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
   7,000 shelves	$70,000	$9,550	$145,000
   14,000 shelves	140,000	17,600	145,000
   28,000 shelves	280,000	33,700	145,000
   35,000 shelves	350,000	41,750	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	$	$
   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	300		6,250
   March	1,000		15,000
   April	4,800		73,750
   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
   4,800

   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 75,800 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		$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 $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	%		$

   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 $40,000 in the coming year, what must their amount of sales be?
   $

   2. If Biblio Files Company wants to increase its profit by $40,000 in the coming year, what must their amount of sales be?
   $

Answer 1

Cost behaviour

	Fixed Portion	Variable Portion
Lumber	$                 -	$          10.00
Utilities	$           1,500	$            1.15
Depreciation	$      145,000	$                -

Utilities
Variable Cost per unit = ($41750-9550)/28000 = $1.15 per unit
Fixed Cost = 41750-35000 x 1.15 = $1500

High low

Variable Cost per unit = ($73750-6250) / (4800-300) = $15 per unit
Fixed Cost = $73750 - 4800 x 15 = $1750

Units	Total Cost
3500	$        54,250
4360	$        67,150
4800	$        73,750

Contribution Margin

	Cover-to-cover Company	Biblio Files Company
Contribution Margin Ratio	20%	40%
Unit Contribution Margin	$              1.00	$              2.00
Break even Sales (Units)	18950	47375
Break even Sales (Dollars)	$         94,750	$       236,875

Sales Mix

Type of Book Shelf	Percent of Sales Mix	Break Even units	Break Even Dollars
Basic	60%	86400	$       432,000
Deluxe	40%	57600	$       518,400

Total Break even = $332640/2.31 = 144000 units

Target Profit

1. Required Sales = ($18950+96850) / 20% = $579,000

2. Required Sales = ($94750+96850) / 40% = $479,000