Question

*Practice Exercise 8–1: Analyzing Mixed Costs

The Metropolis Health System has a system-wide training course for nurse aides. The course requires a packet of materials that MHS calls the training pack. Due to turnover and because the course is system-wide, there is a monthly demand for new packs. In addition the local community college also obtains the training packs used in their credit courses from MHS.

The Education Coordinator needs to know how much of the cost is fixed and how much of the cost is variable for these training packs. She decides to use the high-low method of computation.

Required

Using the monthly utilization information presented below, find the fixed and variable portion of costs through the high-low method.

                                    Number of
Month                     Training Packs                     Cost

January                            1,000                          $6,200

February                             200                            1,820

March                                 250                            2,350

April                                   400                            3,440

May                                    700                            4,900

June                                    300                            2,730

July                                    150                            1,470

August                                100                            1,010

September                        1,100                            7,150

October                               300                            2,850

November                           250                            2,300

December                           100                            1,010

Solution to Practice Exercise 8–1

Step 1.   Find the highest volume of 1,100 packs at a cost of $7,150 in September and the lowest volume of 100 packs at a cost of $1,010 in August.

Step 2.   Compute the variable rate per pack as:

                                                                        Training
                                             # of Packs            Pack Cost

Highest volume                         1,100                 $7,150

Lowest volume                            100                   1,010

                                                                        __________________

Difference                                1,000                 $6,140

Step 3.   Divide the difference in cost ($6,140) by the difference in # of packs (1,000) to arrive at the variable cost rate:

$6,140 divided by 1,000 meals = $6.14 per pack.

Step 4.   Compute the fixed overhead rates as follows:

At the highest level:

Total cost                                                $7,150

Less: Variable portion

[1,100 packs × $6.14 @]                         (6,754)

                                                                              ______

Fixed Portion of Cost                                 $396

At the lowest level:

Total cost                                                $1,010

Less: Variable portion

[100 packs × $6.14 @]                               (614)

                                                                              ______

Fixed Portion of Cost                                 $396

Proof totals: $396 fixed portion at both levels.

*Assignment Exercise 8–1: Analyzing Mixed Costs

The Education Coordinator decides that the Community College packs may be unduly influencing the high-low computation. She decides to re-run the results omitting the Community College volume.

Required

Using the monthly utilization information presented below, and omitting the Community College training packs, find the fixed and variable portion of costs through the high-low method. Note that the college only acquires packs in three months of the year: January, May, and September. These dates coincide with the start dates of their semesters and summer school.

The reason the Education Coordinator needs to know how much of the cost is fixed is because she is supposed to collect the appropriate variable cost from the Community College for their packs. For her purposes, which computation do you believe is better? Why?

Month	Total Number of Training Packs	Total Cost	Community College Number Packs	Community College Cost
January	1,000	$6,200	200	$1,240
February	200	1,820
March	250	2,350
April	400	3,440
May	700	4,900	300	2,100
June	300	2,730
July	150	1,470
August	100	1,010
September	1,100	7,150	300	1,950
October	300	2,850
November	250	2,300
December	100	1,010

Assignment Exercise 8–2: Calculating the Contribution Margin

The Mental Health program for the Community Center has just completed its fiscal year end. The Program Director determines that his program has revenue for the year of $1,210,000. He believes his variable expense amounts to $205,000 and he knows his fixed expense amounts to $1,100,000.

Required

Compute the contribution margin for the Community Center Mental Health program.

What does the result tell you about the program?

Assignment Exercise 8–3: Calculating the PV Ratio and the CVP Ratio

Use the same assumptions for the Greenside Clinic as in Practice Exercise 7–2. One more assumption will be added: the Clinic had 35,000 visits.

Required

In addition to the contribution margin figures already computed, now compute the PV Ratio (also known as CM Ratio).

Add another column to your worksheet and compute the clinic’s per-visit revenue and costs.

Create a Cost-Volume-Profit chart. Refer to the chapter text along with Figure 8–6.

Answer 1

Assignment 8-1
Step 1.   Find the highest volume of 1,100 packs at a cost of $7,150 in September and the lowest volume of 100 packs at a cost of $1,010 in August.
Months	Total Number of Training Pack	Total cost	Community College number pack	Community college cost	Total Number of Training Pack excluding Comunnity college pack	Total cost excluding Community college cost
January	1000	6200	200	1240	800	4960
February	200	1820			200	1820
March	250	2350			250	2350
April	400	3440			400	3440
May	700	4900	300	2100	400	2800
June	300	2730			300	2730
July	150	1470			150	1470
August	100	1010			100	1010
September	1100	7150	300	1950	800	5200
October	300	2850			300	2850
November	250	2300			250	2300
December	100	1010			100	1010
Step 2.   Compute the variable rate per pack as:
		Packs	Community pcks	Training pack cost	Comunity cost
	Highest	1100	300	7150	1950
	Lowest	100	0	1010	0
	Difference	1000	300	6140	1950
Step 3.   Divide the difference in cost ($6,140-$1950) by the difference in # of packs (1,000-300) to arrive at the variable cost rate:
	=(6140-1950)/(1000-300)
	5.985714286
Step 4.   Compute the fixed overhead rates as follows:
At the highest level:
Total Cost	5200
Less: Variable Portion	4,788.57
(800 packs*5.98
Fixed Cost	411.43
At the lowest level:
Total Cost	1010
Less: Variable Portion	598.57
(100 paks*5.99)
Fixed Cost	411.43
Proof totals: $411 fixed portion at both levels excluding Community cost
Assignment 8-2
Revenue	12,10,000
Less: Variable Expense	205000
Contribution	10,05,000
Less: Fixed Cost	11,00,000
Loss	-95,000
The Contribution Margin of the community Center mental health program is 10,05,000.
Although the Program has Contribution Margin of 10,05,000 but the program is actually at loss of 95000.
The program has high fixed cost which result in loss.
Note-
In Absence of Exercise 7-2 as mention in Assignment 8-3 it could not be solved. Please provide the data for the assignment to be completed.
Note-
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