Question

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 product  costs. All marketing costs and customer hotline costs are period  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 selling expenses . Customer hotline costs relate to the customer service section of the value chain and would be further classified as general and administrative expense .

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