Question

Classify the costs below as: Product-Direct, Product-Indirect, or Period AND Variable cost, Fixed cost, or Mixed cost.   Below are budgeted income statements at different team levels, use the information to answer the questions below:

Number of Teams	15	25	30	Product Direct, Product Indirect or Period	Fixed/         Variable
Sales	$1,500	$2,500	$3,000
Cost of Goods Sold
Direct Materials	75	125	150
Direct Labor	150	250	300
Applied Overhead	575	625	650
Gross Profit	$700	$1,500	$1,900
Selling Expenses	300	500	600
Administrative Expenses	280	280	280
Advertising Expenses	200	200	200
Miscellaneous Administrative Expenses	100	100	100
Net Income	$(180)	$420	$720

Using the above data and the high/low method, answer the following questions:

Units – Number of Teams	15	30
Net Income	(180)	720

Determine the variable cost per unit

Determine the fixed cost

What is the cost equation?

Estimate the total cost for 20 teams

In addition to the above data, assume the company has the following sales. Answer the following questions

Number of Teams	15	25	30
Sales	$1,500	$2,500	$3,000

What is the revenue generated per team?

What is the per unit contribution margin?

What is the contribution margin ratio?

Compute break-even point in dollars and in units (round to the next whole number) for each of the three scenarios. Then, choose a scenario for your team.

If CAVALRY wants to have net income of $100.00 from this event, how many teams are needed?

If CAVALRY estimates 20 teams, determine the Margin of Safety in sales dollars.

Perform a sensitivity analysis to determine how an increase in team revenue of $500 would impact Net Income?

If the team revenue changed to $120 per team, and all other expenses remained the same as calculated in your cost equation, what is the new break-even in units?

If the variable costs changed to $50 per team (the fix costs remained the same as in your cost equation and team revenue remained at $100 per team), what is the new break-even in units?

If the fixed costs changed to $980, (variable expenses remained the same as in your cost equation, and sales price remained at $100 per team), what is the new break-even in units?

Answer 1

Direct Material - Direct Product cost - Variable cost

Direct Labour - Direct Product cost - Variable cost

Applied Overheads - Indirect Product cost - Fixed cost

Selling Expenses - Indirect Product cost - Mixed cost

Administration Overheads - Indirect Product cost - Mixed cost (However, mostly it is fixed in nature)

Advertisement expense - Indirect Product cost - Fixed cost

Miscellounous Administration Overheads - Indirect Product cost - Mixed cost (However, mostly it is fixed in nature)

Variable cost and fixed cost by high low method:

The total cost of 15team is $1680 and of 30team is $2280 (Lowest and Highest activities respectively). SO we can see that Total cost increased by $600 in respect to increase in total teams of 15. Therefore, Variable cost p.u. should be [$1080 / 15teams] $40. and the fixed cost will be $1680 - (15teams * $40p.u.) = $1080.

Therefore, cost equation will be $40*(number of teams) + $1080.

Total cost of 20items will be $40(20) + $1080 = $1880.

Revenue generated from sales :

$1500 + $2500 + $3000 = $7000

Contribution margin per unit = [$1500 - (15items * $40 p.u.)] = $900 / 15items = $60

Contribution margin Ratio = [$60 / ($1500 / 15teams)] * 100 = 60%

Break - even point in dollers = $1080 / 70teams = $16 appx.

Break - even point in units = $1080 / $60 contribution per team = 18teams

If cavarly wants $100 net income from this event then he needs 146teams to sale. ($40x + $1080 = $6900. Therefore the answer is 146teams) wherese $6900 cost = $7000 sales - $100 net income.

If cavarly estimates 20teams then Margin of safty will be = 20teams * $100 p.u. sales price = $2000 sales - variable cost $800 ($40p.u. * 20teams) = $1200 contribution - $1080 fixed cost = $120 margin of safty.

Sensitivity Analysis if team revenue increase by $500 :

Margin of safty in existing scenario = $7000 revenue - $2800 variable cost = $4200 contribution - $1080 fixed cost = $3120

Margin of safty in estimated scenario = $7500 revenue - $3000 variable cost = $4500 contribution - $1080 fixed cost = $3420 margin of safty.

Therefore, Margin of safty increased by 9.62% appx. [($3420 - $3120) / $3120] * 100

Break even point per unit if team revenue per unit became $120 = Fixed cost $1080 / contribution per unit $80 = 14units appx.

Break even point per unit if variable cost per unit changed to $50 per unit = Fixed cost $1080 / contribution per unit $50 = 22 units appx.

Break - even point per unit if fixed cost changed to $980 = Fixed cost $980 / Contribution per unit $60 = 16 units appx.