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. Total Total Total Machine Units Lumber Utilities Depreciation Produced Cost Cost Cost 3,000 shelves $33,000 $4,450 $135,000 6,000 shelves 66,000 7,900 135,000 12,000 shelves 132,000 14,800 135,000 15,000 shelves 165,000 18,250 135,000 1. Determine whether the costs in the table are variable, fixed, mixed, or none of these Lumber Variable Cost Utilities Mixed Cost Depreciation Fixed 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 "O". 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. Fixed Portion Variable Portion Fixed Portion of Cost Cost Variable 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 Produced Total Cost January 4,360 units $65,600 February 275 6,250 March 1,000 15,000 April 8,775 133,750 May 1,750 32,500 June 3,015 48,000 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 Cost Variable Cost per Unit Total Fixed Cost Variable 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 8,775 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 74,800 units during the year Cover-to-Cover Biblio Files Company Company Contribution margin ratio (percent) % % Unit contribution margin Break-even sales (units) Break-even sales (dollars) Feedback Check My Work 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-Coves Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8 Sales $374,000 Cover-to-Cover Company Contribution Margin Income Statement For the Year Ended December 31, 2048 Sales $374,000 Variable costs: Manufacturing expense $224,400 Selling expense 18,700 Administrative expense 56,100 (299,200) Contribution margin $74,800 Fixed costs: $5,000 Manufacturing expense Selling expense Administrative expense 4,000 9,700 (18,700) $56,100 Operating income Income Statement - Biblio Files Biblio Files Company Contribution Margin Income Statement For the Year Ended December 31, 2018 $374,000 Sales Variable costs: Manufacturing expense $149,600 $149,600 Manufacturing expense Selling expense Administrative expense Contribution margin 14,960 59,840 (224,400) $149,600 Fixed costs: Manufacturing expense Selling expense $75,500 * Administrative expense 8,000 10,000 (93,500) $56,100 Operating income 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 Sales Price Variable Cost Bookshelf per Unit per Unit Basic $5.00 $1.75 Deluxe 9.00 8.10 The company is interested in deterinining 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 $346,500. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table. Type of Bookshelf Percent of Sales Mix Break-Even Sales Break-Even Sales in Units in Dollars Basic % Deluxe % Feedback Check My Work Review the definition of break-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 sats 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? $ Keter 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 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. Feedback Check My Work Examine the differences between the two companies, including the differences in elements of the target profit formula