Question

1. Mastery Problem: Cost-Volume-Profit Analysis

   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
   15,000 shelves	$150,000	$18,750	$135,000
   30,000 shelves	300,000	36,000	135,000
   60,000 shelves	600,000	70,500	135,000
   75,000 shelves	750,000	87,750	135,000

   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	$	$
   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	5,775		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
   $	$

   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
   5,775

   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 78,800 units during the year.

   	Cover-to-Cover Company	Biblio Files Company
   Contribution margin ratio (percent)	%	%
   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		$394,000
   Variable costs:
   Manufacturing expense	$236,400
   Selling expense	19,700
   Administrative expense	59,100	(315,200)
   Contribution margin		$78,800
   Fixed costs:
   Manufacturing expense	$5,000
   Selling expense	4,000
   Administrative expense	10,700	(19,700)
   Operating income		$59,100

   Income Statement - Biblio Files

   Biblio Files Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
   Sales		$394,000
   Variable costs:
   Manufacturing expense	$157,600
   Selling expense	15,760
   Administrative expense	63,040	(236,400)
   Contribution margin		$157,600
   Fixed costs:
   Manufacturing expense	$80,500
   Selling expense	8,000
   Administrative expense	10,000	(98,500)
   Operating income		$59,100

   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	%		$
   Deluxe	%		$

   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)

   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?
   $____________

   2. If Biblio Files Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be?
   $____________

Answer 1

1) Determine whether the costs in table are Variable, Mixed, Fixed or none of these for Cover to Cover Company

	Variable Cost	Fixed Cost	Mixed Cost	None of These
Lumber	Yes	No	No	No
Utilities	No	No	Yes	No
Depreciation	No	Yes	No	No

2) Determination of Fixed Portion of Cost & Variable cost per unit for Cover to Cover Company

	Fixed Portion of Cost	Variable Cost per unit
Lumber (Total Lumber Cost / No of Units Prodeced)	-	$10
Utilities {Variable per unit = [($36,000 - $18,750) / (30,000 - 15,000)]	$1,500	$1.15
Depreciation	$135,000	-

3) Calculation of Fixed & Variable portion of Total Costs using the High-Low method for Bibilo Files Company

Particulars	Amount
Cost at Lowest Point (275 Points)	$6,250
Cost at Lowest Point (5775 Points)	$88,750
Variable Cost per unit [($88750 - $6250) / (5775 - 275)]	$15
Fixed Cost (Total cost at 275 points - Variable cost at 275 points)	$2,125

4) Calculation of Total Cost of following units produced

No. of Units	Variable Cost per unit	Total Variable Cost	Total Fixed Cost	Total Cost
3,500	$15	$52,500	$2,125	$54,625
4,360	$15	$65,400	$2,125	$67,525
5,775	$15	$86,625	$2,125	$88,750

5) Complete the following table from the data provided on the income statements of Cover to Cover company and Bibilo Files company

Particulars	Cover to Cover Company	Bibilo Files Company
Contribution Margin Ratio [(Contribution Margin / Sales) * 100	20%	40%
Unit Contribution Margin (Contribution Margin / No of Units Sold)	$1	$2
Break even Sales (Units) (Fixed Costs / Unit Contribution)	19,700	49,250
Break even Sales (Dollars) (Break even sales unit / Contribution Margin)	$98,500	$123,125

6) Calculation of Break even Point in units

Fixed Cost = $332,640

Combined Contribution = $2.31

Break even Point (in units) = 144,000

Type of Bookshelf	Selling Price (1)	Variable Cost (2)	Contribution (3 = 1-2)	% of Sales Mix [4 = (3) / 4.15]	Break even sales (units) (5 = 144000 * % of sales mix)	Break even sales (Dollars) (6 = 5*1)
Basic	$5	$1.75	$3.25	78.31%	112,766.4	563,832
Deluxe	$9	$8.1	$0.9	21.69%	31,233.6	281,102.4
Total			$4.15

Ans 1)

Cover-to-Cover Company wants to increase its profit by $20,000 in the coming year, their amount of sales should be

= (Target Profit + Operating Income + Fixed Cost) / Contribution Margin

= ($20,000 + $59,100 + $19,700) / 20%

= $494,000

Ans 2)

Bibilo Files Company wants to increase its profit by $20,000 in the coming year, their amount of sales should be

= (Target Profit + Operating Income + Fixed Cost) / Contribution Margin

= ($20,000 + $59,100 + $98,500) / 40%

= $444,000