Homework SourseCovertoCover Company is a manufacturer of shelving for books
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.
Variable Cost
Fixed Cost
Mixed Cost
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.
Cost Fixed Portion of Cost Variable Portion of Cost (per Unit)
Lumber $ $
Utilities $ $
Depreciation $ $
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 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 in the table at the top of this panel?
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.
The High-Low method only gives accurate data when fixed costs are zero.
The High-Low method gives accurate data only for levels of production outside the relevant range.
The High-Low method is accurate only for months in which production is at full capacity.
Review the contribution margin income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statements panels. Complete the following table from the data provided in the income statements. Each company sold 84,800 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) $ $
Cover-to-Cover Company
Contribution Margin Income Statement
For the Year Ended December 31
1
Sales
$424,000.00
2
Variable costs:
3
Manufacturing
$233,200.00
4
Selling
21,200.00
5
Administrative
63,600.00
318,000.00
6
Contribution margin
106,000.00
7
Fixed Costs:
8
Manufacturing
$5,000.00
9
Selling
4,000.00
10
Administrative
33,400.00
42,400.00
11
Income from operations
$63,600.00
Biblio Files Company
Contribution Margin Income Statement
For the Year Ended December 31
1
Sales
$424,000.00
2
Variable costs:
3
Manufacturing
$169,600.00
4
Selling
16,960.00
5
Administrative
67,840.00
254,400.00
6
Contribution margin
169,600.00
7
Fixed Costs:
8
Manufacturing
$88,000.00
9
Selling
8,000.00
10
Administrative
10,000.00
106,000.00
11
Income from operations
$63,600.00
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 $346,962. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.
Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement panels. 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. If required, round answers to the nearest dollar.
1. If Cover-to-Cover Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be?
2. If Biblio Files Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be?
3. What would explain the difference between your answers for (1) and (2)?
Cover-to-Cover Company’s contribution margin ratio is lower, meaning that it’s more efficient in its operations.
The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.
Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide income from operations.
The companies have goals that are not in the relevant range.
| Units | Total | Total | Total Machine |
|---|---|---|---|
| Produced | Lumber Cost | Utilities Cost | Depreciation Cost |
| 4,000 shelves | $48,000 | $5,600 | $130,000 |
| 8,000 shelves | $96,000 | $10,200 | $130,000 |
| 16,000 shelves | $192,000 | $19,400 | $130,000 |
| 20,000 shelves | $240,000 | $24,000 | $130,000 |
Solution
1 and 2. Lumber cost: Units Produced Lumber cost Cost per unit 4000 48000 12 8000 96000 12 16000 192000 12 20000 240000 12 It is a variable cost since cost per unit is $12 per unit produced Utilities cost: Units Produced Utilities cost Cost per unit 4000 5600 1.4 8000 10200 1.275 16000 19400 1.2125 20000 24000 1.2 It is a mixed cost since cost per unit changes in each level of unit produced. Variable cost=Change in total cost/Change in units produced Consider highest and lowest level of activity. i.e,4000 units and 20000 units Variable cost=(24000-5600)/(20000-4000)=$1.15 per unit Consider 20000 units Fixed cost=Total cost-(Variable cost per unit*Unit produced)=24000-(1.15*4000)=$ 19400 Depreciation cost: Units Produced Utilities cost 4000 130000 8000 130000 16000 130000 20000 130000 It is a fixed cost since total cost is same at each level of unit produced Variable Cost Fixed Cost Mixed Cost None of these Lumber x Utilities x Depreciation x Cost Fixed Portion of Cost Variable Portion of Cost (per Unit) Lumber 0 12 Utilities 1.15 19400 Depreciation 0 130000 1 Variable cost=Change in total cost/Change in units produced Consider highest and lowest level of activity. i.e,225 units and 5475 units Variable cost=(111250-6250)/(5475-225)=$20 per unit Consider 5475 units Fixed cost=Total cost-(Variable cost per unit*Unit produced)=111250-(20*5475)=$ 1750 2 Number of units produced Total cost 3500 (3500*20)+1750=$ 71750 4360 (4360*20)+1750=$ 88950 5475 (5475*20)+1750=$ 111250 3 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.
