Cost Behavior

Cover-to-Cover Company is a manufacturer of shelving for books. The company has compiled the following cost data, and wants your help in determining thecost behavior. After reviewing the data, complete requirements (1) and (2) that follow.

Units

ProducedTotal

Lumber

CostTotal

Utilities

CostTotal Machine

Depreciation

Cost6,000shelves$66,000$8,900$120,00012,000shelves132,00015,800120,00024,000shelves264,00029,600120,00030,000shelves330,00036,500120,000

1.Determine whether the costs in the table arevariable,fixed,mixed, or none of these.

LumberVariable Cost

UtilitiesMixed Cost

DepreciationFixed Cost

2.For each cost, determine the fixed portion of the cost, and the per-unit variable cost. If there is no amount or an amount is zero, enter "0". Recall that, for N = Number of Units Produced, Total Costs = (Variable Cost Per Unit x N) + Fixed Cost. Complete the following table with your answers.Round variable portion of cost (per unit) answers to two decimal places.

CostFixed Portion

of CostVariable Portion

of Cost (per Unit)Lumber$$UtilitiesDepreciation

Feedback

Review the definitions for fixed, variable, and mixed costs, and the relationships between units produced and total cost for each type of cost. Recall that thehigh-low methodmay be used to separate a cost into its fixed and variable components.

High-Low

Biblio Files Company is the chief competitor of Cover-to-Cover Company in the bookshelf business. Biblio Files is analyzing its manufacturing costs, and has compiled the following data for the first six months of the year. After reviewing the data, answer questions (1) through (3) that follow.

Units ProducedTotal CostJanuary4,360units$65,600February3006,250March1,00015,000April7,800118,750May1,75032,500June3,01548,000

1.From the data previously provided, help Biblio Files Company estimate the fixed and variable portions of its total costs using the high-low method. Recall that Total Costs = (Variable Cost Per Unit x Number of Units Produced) + Fixed Cost. Complete the following table.

Total Fixed CostVariable Cost per Unit$$

2.With your Total Fixed Cost and Variable Cost per Unit from the high-low method, compute the total cost for the following values of N (Number of Units Produced).

Number of

Units Produced

Total Cost3,500$4,3607,800

3.Why does the total cost computed for 4,360 units not match the data for January?

a. The high-low method is accurate only for months in which production is at full capacity.

b. The high-low method only gives accurate data when fixed costs are zero.

c. The high-low method gives a formula for the estimated total cost and may not match levels of production other than the highest and lowest.

d. The high-low method gives accurate data only for levels of production outside therelevant range.

Feedback

Review the high-low method, and use the smallest and largest levels of production in your computation.

Contribution Margin

Review thecontribution marginincome statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statements. Complete the following table from the data provided on the income statements. Each company sold 82,800 units during the year.

Cover-to-Cover

CompanyBiblio Files

CompanyContribution margin ratio(percent)%%Unit contribution margin$$Break-even sales (units)Break-even sales (dollars)$$

Feedback

Review the definitions of contribution margin ratio and unit contribution margin. Also review the formulas for break-even in terms of units sold and sales dollars.

Income Statement - Cover-to-Cover

Cover-to-Cover Company

Contribution Margin Income Statement

For the Year Ended December 31, 20Y8Sales$414,000Variable costs:Manufacturing expense$248,400Selling expense20,700Administrative expense62,100(331,200)Contribution margin$82,800Fixed costs:Manufacturing expense$5,000Selling expense4,000Administrative expense11,700(20,700)Operating income$62,100

Income Statement - Biblio Files

Biblio Files Company

Contribution Margin Income Statement

For the Year Ended December 31, 20Y8Sales$414,000Variable costs:Manufacturing expense$165,600Selling expense16,560Administrative expense66,240(248,400)Contribution margin$165,600Fixed costs:Manufacturing expense$85,500Selling expense8,000Administrative expense10,000(103,500)Operating income$62,100

Sales Mix

Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings.

Type of

BookshelfSales Price

per UnitVariable Cost

per UnitBasic$5.00$1.75Deluxe9.008.10

The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called "Combined," the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $344,190. Recall that the totals of all thesales mixpercents must be 100%. Determine the amounts to complete the following table.

Type of BookshelfPercent of Sales MixBreak-Even Sales in UnitsBreak-Even Sales in DollarsBasic%$Deluxe%$

Feedback

Review the definition ofbreak-even point.

Recall that the Combined unit contribution margin is given by [(Basic unit contribution margin) x (Basic percent of sales mix)] + [(Deluxe unit contribution margin) x (Deluxe percent of sales mix)]. Since these percents must add up to 100%, we have the following:

(Basic percent of sales mix) + (Deluxe percent of sales mix) = 100%, so that

(Deluxe percent of sales mix) = 100% - (Basic percent of sales mix)

Target Profit

Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales.

1.If Cover-to-Cover Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be?

$

2.If Biblio Files Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be?

$

3.What would explain the difference between your answers for (1) and (2)?

a. Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide operating income.

b. Cover-to-Cover Company's contribution margin ratio is lower, meaning that it's more efficient in its operations.

c. The companies have goals that are not in the relevant range.

d. The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.