1. Mastery Problem: Cost-Volume-Profit Analysis

   Question Content Area

   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 Produced	Total Lumber Cost	Total Utilities Cost	Total Machine Depreciation Cost
   9,000 shelves	$108,000	$11,350	$130,000
   18,000 shelves	216,000	21,700	130,000
   36,000 shelves	432,000	42,400	130,000
   45,000 shelves	540,000	52,750	130,000

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

   Lumber	Variable CostFixed CostMixed CostNone of theseVariable Cost
   Utilities	Variable CostFixed CostMixed CostNone of theseMixed Cost
   Depreciation	Variable CostFixed CostMixed CostNone of theseFixed 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.

   Cost	Fixed Portion of Cost	Variable Portion of Cost (per Unit)
   Lumber	$fill in the blank aeb522fce056044_4	$fill in the blank aeb522fce056044_5
   Utilities	fill in the blank aeb522fce056044_6	fill in the blank aeb522fce056044_7
   Depreciation	fill in the blank aeb522fce056044_8	fill in the blank aeb522fce056044_9

   Question Content Area

   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
   $fill in the blank 70b25305d048047_1	$fill in the blank 70b25305d048047_2

   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	$fill in the blank 70b25305d048047_3
   4,360	fill in the blank 70b25305d048047_4
   8,775	fill in the blank 70b25305d048047_5

   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.

   abcd

   Question Content Area

   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 84,800 units during the year.

   	Cover-to-Cover Company	Biblio Files Company
   Contribution margin ratio (percent)	fill in the blank f42931f8e074028_1%	fill in the blank f42931f8e074028_2%
   Unit contribution margin	$fill in the blank f42931f8e074028_3	$fill in the blank f42931f8e074028_4
   Break-even sales (units)	fill in the blank f42931f8e074028_5	fill in the blank f42931f8e074028_6
   Break-even sales (dollars)	$fill in the blank f42931f8e074028_7	$fill in the blank f42931f8e074028_8

   Question Content Area

   Income Statement - Cover-to-Cover

   Cover-to-Cover Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
   Sales		$424,000
   Variable costs:
   Manufacturing expense	$254,400
   Selling expense	21,200
   Administrative expense	63,600	(339,200)
   Contribution margin		$84,800
   Fixed costs:
   Manufacturing expense	$5,000
   Selling expense	4,000
   Administrative expense	12,200	(21,200)
   Operating income		$63,600

   Income Statement - Biblio Files

   Biblio Files Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
   Sales		$424,000
   Variable costs:
   Manufacturing expense	$169,600
   Selling expense	16,960
   Administrative expense	67,840	(254,400)
   Contribution margin		$169,600
   Fixed costs:
   Manufacturing expense	$88,000
   Selling expense	8,000
   Administrative expense	10,000	(106,000)
   Operating income		$63,600

   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 Bookshelf	Sales Price per Unit	Variable Cost per Unit
   Basic	$5.00	$1.75
   Deluxe	9.00	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 $334,950. 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 in Units	Break-Even Sales in Dollars
   Basic	fill in the blank 200cfafcefc7fd6_1%	fill in the blank 200cfafcefc7fd6_2	$fill in the blank 200cfafcefc7fd6_3
   Deluxe	fill in the blank 200cfafcefc7fd6_4%	fill in the blank 200cfafcefc7fd6_5	$fill in the blank 200cfafcefc7fd6_6

   Question Content Area

   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? $fill in the blank 18363ff68fd7f83_1

   2. If Biblio Files Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be? $fill in the blank 18363ff68fd7f83_2

   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.

   abcd