Homework SourseThe Central Valley Company is a manufacturing firm that prod
| The Central Valley Company is a manufacturing firm that produces and sells a single product. The company’s revenues and expenses for the last four months are given below. |
| Central Valley Company Comparative Income Statement | ||||||||||||
| March | April | May | June | |||||||||
| Sales in units | 5,800 | 5,300 | 6,450 | 7,600 | ||||||||
| Sales revenue | $ | 742,400 | $ | 678,400 | $ | 825,600 | $ | 972,800 | ||||
| Less: Cost of goods sold | 392,200 | 366,336 | 429,312 | 496,128 | ||||||||
| Gross margin | $ | 350,200 | $ | 312,064 | $ | 396,288 | $ | 476,672 | ||||
| Less: Operating Expenses | ||||||||||||
| Shipping expense | $ | 63,100 | $ | 54,400 | $ | 66,600 | $ | 67,000 | ||||
| Advertising expense | 82,000 | 82,000 | 82,000 | 82,000 | ||||||||
| Salaries and commissions | 163,200 | 139,000 | 165,500 | 176,500 | ||||||||
| Insurance expense | 13,000 | 13,000 | 13,000 | 13,000 | ||||||||
| Amortization expense | 46,000 | 46,000 | 46,000 | 46,000 | ||||||||
| Total operating expenses | $ | 367,300 | $ | 334,400 | $ | 373,100 | $ | 384,500 | ||||
| Net income | $ | (17,100 | ) | $ | (22,336 | ) | $ | 23,188 | $ | 92,172 | ||
| Required: |
| 1. | Management is concerned about the losses experienced during the spring and would like to know more about the cost behaviour. Develop a cost equation for each of the costs. (Do not round intermediate calculations. Round \"Per Unit\" answers to 2 decimal places.) |
| 2. | Assume that fixed costs are incurred uniformly throughout the year. Compute the annual break-even sales, and the profit if 74,000 units are sold during the year. (Round \"Break-even sales\" answer to nearest whole number.) |
| 3. | Calculate the change in profit if the selling price were reduced by $8.0 each and annual sales were to increase by 6,600 units. |
| 4. | Determine the change in profit if the company were to increase advertising by $108,000 and if this were to increase sales by 6,600 units. |
| The Central Valley Company is a manufacturing firm that produces and sells a single product. The company’s revenues and expenses for the last four months are given below. |
Solution
1. Application of the high-low method for segregating mixed costs into variable costs and fixed costs:
a. Cost of goods sold:
7,600 V + F = 496,128
5,300 V + F = 366,336
Variable cost of goods sold per unit = $ 56.43
Fixed cost per month = $ 67,260.
Cost equation : Y = 56.43 x + 67,260
b. Shipping Expenses:
7,600 V + F = 67,000
5,300 V + F = 54,400
Variable shipping expenses per unit = $ 5.48
Fixed shipping expenses per month = $ 25,352
Cost equation : Y = 5.48 x + 25,352
c. Salaries and Commissions :
7,600 V + F = 176,500
5,300 V + F = 139,000
Variable salaries and commissions per unit = $ 16.30 per unit.
Fixed salaries and commissions per month = $ 52,620
Cost equation : Y = 16.30 x + 52,620
2. Total fixed cost per month = $ 286,232.
Total fixed cost per year = $ 3,434,784.
Contribution margin per unit = Unit sales price - Unit variable cost = $ 128 - $ ( 56.43 + 5.48 + 16.30) = $ 49.79
Annual break-even sales = Total Fixed Cost / Unit Contribution Margin = $ 3,434,784 / $ 49.79 = 68,985.42 units
Profit if 74,000 units are sold during the year = 74,000 x $ 49.79 - $ 3,434,784 = $ 249,676.
3. If selling price were to be reduced by $ 8 per unit, and unit sales were to increase by 6,600 units, change in profit = 6,600 x $ ( 49.79 - 8.00) = $ 275,814 Increase.
4. Change in profit = 6,600 x $ 49.79 - $ 108,000 = $ 220,614. Increase.
