Question

1. 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 The manner in which a cost changes in relation to its activity base (driver).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
   3,000 shelves	$36,000	$4,950	$145,000
   6,000 shelves	72,000	8,400	145,000
   12,000 shelves	144,000	15,300	145,000
   15,000 shelves	180,000	18,750	145,000

   1. Determine whether the costs in the table are Costs that vary in proportion to changes in the activity base.variable, Costs that tend to remain the same in amount, regardless of variations in the level of activity.fixed, Costs with both variable and fixed characteristics, sometimes called semivariable or semifixed costs.mixed, or none of these.

   Lumber	Variable Cost Fixed Cost Mixed Cost None of these
   Utilities	Variable Cost Fixed Cost Mixed Cost None of these
   Depreciation	Variable Cost Fixed Cost Mixed Cost None of these

   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	$	$
   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
   $	$

   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 The range of activity over which changes in cost are of interest to management.relevant range.

   • a
   • b
   • c
   • d

   Contribution Margin

   Review the The excess of sales over variable costs.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 75,800 units during the year.

   	Cover-to-Cover Company	Biblio Files Company
   The percentage of each sales dollar that is available to cover the fixed costs and provide an operating income. Also called profit-volume ratio.Contribution margin ratio (percent)	%	%
   The dollars available from each unit of sales to cover fixed costs and provide operating profits.Unit contribution margin	$	$
   Break-even sales (units)
   Break-even sales (dollars)	$	$

   Income Statement - Cover-to-Cover

   Cover-to-Cover Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
   Sales		$379,000
   Variable costs:
   Manufacturing expense	$227,400
   Selling expense	18,950
   Administrative expense	56,850	(303,200)
   Contribution margin		$75,800
   Fixed costs:
   Manufacturing expense	$5,000
   Selling expense	4,000
   Administrative expense	9,950	(18,950)
   Operating income		$56,850

   Income Statement - Biblio Files

   Biblio Files Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
   Sales		$379,000
   Variable costs:
   Manufacturing expense	$151,600
   Selling expense	15,160
   Administrative expense	60,640	(227,400)
   Contribution margin		$151,600
   Fixed costs:
   Manufacturing expense	$76,750
   Selling expense	8,000
   Administrative expense	10,000	(94,750)
   Operating income		$56,850

   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 $341,880. Recall that the totals of all the The relative distribution of sales among the various products sold by a company.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	%		$
   Deluxe	%		$

   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?
   $

   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.

Answer 1

1 and 2.	Lumber cost:
	Units Produced	Lumber cost	Cost per unit
	3000	36000	12
	6000	72000	12
	12000	144000	12
	15000	180000	12
	It is a variable cost since cost per unit is $12 per unit produced
	Utilities cost:
	Units Produced	Utilities cost	Cost per unit
	3000	4950	1.65
	6000	8400	1.4
	12000	15300	1.275
	15000	18750	1.25
	It is a mixed cost since cost per unit changes in each level of unit produced.
	Variable cost=Change in total cost/Change in units produced
	Consider highest and lowest level of activity. i.e,3000 units and 15000 units
	Variable cost=(18750-4950)/(15000-3000)=$1.15 per unit
	Consider 15000 units
	Fixed cost=Total cost-(Variable cost per unit*Unit produced)=18750-(1.15*15000)=$ 1500
	Depreciation cost:
	Units Produced	Utilities cost
	3000	145000
	6000	145000
	12000	145000
	15000	145000
	It is a fixed cost since total cost is same at each level of unit produced
		Variable Cost	Fixed Cost	Mixed Cost	None of these
	Lumber	x
	Utilities			x
	Depreciation		x
	Cost	Fixed Portion of Cost	Variable Portion of Cost (per Unit)
	Lumber	0	12
	Utilities	1500	1.15
	Depreciation	145000	0
	High-Low:
1	Variable cost=Change in total cost/Change in units produced
	Consider highest and lowest level of activity. i.e,275 units and 8775 units
	Variable cost=(133750-6250)/(8775-275)=$15 per unit
	Consider 8775 units
	Fixed cost=Total cost-(Variable cost per unit*Unit produced)=133750-(15*8775)=$ 2125
2	Number of units produced			Total cost
	3500			(3500*15)+2125=$ 54625
	4360			(4360*15)+2125=$ 67525
	8775			(8775*15)+2125=$ 133750
3	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.