Question

1.

With the information for the first four months of production, determine the variable cost per unit and the fixed

cost using the high-low method.

Total Cost

Units Produced

January

$155,100

9,000

February

166,350

9,750

March

158,100

9,200

April

157,350

9,150

2.

For 20Y5, Moore’s Mowers had total sales of $42,000, with each product selling for $15 each. Each product had

variable costs of $8. Calculate the (a) contribution margin, (b) contribution margin ratio, and (c) unit contribution

margin. Round contribution margin ratio to the nearest percent.

3.

Use the following information to determine the change in income from operations for each situation if the

company sells its products for $4 each.

a.

Contribution margin ratio of 35% and a 10,000 increase in sales units.

b.

Unit contribution margin of $2.10 and an increase of $20,000 in sales.

c.

Contribution margin ratio of 30% and an increase in sales of $30,000.

4.

During 20Y5, Jackson Computer Supply produced income from operations of $95,000 from sales of 80,000 units at

$2.50 each. The company’s fixed costs totaled $22,000. If the company has a 4,000 increase in sales units in the

upcoming year, what will income from operations be for 20Y6? Assume that fixed costs and the selling price and

variable cost per unit will remain the same.

Answer 1

Solution 1:

Variable cost per unit using high low method = (Total cost at high level - Total cost at low level) / (High level activity - Low level activity)

= ($166,350 - $155,100) / (9750 - 9000) = $15 per unit

Total fixed costs = $166,350 - (9750*$15) = $20,100

Solution 2:

Contribution margin per unit = Selling price per unit - Variable cost per unit = $15 - $8 = $7 per unit

Contribution margin ratio = $7 / $15 = 47%

Total contribution margin = $42,000*$7/$15 = $19,600

Solution 3a:

Change in operating income = Change in sales * contribution margin ratio = 10000*$4*35% = $14,000

Solution 3b:

Contribution margin ratio = $2.10 / $4 = 52.5%

Change in operating income = Change in sales * contribution margin ratio = $20,000*52.5% = $10,500

Solution 3c:

Change in operating income = Change in sales * contribution margin ratio = $30,000*30% = $9,000

Solution 4:

Current contribution margin = Income from operations + Fixed costs = $95,000 + $22,000 = $117,000

Contribution margin per unit = $117,000 / 80000 = $1.4625 per unit

If company has a 4000 increase in unit sales then increase in contribution margin = 4000 * $1.4625 = $5,850

Income from operations for 20Y6 = Income from operations from 20Y5 + Increase in contribution margin

= $95,000 + $5,850 = $100,850