ACC431 Lecture Notes - Lecture 3: Fixed Cost, Income Statement, Earnings Before Interest And Taxes
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Integrative Exercise
Cost Behavior and Cost-Volume-Profit Analysis for Many GlacierHotel
Using the High-Low Method to Estimate Variable and FixedCosts
Located on Swiftcurrent Lake in Glacier National Park, ManyGlacier Hotel was built in 1915 by the Great Northern Railway. Inan effort to supplement its lodging revenue, the hotel decided in20X1 to begin manufacturing and selling small wooden canoesdecorated with symbols hand painted by Native Americans living nearthe park. Due to the great success of the canoes, the hotel beganmanufacturing and selling paddles as well in 20X3. Many hotelguests purchase a canoe and paddles for use in self-guided tours ofSwiftcurrent Lake. Because production of the two products began indifferent years, the canoes and paddles are produced in separateproduction facilities and employ different laborers. Each canoesells for $500, and each paddle sells for $50. A 20X3 firedestroyed the hotelâs accounting records. However, a new system putinto place before the 20X4 season provides the following aggregateddata for the hotelâs canoe and paddle manufacturing and marketingactivities:
| Manufacturing Data: | ||||||||||||||
| Year | Number of Canoes Manufactured | Total Canoe Manufacturing Costs | Year | Number of Paddles Manufactured | Total Paddle Manufacturing Costs | |||||||||
| 20X9 | 250 | $103,000 | 20X9 | 900 | $38,500 | |||||||||
| 20X8 | 275 | 128,000 | 20X8 | 1,200 | 49,000 | |||||||||
| 20X7 | 240 | 108,000 | 20X7 | 1,000 | 44,000 | |||||||||
| 20X6 | 310 | 114,000 | 20X6 | 1,100 | 45,500 | |||||||||
| 20X5 | 350 | 141,500 | 20X5 | 1,400 | 52,000 | |||||||||
| 20X4 | 400 | 140,000 | 20X4 | 1,700 | 66,500 | |||||||||
| Marketing Data: | ||||||||||||||
| Year | Number of Canoes Sold | Total Canoe Marketing Costs | Year | Number of Paddles Sold | Total Paddle Marketing Costs | |||||||||
| 20X9 | 250 | $45,000 | 20X9 | 900 | $7,500 | |||||||||
| 20X8 | 275 | 43,000 | 20X8 | 1,200 | 9,000 | |||||||||
| 20X7 | 240 | 44,000 | 20X7 | 1,000 | 8,000 | |||||||||
| 20X6 | 310 | 51,000 | 20X6 | 1,100 | 8,500 | |||||||||
| 20X5 | 350 | 62,000 | 20X5 | 1,400 | 10,000 | |||||||||
| 20X4 | 400 | 60,000 | 20X4 | 1,700 | 11,500 | |||||||||
Required:
1. High-Low Cost Estimation Method
a. Use the high-low method to estimate the per-unit variablecosts and total fixed costs for the canoe productline.
| Variable cost per unit | $ |
| Total fixed cost | $ |
b. Use the high-low method to estimate the per-unit variablecosts and total fixed costs for the paddle productline.
| Variable cost per unit | $ |
| Total fixed cost | $ |
2. Cost-Volume-Profit Analysis, Single-ProductSetting
Use CVP analysis to calculate the break-even point in units for
a. The canoe product line only (i.e.,single-product setting)
| BE units | canoes |
b. The paddle product line only (i.e.,single-product setting)
| BE units | paddles |
3. Cost-Volume-Profit Analysis,Multiple-Product Setting
The hotel's accounting system data show an average sales mix ofapproximately 300 canoes and 1,200 paddles each season.Significantly more paddles are sold relative to canoes because someinexperienced canoe guests accidentally break one or more paddles,while other guests purchase additional paddles as presents forfriends and relatives. In addition, for this multiple-product CVPanalysis, assume the existence of an additional $30,000 of commonfixed costs for a customer service hotline used for both canoe andpaddle customers. Use CVP analysis to calculate the break-evenpoint in units for both the canoe and paddle product lines combined(i.e., the multiple-product setting).
| Canoe BE units | canoes |
| Paddle BE units | paddles |
4. Cost Classification
a. Classify the manufacturing costs, marketing costs, andcustomer service hotline costs either as production costs or periodcosts.
