Question

Computational Problems: Cost-Volume-Profit Analysis and High-Low Method of Estimation 1. PPP Publishers has collected the following data for recent months:

Month	Issues Published	Total Cost
May	20,500	$20,960
June	22,300	$21,428
July	18,750	$20,505
August	21,200	$21,395

Each issue sells for $1.50

Required:

a) Using the high-low method, find the following.

i. Variable cost per unit (issue): ___________________________
ii. Total fixed cost per month: ____________________________
iii. Cost Equation/Function: ____________________________________

b) i. What is the total estimated cost for a month when 22,000 issues are published?______ ii. What is the cost per issue in a month when 22,000 issues are published? __________

c) What is the Break-even Point (BEP) in units (issues)? ________________________
d) How many issues does PPP need to sell to generate a $25,000 profit? __________
e) Prepare a Contribution Margin Income Statement at the level of sales needed to generate a $25,000 profit.

Answer 1

HIGH-LOW METHOD:			Cost	Units
High activity-June			21428	22300
Low activity -July			20505	18750
Change			923	3550
variable cost per unit: Change in cost/Change in units
		923 /3550 = $0.26 per unit
At high activity, Total c ost is			21428
Less: variable cost (22300*0.26)			5798
Total fixed cost			15630
Cost Equation, Let Cost= C and X= Number of units
C(X) = $ 15630 + 0.26X
Selling price per unit		1.5
Less: VC per unit		0.26
Contribution per unit		1.24
Break even point in units: Fixed cost / CM per unit
		15630 /1.24 = 12605 units
Target sales sunit: Desired contribution/ CM per unit
		(15630+25000)/1.24 = 32766 units
CONTRIBUTION MARGIN INCOME STATEMENT
Sales revenue (32766 units @1.50)				49149
Less: variable cost(32766*0.26)				8519.16
Contribution				40629.84
Less: Fixed cost				15630
net operating income				24999.84