Integrative Exercise Cost Behavior and Cost-Volume-Profit Analysis for Many Glacier Hotel

Using the High-Low Method to Estimate Variable and Fixed Costs

Located on Swiftcurrent Lake in Glacier National Park, Many Glacier Hotel was built in 1915 by the Great Northern Railway. To supplement its lodging revenue, the hotel decided to begin manufacturing and selling small wooden canoes decorated with symbols hand painted by Native Americans living near the park. The canoes were a great success, so a couple of years later the hotel began manufacturing and selling paddles. Many hotel guests purchase a canoe and paddles for use in self-guided tours of Swiftcurrent Lake. Because production of the two products began in different years, the canoes and paddles are produced in separate production facilities and employ different laborers. Each canoe sells for $540, and each paddle sells for $60. About 15 years ago, a fire destroyed the hotel's accounting records. A new system put into place before the next season provides the following aggregated data for the hotel's canoe and paddle manufacturing and marketing activities (Years 1 through 12 give the data for the years in which the new accounting system was active):

YearNumber of Canoes ManufacturedTotal Canoe Manufacturing CostsYearNumber of Paddles ManufacturedTotal Paddle Manufacturing Costs1250 $103,000 1900 $38,500 2240 115,000 21,200 49,000 3275 128,000 31,000 44,000 4310 114,000 41,100 45,500 5350 141,500 51,400 52,000 6380 132,000 61,700 66,500 7415 146,500 71,720 66,300 8430 132,000 81,850 71,750 9450 146,100 91,900 72,000 10470 155,000 102,020 78,900 11480 136,000 112,050 78,200 12500 167,000 122,200 84,000

YearNumber of Canoes SoldTotal Canoe Marketing CostsYearNumber of Paddles SoldTotal Paddle Marketing Costs1250 $45,000 1900 $7,500 2240 47,000 21,200 9,000 3275 43,000 31,000 8,000 4310 51,000 41,100 8,500 5350 62,000 51,400 10,000 6380 53,000 61,700 11,500 7415 68,500 71,720 11,600 8430 63,000 81,850 12,250 9450 65,000 91,900 12,500 10470 67,000 102,020 13,100 11480 52,000 112,050 13,250 12500 73,000 122,200 14,000

Required:

1. High-Low Cost Estimation Method

a. Use the high-low method to estimate the per-unit variable costs and total fixed costs for the canoe product line.

Line Item DescriptionAmountVariable cost per unit$fill in the blank 1Total fixed cost$fill in the blank 2

b. Use the high-low method to estimate the per-unit variable costs and total fixed costs for the paddle product line.

Line Item DescriptionAmountVariable cost per unit$fill in the blank 3Total fixed cost$fill in the blank 4

2. Cost-Volume-Profit Analysis, Single-Product Setting Use CVP analysis to calculate the break-even point in units for

a. The canoe product line only (i.e., single-product setting)

Line Item DescriptionAnswerBE unitsfill in the blank 5 canoes

b. The paddle product line only (i.e., single-product setting)

Line Item DescriptionAnswerBE unitsfill in the blank 6 paddles

3. Cost-Volume-Profit Analysis, Multiple-Product Setting

The hotel's accounting system data show an average sales mix of approximately 300 canoes and 1,200 paddles each season. Significantly more paddles are sold relative to canoes because some inexperienced canoe guests accidentally break one or more paddles, while other guests purchase additional paddles as presents for friends and relatives. In addition, for this multiple-product CVP analysis, assume there is an additional $28,000 of common fixed costs for a customer service hotline used for both canoe and paddle customers. Use CVP analysis to calculate the break-even point in units for both the canoe and paddle product lines combined (i.e., the multiple-product setting).

Line Item DescriptionAnswerCanoe BE unitsfill in the blank 7 canoesPaddle BE unitsfill in the blank 8 paddles

4. Cost Classification

a. Classify the manufacturing costs, marketing costs, and customer service hotline costs either as production costs or period costs.

All manufacturing costs are

productperioddirect

costs. All marketing costs and customer hotline costs are

productperioddirect

costs

b. For the period costs, further classify them into either selling expenses or general and administrative expenses.

Marketing costs are selling oriented; therefore, the marketing period costs would be further classified as

selling expensesgeneral and administrative expensedirect expenses

. Customer hotline costs relate to the customer service section of the value chain and would be further classified as

selling expensesgeneral and administrative expensedirect expenses

.

5. Sensitivity Cost-Volume-Profit Analysis and Production Versus Period Costs, Multiple- Product Setting

If both the variable and fixed production costs (refer to your answer to Requirement 1) associated with the canoe product line increased by 5% (beyond the estimate from the high-low analysis), how many canoes and paddles would need to be sold in order to earn a target income of $96,000? Assume the same sales mix and additional fixed costs as in Requirement 3.

Line Item DescriptionAnswerCanoe target income unitsfill in the blank 13 canoesPaddle target income unitsfill in the blank 14 paddles

6. Margin of Safety (MOS)

Calculate the hotel's margin of safety (both in units and in sales dollars) for Many Glacier Hotel, assuming the same facts as in Requirement 3, and assuming that it sells 650 canoes and 2,400 paddles next year. The total MOS units equal fill in the blank 1 of 1.

The MOS in sales dollars equals fill in the blank 1 of 1$.