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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

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 $11,850 $120,000
18,000 shelves 216,000 22,200 120,000
36,000 shelves 432,000 42,900 120,000
45,000 shelves 540,000 53,250 120,000

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 ec7a95046fe4fa8_4 $fill in the blank ec7a95046fe4fa8_5
Utilities fill in the blank ec7a95046fe4fa8_6 fill in the blank ec7a95046fe4fa8_7
Depreciation fill in the blank ec7a95046fe4fa8_8 fill in the blank ec7a95046fe4fa8_9

Feedback Area

Feedback

Review the definitions for fixed, variable, and mixed costs, and the relationships between units produced and total cost for each type of cost. Recall that the high-low method may be used to separate a cost into its fixed and variable components.

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 300 6,250
March 1,000 15,000
April 5,800 88,750
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 dd0923fc8fe4006_1 $fill in the blank dd0923fc8fe4006_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 dd0923fc8fe4006_3
4,360 fill in the blank dd0923fc8fe4006_4
5,800 fill in the blank dd0923fc8fe4006_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.

abcdc

Feedback Area

Feedback

Review the high-low method, and use the smallest and largest levels of production in your computation.

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 83,800 units during the year.

Cover-to-Cover Company Biblio Files Company
Contribution margin ratio (percent) fill in the blank 0e8e8a05afca061_1% fill in the blank 0e8e8a05afca061_2%
Unit contribution margin $fill in the blank 0e8e8a05afca061_3 $fill in the blank 0e8e8a05afca061_4
Break-even sales (units) fill in the blank 0e8e8a05afca061_5 fill in the blank 0e8e8a05afca061_6
Break-even sales (dollars) $fill in the blank 0e8e8a05afca061_7 $fill in the blank 0e8e8a05afca061_8

Feedback Area

Feedback

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.

Question Content Area

Income Statement - Cover-to-Cover

Cover-to-Cover Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
Sales $419,000
Variable costs:
Manufacturing expense $251,400
Selling expense 20,950
Administrative expense 62,850 (335,200)
Contribution margin $83,800
Fixed costs:
Manufacturing expense $5,000
Selling expense 4,000
Administrative expense 11,950 (20,950)
Operating income $62,850

Income Statement - Biblio Files

Biblio Files Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
Sales $419,000
Variable costs:
Manufacturing expense $167,600
Selling expense 16,760
Administrative expense 67,040 (251,400)
Contribution margin $167,600
Fixed costs:
Manufacturing expense $86,750
Selling expense 8,000
Administrative expense 10,000 (104,750)
Operating income $62,850

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 $323,400. 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 82ed19095023fae_1% fill in the blank 82ed19095023fae_2

$fill in the blank 82ed19095023fae_3

Incorrect

Deluxe fill in the blank 82ed19095023fae_4% fill in the blank 82ed19095023fae_5 $fill in the blank 82ed19095023fae_6

Feedback Area

Feedback

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)

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 25d1e1fd4024fa0_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 25d1e1fd4024fa0_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.

abcda

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