Mastery Problem: Cost-Volume-Profit Analysis

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 the cost behavior. After reviewing the data, complete requirements (1) and (2) that follow.

Units ProducedTotal Lumber CostTotal Utilities CostTotal Machine Depreciation Cost

10,000 shelves$100,000 $13,500 $145,000

20,000 shelves200,000 25,000 145,000

40,000 shelves400,000 48,000 145,000

50,000 shelves500,000 59,500 145,000

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

Lumber

Utilities

Depreciation

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$$

Utilities

Depreciation

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 Cost

January4,360units$65,600

February3006,250

March1,00015,000

April6,800103,750

May1,75032,500

June3,01548,000

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 Cost

3,500$

4,360

6,800

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 the relevant range.

Contribution Margin

Review the contribution margin income 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 Company

Contribution margin ratio (percent)%%

Unit contribution margin$ $

Break-even sales (units)

Break-even sales (dollars)$ $

Income Statement - Cover-to-Cover

Cover-to-Cover Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8

Sales$414,000

Variable costs:

Manufacturing expense$248,400

Selling expense20,700

Administrative expense62,100(331,200)

Contribution margin$82,800

Fixed costs:

Manufacturing expense$5,000

Selling expense4,000

Administrative 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, 20Y8

Sales$414,000

Variable costs:

Manufacturing expense$165,600

Selling expense16,560

Administrative expense66,240(248,400)

Contribution margin$165,600

Fixed costs:

Manufacturing expense$85,500

Selling expense8,000

Administrative 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 Unit

Basic$5.00 $1.75

Deluxe9.00 8.10

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 the sales mix percents must be 100%. Determine the amounts to complete the following table.

Type of BookshelfPercent of Sales MixBreak-Even Sales in UnitsBreak-Even Sales in Dollars

Basic%$

Deluxe%$

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 $30,000 in the coming year, what must their amount of sales be? $

2. If Biblio Files Company wants to increase its profit by $30,000 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 Companys contribution margin ratio is lower, meaning that its 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.