All manufacturing costs are costs. All marketing costs andcustomer hotline costs are costs
b. For the period costs, further classify them into eitherselling expenses or general and administrative expenses.
Marketing costs are selling oriented; therefore, the marketingperiod costs would be further classified as . Customer hotlinecosts relate to the customer service section of the value chain andwould be further classified as .
5. Sensitivity Cost-Volume-Profit Analysis andProduction Versus Period Costs, Multiple- Product Setting
If both the variable and fixed production costs (refer to youranswer to Requirement 1) associated with the canoe product lineincreased by 5% (beyond the estimate from the high-low analysis),how many canoes and paddles would need to be sold in order to earna target income of $96,000? Assume the same sales mix andadditional fixed costs as in Requirement 3.
| Canoe target income units | canoes |
| Paddle target income units | paddles |
6. Margin of Safety
Calculate the hotelâs margin of safety (both in units and insales dollars) for Many Glacier Hotel, assuming the same facts asin Requirement 3, and assuming that it sells 700 canoes and 2,500paddles next year.
total MOS units above total BE units
$ MOS in sales dollars
Need Answers and why:
12. _____ is an example of a monetary incentiveused to control a manager's tendency to shirk and wasteresources.
a. A recognition program
b. Job enrichment
c. A promotion
13. Which of the following is true ofparticipative budgeting?
a. It imposes budgets on subordinate managers.
b. It fosters a sense of responsibility among managers.
d. It discourages creativity.
14. In March, Burlywood had the followingresults:
Production:
Units in process, March 1, 80% complete | 36,000 units |
Units completed and transferred out | 120,000 units |
Units in process, March 31, 40% complete | 44,500 units |
Costs: | |
Work in process, March 1 | $11,600 |
Costs added during March | $32,000 |
Determine the total cost to be assigned using the first-in,first-out costing method.
a. $55,200
c. $48,080
d. $52,320
9. In cost-volume-profit analysis, amultiple-product problem is converted into a single-product problemby:
a. determining the sales prices.
b. defining the features of the products.
c. determining the unit variable cost.
d. defining a particular sales mix inunits.
13. Which of the following is true ofsensitivity analysis?
a. It allows managers to vary costs, prices, and salesmix to show various possible break-even points.
b. It can be performed only when managers have accurate dataabout financial forecasts.
c. It provides accurate data about sales, contribution margin,and operating income without ambiguity.
d. It can be easily performed on hand with limited knowledge ofrevenue and cost systems.
1.Decisions that involve choosing betweendifferent alternatives that attempt to provide a competitiveadvantage over a particular time frame are called:
b. strategic decisions.
c. relevant decisions.
d. short-term decisions.
4. Which of the following is an example of adirect fixed cost?
a. Cost of a mold for a product
c. Cost of printing annual reports
d. Salary of a receptionist
10. Which of the following is true of targetpricing?
a. It aims to increase cost on redesigning the product duringthe production stage.
b. It requires the use of fewer materials, labor, and processesduring production, delivery and customer service.
c. It recognizes that only 50% of a product's cost becomescommitted by the time it reaches the design stage.
Budgets can be improved as performance measures by:
a. holding managers accountable for noncontrollable costs.
b. using fixed budgeting.
c. setting standards that are either too high or too low.
d. using participative budgeting.
_____ are an example of nonmonetary incentives used to enhance abudgetary control system.
a. Bonuses paid to managers
b. Salary increases to workers
c. Recognition programs
d. Promotions offered to supervisors