High-Low Methods for a Service Company

Continental Railroad decided to use the high-low method and operating data from the past six months to estimate the fixed and variable components of transportation costs. The activity base used by Continental Railroad is a measure of railroad operating activity, termed "gross-ton miles," which is the total number of tons multiplied by the miles moved.

	Transportation Costs	Gross-Ton Miles
January	$1,013,400		218,000
February	1,129,900		244,000
March	798,500		158,000
April	1,083,300		236,000
May	908,500		190,000
June	1,164,800		257,000

Determine the variable cost per gross-ton mile and the total fixed cost.

Variable cost (Round to two decimal places.)	$fill in the blank 1 per gross-ton mile
Total fixed cost	$fill in the blank 2

Break-Even Sales

Anheuser-Busch InBev SA/NV (BUD) reported the following operating information for a recent year:

Sales		$3,696,000
Cost of goods sold	$924,000
Selling, general, and administrative expenses	396,000	1,320,000
Operating income		$2,376,000*
*Before special items

In addition, assume that Anheuser-Busch InBev sold 33,000 barrels of beer during the year. Assume that variable costs were 75% of the cost of goods sold and 50% of selling, general, and administrative expenses. Assume that the remaining costs are fixed. For the following year, assume that Anheuser-Busch InBev expects pricing, variable costs per barrel, and fixed costs to remain constant, except that new distribution and general office facilities are expected to increase fixed costs by $12,900.

a. Compute the break-even number of barrels for the current year. Round to the nearest whole barrel. fill in the blank 1 barrel

b. Compute the anticipated break-even number of barrels for the following year. Round to the nearest whole barrel. fill in the blank 2 barrels

Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart, Margin of Safety, and Operating Leverage

Belmain Co. expects to maintain the same inventories at the end of 20Y7 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during the year. A summary report of these estimates is as follows:

	Estimated Fixed Cost		Estimated Variable Cost (per unit sold)
Production costs:
	Direct materials			$24
	Direct labor			16
	Factory overhead	$922,500			12
Selling expenses:
	Sales salaries and commissions	191,700			5
	Advertising	64,900
	Travel	14,400
	Miscellaneous selling expense	15,900			4
Administrative expenses:
	Office and officers' salaries	187,400
	Supplies	23,100			2
	Miscellaneous administrative expense	21,540			3
	Total	$1,441,440			$66

It is expected that 9,360 units will be sold at a price of $330 a unit. Maximum sales within the relevant range are 12,000 units.

Required:

1. Prepare an estimated income statement for 20Y7.

Direct materialsOperating incomeMiscellaneous administrative expenseSales salaries and commissionsSales			$- Select -
Cost of goods sold:
Direct materialsOperating incomeSalesSuppliesTravel		$- Select -
AdvertisingDirect laborOperating incomeLoss from operationsOffice and officers' salaries		- Select -
Factory overheadMiscellaneous administrative expenseSalesSuppliesTravel		- Select -
Total cost of goods sold			fill in the blank a2c4a6f88006fce_9
Gross profit			$fill in the blank a2c4a6f88006fce_10
Expenses:
Selling expenses:
Factory overheadOperating incomeMiscellaneous administrative expenseSales salaries and commissionsSales	$- Select -
AdvertisingCost of goods manufacturedDirect materialsOffice and officers' salariesSales	- Select -
Direct laborFactory overheadSalesSuppliesTravel	- Select -
Direct materialsMiscellaneous administrative expenseMiscellaneous selling expenseSalesSupplies	- Select -
Total selling expenses		$fill in the blank a2c4a6f88006fce_19
Administrative expenses:
AdvertisingDirect laborOffice and officers' salariesSales salaries and commissionsTravel	$- Select -
Direct materialsFactory overheadSalesSuppliesTravel	- Select -
Direct materialsMiscellaneous administrative expenseMiscellaneous selling expenseSales salaries and commissionsSales	- Select -
Total administrative expenses		fill in the blank a2c4a6f88006fce_26
Total expenses			fill in the blank a2c4a6f88006fce_27
Operating income			$fill in the blank a2c4a6f88006fce_28

2. What is the expected contribution margin ratio? Round to the nearest whole percent. fill in the blank 28600dfb306e005_1 %

3. Determine the break-even sales in units and dollars.

Units	fill in the blank 28600dfb306e005_2 units
Dollars	$fill in the blank 28600dfb306e005_3

4. Construct a cost-volume-profit chart on your own paper. What is the break-even sales? $ fill in the blank 28600dfb306e005_4

5. What is the expected margin of safety in dollars and as a percentage of sales?

Dollars:	$fill in the blank 28600dfb306e005_5
Percentage: (Round to the nearest whole percent.)	fill in the blank 28600dfb306e005_6	%

6. Determine the operating leverage. Round to one decimal place. fill in the blank 28600dfb306e005_7

Break-Even Sales and Cost-Volume-Profit Chart

For the coming year, Cleves Company anticipates a unit selling price of $110, a unit variable cost of $55, and fixed costs of $610,500.

