1. 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.

   Units Produced	Total Lumber Cost	Total Utilities Cost	Total Machine Depreciation Cost
   7,000 shelves	$70,000	$9,550	$145,000
   14,000 shelves	140,000	17,600	145,000
   28,000 shelves	280,000	33,700	145,000
   35,000 shelves	350,000	41,750	145,000

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

   Lumber	Variable Cost
   Utilities	Mixed Cost
   Depreciation	Fixed Cost

   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.

   Cost	Fixed Portion of Cost	Variable Portion of Cost (per Unit)
   Lumber	$	$
   Utilities
   Depreciation

   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.

   	Units Produced		Total Cost
   January	4,360	units	$65,600
   February	300		6,250
   March	1,000		15,000
   April	4,800		73,750
   May	1,750		32,500
   June	3,015		48,000

   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.

   Total Fixed Cost	Variable Cost per Unit
   $	$

   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).

   Number of Units Produced	Total Cost
   3,500	$
   4,360
   4,800

   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 75,800 units during the year.

   	Cover-to-Cover Company	Biblio Files Company
   Contribution margin ratio (percent)	%	%
   Unit contribution margin	$	$
   Break-even sales (units)
   Break-even sales (dollars)	$	$

   Income Statement - Cover-to-Cover

   Cover-to-Cover Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
   Sales		$379,000
   Variable costs:
   Manufacturing expense	$227,400
   Selling expense	18,950
   Administrative expense	56,850	(303,200)
   Contribution margin		$75,800
   Fixed costs:
   Manufacturing expense	$5,000
   Selling expense	4,000
   Administrative expense	9,950	(18,950)
   Operating income		$56,850

   Income Statement - Biblio Files

   Biblio Files Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
   Sales		$379,000
   Variable costs:
   Manufacturing expense	$151,600
   Selling expense	15,160
   Administrative expense	60,640	(227,400)
   Contribution margin		$151,600
   Fixed costs:
   Manufacturing expense	$76,750
   Selling expense	8,000
   Administrative expense	10,000	(94,750)
   Operating income		$56,850

   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.

   Type of Bookshelf	Sales Price per Unit	Variable Cost per Unit
   Basic	$5.00	$1.75
   Deluxe	9.00	8.10

   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 $332,640. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.

   Type of Bookshelf	Percent of Sales Mix	Break-Even Sales in Units	Break-Even Sales in Dollars
   Basic	%		$
   Deluxe	%		$

   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 $40,000 in the coming year, what must their amount of sales be?
   $

   2. If Biblio Files Company wants to increase its profit by $40,000 in the coming year, what must their amount of sales be?
   $

Pedregon Corporation has provided the following information:

If 4,500 units are sold, the total variable cost is closest to:

Multiple Choice

• $68,625

• $52,425

• $61,200

• $48,600

Glew Corporation has provided the following information:

For financial reporting purposes, the total amount of period costs incurred to sell 4,000 units is closest to:

Multiple Choice

$9,600

$6,400

$5,600

$4,000

Total Manufacturing Cost, Income Statement, Unit Cost, and Selling Price Two inventors, recently

organized as Innovation, Inc., consult you regarding a planned new product. They have estimates of the

costs of materials, labor, overhead, and other expenses for 2016 but need to know how much to charge for

each unit to earn a profit in 2016 equal to 15% of their estimated total long-term investment of $400,000

(ignore income taxes). Their plans indicate that each unit of the new product requires the following:

Direct material

4 lb. of a material costing $5/lb.

Direct labor

2 hrs. of a metal former’s time at $11/hr.

0.6 hr. of an assembler’s time at $8/hr.

Major items of production overhead would be annual rent of $46,460 for a factory building, $28,660

rent for machinery, and $21,700 of indirect material. Other production overhead is estimated to be

$233,280. Selling expenses are an estimated 30% of total sales, and non-factory administrative expenses

are 20% of total sales.

The consensus at Innovation is that during 2016 10,000 units of product should be produced for

selling and another 2,000 units should be produced for the next year’s beginning inventory. Also, an

extra 3,000 pounds of material will be purchased as beginning inventory for the next year. Because

of the nature of the manufacturing process, all units started must be completed, so work in process

inventories are negligible.

Required

a. Incorporate the above data into a schedule of estimated total manufacturing costs and compute

the unit production cost for 2016.

b. Prepare an estimated income statement that would provide the target amount of profit for 2016.

c. What unit sales price should Innovation charge for the new product?

Problem 8-31 Calculating Required Savings

A proposed cost-saving device has an installed cost of $630,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial net working capital investment is $45,000, the marginal tax rate is 34 percent, and the project discount rate is 10 percent. The device has an estimated Year 5 salvage value of $70,000. What level of pretax cost savings do we require for this project to be profitable? Refer to Table 8.3. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
Pretax cost savings           $

Case 3 VietJet is an international low-cost airline from Vietnam. As a low-cost carrier, VietJet offers the different fares based on seasonal demands in order to maximize their profit and hence the fares vary as per the demand during peak and off-peak season. The airline’s total demand is given by; Q = 1200 – 8P, where Q is the number of passengers (in thousands) per year and P is the fare in US dollars. The demand in the peak season is given by; Q = 640 – 3P and this demand function is different in offpeak season which is given by; Q = 560 – 5P. Assume that the fixed cost is $12 million per year with a constant marginal cost of $120 per passenger. Based on this information, discuss the below parts:

a) Calculate the maximum profit, price and number of passengers given that the airline charges only one prices irrespective of the season.

b) Calculate the maximum profit, price and number of passengers given that the airline charges different prices based on the season.

c) Calculate and comment on the demand elasticities at the price where they get maximum profit based on your answer in part (b) above.

d) Why do you think the airline would like to charge the different prices in different seasons? What benefits can it bring to the VietJet by doing so? Explain.

1. Modeling Questions – Cost Functions and Profit Maximization

A perfect competitive firm’s short-run cost function is estimated to be

Cy=10+18 y-4y2+0.6y3 ,

where y is the output, C(y) is the total cost.

a.(2’) What is the firm’s short-run fixed cost?

b.(2’) What is the firm’s short-run variable cost function?

c.(12’) Derive the functions of MC, AVC, AFC, and AC.

d Carefully graph your functions in the following combinations:

TC, FC, and VC vs. y on a single graph.

AC, AFC, AVC, and MC vs. y on a single graph.

(4’) On the graph (ii) at the bottom, label clearly the minimum AVC point and explain why MC curve crosses AVC curve at its minimum.

(20’) Given the output price is p, set up the output-side profit-maximization problem and find the product supply function.

A company, Megah Setia, has the following cost structure:

1. Is it a long run cost structure? Explain your answer briefly.
2. Complete the appropriate numbers in the column of “Average fixed cost”.
3. Complete the appropriate numbers in the column of “Average total cost”.
4. Complete the appropriate numbers in the column of “marginal cost”.