Question

Integrative Exercise
Cost Behavior and Cost-Volume-Profit Analysis for Many Glacier Hotel

Using the High-Low Method to Estimate Variable and Fixed Costs

Located on Swiftcurrent Lake in Glacier National Park, Many Glacier Hotel was built in 1915 by the Great Northern Railway. In an effort to supplement its lodging revenue, the hotel decided in 20X1 to begin manufacturing and selling small wooden canoes decorated with symbols hand painted by Native Americans living near the park. Due to the great success of the canoes, the hotel began manufacturing and selling paddles as well in 20X3. Many hotel guests purchase a canoe and paddles for use in self-guided tours of Swiftcurrent Lake. Because production of the two products began in different years, the canoes and paddles are produced in separate production facilities and employ different laborers. Each canoe sells for $500, and each paddle sells for $50. A 20X3 fire destroyed the hotel’s accounting records. However, a new system put into place before the 20X4 season provides the following aggregated data for the hotel’s canoe and paddle manufacturing and marketing activities:

Manufacturing Data:
Year	Number of Canoes Manufactured			Total Canoe Manufacturing Costs				Year	Number of Paddles Manufactured			Total Paddle Manufacturing Costs
20X9		250			$103,000			20X9		900			$38,500
20X8		275			128,000			20X8		1,200			49,000
20X7		240			108,000			20X7		1,000			44,000
20X6		310			114,000			20X6		1,100			45,500
20X5		350			141,500			20X5		1,400			52,000
20X4		400			140,000			20X4		1,700			66,500

Marketing Data:
Year	Number of Canoes Sold			Total Canoe Marketing Costs				Year	Number of Paddles Sold			Total Paddle Marketing Costs
20X9		250			$45,000			20X9		900			$7,500
20X8		275			43,000			20X8		1,200			9,000
20X7		240			44,000			20X7		1,000			8,000
20X6		310			51,000			20X6		1,100			8,500
20X5		350			62,000			20X5		1,400			10,000
20X4		400			60,000			20X4		1,700			11,500

Required:

1. High-Low Cost Estimation Method

a. Use the high-low method to estimate the per-unit variable costs and total fixed costs for the canoe product line.

Variable cost per unit	$
Total fixed cost	$

b. Use the high-low method to estimate the per-unit variable costs and total fixed costs for the paddle product line.

Variable cost per unit	$
Total fixed cost	$

2. Cost-Volume-Profit Analysis, Single-Product Setting
Use CVP analysis to calculate the break-even point in units for

a. The canoe product line only (i.e., single-product setting)

BE units

canoes

b. The paddle product line only (i.e., single-product setting)

BE units

paddles

3. Cost-Volume-Profit Analysis, Multiple-Product Setting

The hotel's accounting system data show an average sales mix of approximately 300 canoes and 1,200 paddles each season. Significantly more paddles are sold relative to canoes because some inexperienced canoe guests accidentally break one or more paddles, while other guests purchase additional paddles as presents for friends and relatives. In addition, for this multiple-product CVP analysis, assume the existence of an additional $30,000 of common fixed costs for a customer service hotline used for both canoe and paddle customers. Use CVP analysis to calculate the break-even point in units for both the canoe and paddle product lines combined (i.e., the multiple-product setting).

Canoe BE units	canoes
Paddle BE units	paddles

4. Cost Classification

a. Classify the manufacturing costs, marketing costs, and customer service hotline costs either as production costs or period costs.

All manufacturing costs are costs. All marketing costs and customer hotline costs are costs

b. For the period costs, further classify them into either selling expenses or general and administrative expenses.

Marketing costs are selling oriented; therefore, the marketing period costs would be further classified as . Customer hotline costs relate to the customer service section of the value chain and would be further classified as .

5. Sensitivity Cost-Volume-Profit Analysis and Production Versus Period Costs, Multiple- Product Setting

If both the variable and fixed production costs (refer to your answer to Requirement 1) associated with the canoe product line increased by 5% (beyond the estimate from the high-low analysis), how many canoes and paddles would need to be sold in order to earn a target income of $96,000? Assume the same sales mix and additional fixed costs as in Requirement 3.

