margin income statement for the year ended December 31, 2020, detailing the components of total variable costs and total fixed costs, and clearly showing contribution and net income.

d) Assuming sales of 5,000 units, calculate Buggs-Off break-even point and margin of safety in units and sales dollars.

e) Recompute the break-even point in units, assuming that variable costs increased by 20% and fixed costs are reduced by $50,625. How will this impact the margin of safety ratio?

(f) The President of Buggs-Off is under pressure from shareholders to increase operating income by 20% in 2021. Management expects per unit data and total fixed costs to remain the same in 2021. Using the equation method, compute the number of units that would have to be sold in 2021 to reach the shareholders desired profit level. Is this a realistic goal?

(g) Briefly explain the impact of each of the following scenarios on the contribution margin per unit and the break-even point:

(i) Sales volume increases

(ii) Total fixed cost decreases

(iii) Selling price per unit increases

(iv) Variable cost per unit increases

Course Objectives:

1) Apply the concepts of cost classification to determine whether a cost is fixed, variable or mixed.

2) Given two levels of activity, demonstrate the use of the high-low method in separating mixed costs into their fixed and variable components.

3) Compute variable production cost per unit, total cost per unit, total fixed production cost and total fixed costs.

4) Use selling price per unit, total fixed cost, and total variable cost per unit to compute the breakeven point and margin of safety ratio.

5) Prepare a contribution margin income statement, clearly showing contribution.

6) Calculate the sales quantity necessary to achieve a specific target operating income

7)With the aid of supporting computations, analyze and explain the impact which changes in sales volume, selling price per unit, variable costs per unit and total fixed costs will have on the contribution margin per unit and break-even point