Chapter 20 - Mastery MP.20.01.ALGO Hide or show questions Progress:1/1 items Question Content Area 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 12,000 shelves $132,000 $15,300 $145,000 24,000 shelves 264,000 29,100 145,000 48,000 shelves 528,000 56,700 145,000 60,000 shelves 660,000 70,500 145,000 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 "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 06674c001015062_4 $fill in the blank 06674c001015062_5 Utilities fill in the blank 06674c001015062_6 fill in the blank 06674c001015062_7 Depreciation fill in the blank 06674c001015062_8 fill in the blank 06674c001015062_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 5,800 116,250 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 b4388608b061fc8_1 $fill in the blank b4388608b061fc8_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 b4388608b061fc8_3 4,360 fill in the blank b4388608b061fc8_4 5,800 fill in the blank b4388608b061fc8_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.

c

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 84,800 units during the year.

Cover-to-Cover Company Biblio Files Company Contribution margin ratio (percent) fill in the blank 6a9253ff7ff6037_1 % fill in the blank 6a9253ff7ff6037_2 % Unit contribution margin $fill in the blank 6a9253ff7ff6037_3 $fill in the blank 6a9253ff7ff6037_4 Break-even sales (units) fill in the blank 6a9253ff7ff6037_5 fill in the blank 6a9253ff7ff6037_6 Break-even sales (dollars) $fill in the blank 6a9253ff7ff6037_7 $fill in the blank 6a9253ff7ff6037_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 $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 $341,880. 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 88c0bb03df87ff0_1 % fill in the blank 88c0bb03df87ff0_2 $fill in the blank 88c0bb03df87ff0_3 Deluxe fill in the blank 88c0bb03df87ff0_4 % fill in the blank 88c0bb03df87ff0_5 $fill in the blank 88c0bb03df87ff0_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 $30,000 in the coming year, what must their amount of sales be? $fill in the blank 2e01b9f84fb9054_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 2e01b9f84fb9054_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.

Feedback Area Feedback Examine the differences between the two companies, including the differences in elements of the target profit formula.

Feedback Area Feedback Partially correct Check My Work