Canoe target income units	canoes
Paddle target income units	paddles

6. Margin of Safety

Calculate the hotel’s margin of safety (both in units and in sales dollars) for Many Glacier Hotel, assuming the same facts as in Requirement 3, and assuming that it sells 700 canoes and 2,500 paddles next year.
total MOS units above total BE units

$ MOS in sales dollars

Answer 1

1	Under High low method,Consider the Highest and Lowest activity and then apply the following equation
	Variable cost per unit=Change in Total cost/Change in activity
a.	For Canoe product line:
	Highest activity=400 units
	Lowest activity=250 units
	For manufacturing data:
	Variable cost per unit=(140000-103000)/(400-250)=37000/150=$ 247 per unit
	To find fixed cost, Apply variable cost per unit in Lowest activity
	Fixed cost=103000-(250*247)=$ 41250
	For marketing data:
	Variable cost per unit=(60000-45000)/(400-250)=15000/150=$ 100 per unit
	To find fixed cost, Apply variable cost per unit in Lowest activity
	Fixed cost=45000-(250*100)=$ 20000
	Variable cost per unit:
	Manufacturing cost		247
	Marketing cost		100
	Total		347
	Fixed cost:
	Manufacturing cost		41250
	Marketing cost		20000
	Total		61250
b.	For Paddle product line:
	Highest activity=900 units
	Lowest activity=1700 units				5
	For manufacturing data:
	Variable cost per unit=(66500-38500)/(1700-900)=28000/800=$35 per unit
	To find fixed cost, Apply variable cost per unit in Lowest activity
	Fixed cost=38500-(900*5)=$ 34000
	For marketing data:
	Variable cost per unit=(11500-7500)/(1700-900)=4000/800=$ 5 per unit
	To find fixed cost, Apply variable cost per unit in Lowest activity
	Fixed cost=7500-(900*5)=$ 3000
	Variable cost per unit:
	Manufacturing cost		35
	Marketing cost		5
	Total		40
	Fixed cost:
	Manufacturing cost		34000
	Marketing cost		3000
	Total		37000
2	Break-even point in units=Fixed cost/Contribution margin per unit
a.	For canoe:
	Fixed cost=$ 61250
	Contribution margin per unit=Sales-Variable cost=500-347=$ 153
	Break-even point in units=61250/153=400.32=400 units
b.	For Paddles:
	Fixed cost=$ 37000
	Contribution margin per unit=Sales-Variable cost=50-40=$ 10
	Break-even point in units=37000/10=3700 units
3	Break-even point in units for sales mix=Total fixed cost/Weighted average contribution margin per unit
	Total fixed cost:
	Canoe		61250
	Paddles		37000
	Common		30000
	Total fixed cost		128250
	Weighted average contribution margin per unit:
				Canoe	Paddles
	Sales price per unit			500	50
	Less: Variable cost per unit			347	40
	Contribution margin per unit			153	10
	*
	Sales mix %			20%	80%
				(300/1500)	(1200/1500)
	Weighted average contribution margin per unit			30.6	8	38.6
	Break-even point in units for sales mix=128250/38.6=3322.54=3323 units
	Seperation of break-even point based on sales mix:
	Canoe=3323*20%=665 units
	Paddles=3323*80%=2658 units
4
a.	Cost			Nature
	Manufacturing cost			Product cost
	Marketing cost			Period cost
	Customer service hotline cost			Period cost
b.	Cost			Nature
	Marketing cost			Selling expense
	Customer service hotline cost			general and administrative expenses
5	Units required to earn a target income of $96000=(Total fixed cost+Tearget income)/Weighted averahe contribution margin per unit
	Total fixed cost:
	Canoe	(61250*1.05)	64313
	Paddles	(37000*1.05)	38850
	Common		30000
	Total fixed cost		133163
	Weighted average contribution margin per unit:
				Canoe	Paddles
	Sales price per unit			500	50
	Less: Variable cost per unit			364.35	42
				(347*1.05)	(40*1.05)
	Contribution margin per unit			135.65	8
	*
	Sales mix %			20%	80%
				(300/1500)	(1200/1500)
	Weighted average contribution margin per unit			27.13	6.4	33.53
	Units required to earn a target income of $96000=(133163+90000)/33.53=6655.62=6656 units
	Seperation of units required to earn a targe income $90000 based on sales mix:
	Canoe=6656*20%=1331 units
	Paddles=6656*80%=5325 units
6	Margin of safety in units=Actual sales units-Break-even point sales units
	Canoe	Margin of safety=700-665=35 units
	Paddles	Margin of safety=2500-2658=-158 units
	Margin of safety in $=Margin of safety in units*Sales price per unit
	Canoe	Margin of safety=35*500=$ 17500
	Paddles	Margin of safety=-158*50=$ -7900