Question 8

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 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
14,000 shelves	$154,000	$18,100	$130,000
28,000 shelves	308,000	34,200	130,000
56,000 shelves	616,000	66,400	130,000
70,000 shelves	770,000	82,500	130,000

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

Lumber	Variable CostFixed CostMixed CostNone of these
Utilities	Variable CostFixed CostMixed CostNone of these
Depreciation	Variable CostFixed CostMixed CostNone of these

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	6,800		103,750
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 d9085501df9f075_1	$fill in the blank d9085501df9f075_2

2. With 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 d9085501df9f075_3
4,360	fill in the blank d9085501df9f075_4
6,800	fill in the blank d9085501df9f075_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

Income Statement - Cover-to-Cover

Cover-to-Cover Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
Sales		$399,000
Variable costs:
Manufacturing expense	$239,400
Selling expense	19,950
Administrative expense	59,850	(319,200)
Contribution margin		$79,800
Fixed costs:
Manufacturing expense	$5,000
Selling expense	4,000
Administrative expense	10,950	(19,950)
Operating income		$59,850

Income Statement - Biblio Files

Biblio Files Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
Sales		$399,000
Variable costs:
Manufacturing expense	$159,600
Selling expense	15,960
Administrative expense	63,840	(239,400)
Contribution margin		$159,600
Fixed costs:
Manufacturing expense	$81,750
Selling expense	8,000
Administrative expense	10,000	(99,750)
Operating income		$59,850

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 $332,640. 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 7f17a8f66f9a032_1%	fill in the blank 7f17a8f66f9a032_2	$fill in the blank 7f17a8f66f9a032_3
Deluxe	fill in the blank 7f17a8f66f9a032_4%	fill in the blank 7f17a8f66f9a032_5	$fill in the blank 7f17a8f66f9a032_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 $30,000 in the coming year, what must their amount of sales be? $fill in the blank 02bbd9fd201cfdc_1

2. If Biblio Files Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be? $fill in the blank 02bbd9fd201cfdc_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 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.

abcd