Required:

1. Compute the anticipated break-even sales (units). fill in the blank 1 unit

2. Compute the sales (units) required to realize a target profit of $264,000. fill in the blank 2 units

3. Construct a cost-volume-profit chart on paper, assuming maximum sales of 22,200 units within the relevant range. From your chart, indicate whether each of the following sales levels would produce a profit, a loss, or break-even.

$1,705,000	Break-evenLossProfit
$1,529,000	Break-evenLossProfit
$1,221,000	Break-evenLossProfit
$913,000	Break-evenLossProfit
$737,000	Break-evenLossProfit

4. Determine the probable operating income (loss) if sales total 17,800 units. If required, use the minus sign to indicate a loss. $fill in the blank 8

IncomeLoss

Mastery Problem: Variable Costing for Management Analysis

Absorption vs. Variable

Operating income is one of the most important items reported by a company. Depending on the decision-making needs of management, operating income can be determined using absorption costing or variable costing.

Select whether the following characteristics are most often associated with absorption costing or variable costing.

Required under generally accepted accounting principles (GAAP)	Absorption CostingVariable Costing
Often used for internal use in decision making	Absorption CostingVariable Costing
Cost of goods manufactured includes only variable manufacturing costs	Absorption CostingVariable Costing
Used in reports prepared for external users	Absorption CostingVariable Costing
Fixed factory overhead costs are not part of cost of goods manufactured	Absorption CostingVariable Costing
Both fixed and variable factory costs are included in cost of goods sold and inventory	Absorption CostingVariable Costing

Absorption Statement

Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold.

Saxon, Inc. Absorption Costing Income Statement For the Year Ended December 31
Sales		$1,200,000
Cost of goods sold:
Cost of goods manufactured	$840,000
Ending inventory	(168,000)
Total cost of goods sold		(672,000)
Gross profit		$528,000
Selling and administrative expenses		(289,000)
Operating income		$239,000

Variable Statement

Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a computation of manufacturing margin.

Saxon, Inc. Variable Costing Income Statement For the Year Ended December 31
Sales		$1,200,000
Variable cost of goods sold:
Variable cost of goods manufactured	$600,000
Ending inventory	(120,000)
Total variable cost of goods sold		(480,000)
Manufacturing margin		$720,000
Variable selling and administrative expenses		(224,000)
Contribution margin		$496,000
Fixed costs:
Fixed manufacturing costs	$240,000
Fixed selling and administrative expenses	65,000
Total fixed costs		(305,000)
Operating income		$191,000

Method Comparison

Review the income statements on the Absorption Statement and Variable Statement, then complete the following table. The company's sales price per unit is $75, and the number of units in ending inventory is 4,000. There was no beginning inventory.

Item	Amount
Number of units sold	fill in the blank 39ae80054061037_1
Variable sales and administrative costperunit	$fill in the blank 39ae80054061037_2
Number of units manufactured	fill in the blank 39ae80054061037_3
Variable cost of goods manufacturedperunit	$fill in the blank 39ae80054061037_4
Fixedmanufacturingcostperunit	$fill in the blank 39ae80054061037_5

Manufacturing Decisions

Whenever the units manufactured differ from the units sold, finished goods inventory is affected. In analyzing operating income, such increases and decreases could be misinterpreted as operating efficiencies or inefficiencies. Each decision-making situation should be carefully analyzed in deciding whether absorption or variable costing reporting would be more useful.

All costs are controllable in the long run by someone within a business. For a given level of management, costs may be controllable costs or noncontrollable costs.

The production manager for Saxon, Inc. is worried because the company is not showing a high enough profit. Looking at the income statements on the Absorption Statement and the Variable Statement, he notices that the operating income is higher on the absorption cost income statement. He is considering manufacturing another 10,000 units, up to the company's capacity for manufacturing, in the coming year. He reasons that this will boost operating income and satisfy the company's owner that the company is sufficiently profitable. Although the total units manufactured changes, assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same. Complete questions (1)-(4) that follow. If the answer is zero, enter "0".

1. Use the income statements on the Absorption Statement and Variable Statement to complete the following table for the original production level. Then prepare similar income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels.

Operating Income
Original Production Level-Absorption	Original Production Level-Variable	Additional 10,000 Units-Absorption	Additional 10,000 Units-Variable
$fill in the blank d5d0a10adfb1059_1	$fill in the blank d5d0a10adfb1059_2	$fill in the blank d5d0a10adfb1059_3	$fill in the blank d5d0a10adfb1059_4

2. What is the change in operating income from producing 10,000 additional units under absorption costing?

$fill in the blank d5d0a10adfb1059_5

3. What is the change in operating income from producing 10,000 additional units under variable costing?

$fill in the blank d5d0a10adfb1059_6

4. What would be your recommendation to the production manager?

a. Do not produce the extra 10,000 units. The increase in operating income under absorption costing is due to fixed manufacturing costs being held in inventory, and the additional inventory will lead to higher handling, storage, financing, and obsolescence costs.

b. Produce the extra 10,000 units. Operating income will be increased, and the production manager will receive praise for creating higher profits.

c. Do not produce the extra 10,000 units. Operating income does not change under absorption costing when the additional units are produced.

d. Produce the extra 10,000 units. It's always a good idea to have extra units on hand and keep the factory operating at capacity, even if all the units are not sold.

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