Mastery Problem: Cost-Volume-Profit Analysis

Cost Behavior

Cover-to-Cover Company is a manufacturer of shelving for books. The company has compiled the following cost data, and wants your help in determining the cost behavior. After reviewing the data, complete requirements (1) and (2) that follow.

1. Determine whether the costs in the table are variable, fixed, mixed, or none of these.

2. For each cost, determine the fixed portion of the cost, and the per-unit variable cost. If there is no amount or an amount is zero, enter "0". Recall that, for N = Number of Units Produced, Total Costs = (Variable Cost Per Unit x N) + Fixed Cost. Complete the following table with your answers. Round variable portion of cost (per unit) answers to two decimal places.

High-Low

Biblio Files Company is the chief competitor of Cover-to-Cover Company in the bookshelf business. Biblio Files is analyzing its manufacturing costs, and has compiled the following data for the first six months of the year. After reviewing the data, answer questions (1) through (3) that follow.

1. From the data previously provided, help Biblio Files Company estimate the fixed and variable portions of its total costs using the high-low method. Recall that Total Costs = (Variable Cost Per Unit x Number of Units Produced) + Fixed Cost. Complete the following table.

2. With your Total Fixed Cost and Variable Cost per Unit from the high-low method, compute the total cost for the following values of N (Number of Units Produced).

3. Why does the total cost computed for 4,360 units not match the data for January?

a. The high-low method is accurate only for months in which production is at full capacity.

b. The high-low method only gives accurate data when fixed costs are zero.

c. The high-low method gives a formula for the estimated total cost and may not match levels of production other than the highest and lowest.

d. The high-low method gives accurate data only for levels of production outside the relevant range.

Contribution Margin

Review the contribution margin income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statements. Complete the following table from the data provided on the income statements. Each company sold 82,800 units during the year.

Income Statement - Cover-to-Cover

Income Statement - Biblio Files

Sales Mix

Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings.

The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called “Combined,” the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $325,710. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.

Target Profit

Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales.

1. If Cover-to-Cover Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be?
$

2. If Biblio Files Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be?
$

3. What would explain the difference between your answers for (1) and (2)?

a. Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide operating income.

b. Cover-to-Cover Company’s contribution margin ratio is lower, meaning that it’s more efficient in its operations.

c. The companies have goals that are not in the relevant range.

d. The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.

Check My Work

Fine Oak Furniture manufactures high-quality wooden desks and uses a standard cost system. A standard cost card for one model of desk, the “heritage”, developed for 2019, is shown below:

The company expected to produce and sell 300 units of the Heritage in March 2019.

Actual results for March 2019 are as follows:

• 310 units of the Heritage were produced.
• A total of 21,600 BF of wood was purchased and used at a cost of $9,993.
• Actual direct labour costs were $6,938 for 408 direct labour hours worked.
• Actual variable overhead incurred was $1,738 and actual fixed overhead incurred was $2,191.

Required:

Calculate the following variances and provide only numeric values without any formatting to the boxes given below. Be sure to indicate whether the variances are favourable or unfavourable as instructed. Round to the 4th decimal places for interim numbers, and round to the 2nd decimal places for final results.

What kind of total cost increases when volume increases while per unit cost decreases as volume increases.

Mixed

Fixed

Variable

XYZ Company reported the following information: June July Cost A $18,000 $0.20 per unit Cost B $19,000 $29,800 Cost C $17,000 $0.34 per unit Units sold 50,000 units 90,000 units XYZ Company expects to sell 76,000 units in August at a selling price of $1.50 per unit Calculate the amount of net income XYZ Company would expect to earn in August.

Lower-of-Cost-or-Market Inventory

On the basis of the following data:

Determine the value of the inventory at the lower of cost or market. Assemble the data in the form illustrated in Exhibit 10.

Restex has a debt-equity ratio of 0.76, an equity cost of capital of 18 %, and a debt cost of capital of 9 %.

Restex's corporate tax rate is 30%, and its market capitalization is $ 199 million.

a. If? Restex's free cash flow is expected to be $5 million one year from now and will grow at a constant? rate, what expected future growth rate is consistent with?Restex's current market? value?

b. Estimate the value of Restex's interest tax shield.

For the given cost function ,C(x)=3136+787x+x^2

a) The average cost at the production level 49 is

b) The marginal cost at the production level 49 is

c) The production level that will minimize the average cost is

446

economic profit minus explicit cost.

business profit plus economic profit.

business profit minus economic profit.

economic profit minus business profit.

(a)   At what output level and at what price will the firm produce in the short run? What will be the total profit?

(b)   What will happen to demand, price, and profit in the long run?

n October 2017 a pound of apples cost $1.43, while oranges cost $1.07. Two years earlier the price of apples was only $1.22 a pound and that of oranges was $0.93 a pound.

What was the annual compound rate of growth in the price of apples?

What was the annual compound rate of growth in the price of oranges?

If the same rates of growth persist in the future, what will be the price of apples in 2030?

If the same rates of growth persist in the future, what will be the price of oranges in 2030?