ACC 3200 Chapter Notes - Chapter 5: Operating Leverage, Earnings Before Interest And Taxes, Contribution Margin
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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 | 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 |
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.
| Month | Number of Units Produced | Total Cost |
|---|---|---|
| January | 4,360 | $65,600 |
| February | 225 | $6,250 |
| March | 1,000 | $15,000 |
| April | 5,475 | $111,250 |
| 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 Units Produced) +
Fixed Cost. Complete the following table.
| Total Fixed Cost | Variable Cost per Unit |
| $ | $ |
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 Costs |
| 3,500 | $ |
| 4,360 | $ |
| 5,475 | $ |
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.
| 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 âCombined,â 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.
| Type of Bookshelf | Percent of Sales Mix | Break-Even Sales in Units | Break-Even Sales in Dollars |
| Basic | % | $ | |
| Deluxe | % | $ |
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? $
I'll rate do not skip any parts please if you can't dodon't do at all pass it to someone else don't waste my questionthanks ( I need all answers Cost behavior, High low, contributionmargin, Sales mix, target profit Etc)
Cover-to-Cover Company is a manufacturer of shelving forbooks. The company has compiled the following cost data, and wantsyour help in determining the cost behavior. After reviewing thedata, complete requirements (1) and (2) that follow.
| Units | Total | Total | TotalMachine |
|---|---|---|---|
| Produced | Lumber Cost | Utilities Cost | Depreciation Cost |
| 13,000 shelves | $156,000 | $15,950 | $145,000 |
| 26,000 shelves | $312,000 | $30,900 | $145,000 |
| 52,000 shelves | $624,000 | $60,800 | $145,000 |
| 65,000 shelves | $780,000 | $75,750 | $145,000 |
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 | ||
|---|---|---|---|---|---|
| Lumber | |||||
| Utilities | |||||
| Depreciation |
2. For each cost, determine the fixed portion of the cost, andthe per-unit variable cost. If there is no amount or an amount iszero, enter "0". Recall that, for N= Number of Units Produced,Total Costs = (Variable Cost Per Unit x N) + Fixed Cost. Completethe following table with your answers.
| 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-CoverCompany in the bookshelf business. Biblio Files is analyzing itsmanufacturing costs, and has compiled the following data for thefirst six months of the year. After reviewing the data, answerquestions (1) through (3) that follow.
| Month | Number of Units Produced | TotalCost |
|---|---|---|
| January | 4,360 | $65,600 |
| February | 250 | $6,250 |
| March | 1,000 | $15,000 |
| April | 5,250 | $56,250 |
| May | 1,750 | $32,500 |
| June | 3,015 | $48,000 |
1. From the data previously provided, help Biblio Files Companyestimate the fixed and variable portions of its total costs usingthe High-Low Method. Recall that Total Costs = (Variable Cost PerUnit x Units Produced) + Fixed Cost. Complete the followingtable.
| Total FixedCost | Variable Cost perUnit |
2. With your Total Fixed Cost and Variable Cost per Unit fromthe High-Low Method, compute the total cost for the followingvalues of N (Number of Units Produced).
| Number of UnitsProduced | TotalCosts |
| 3,500 | |
| 4,360 | |
| 5,250 |
3. Why does the total cost computed for 4,360 units not matchthe data for January in the table at the top of this panel?
The High-Low method gives accurate data only for levels ofproduction outside the relevant range.
The High-Low method gives a formula for the estimated total costand may not match levels of production other than the highest andlowest.
The High-Low method is accurate only for months in whichproduction is at full capacity.
The High-Low method only gives accurate data when fixed costsare zero.
Contribution Margin
Review the contribution margin income statements forCover-to-Cover Company and Biblio Files Company on their respectiveIncome Statements panels. Complete the following table from thedata provided in the income statements. Each company sold 84,800units 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 |
1 | Sales | $424,000.00 | ||
2 | Variable costs: | |||
3 | Manufacturing | $212,000.00 | ||
4 | Selling | 21,200.00 | ||
5 | Administrative | 63,600.00 | 296,800.00 | |
6 | Contribution margin | 127,200.00 | ||
7 | Fixed Costs: | |||
8 | Manufacturing | $5,000.00 | ||
9 | Selling | 4,000.00 | ||
10 | Administrative | 54,600.00 | 63,600.00 | |
11 | Income from operations | $63,600.00 |
Income Statement - Biblio Files
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 | 33,920.00 | 220,480.00 | |
6 | Contribution margin | 203,520.00 | ||
7 | Fixed Costs: | |||
8 | Manufacturing | $121,920.00 | ||
9 | Selling | 8,000.00 | ||
10 | Administrative | 10,000.00 | 139,920.00 | |
11 | Income from operations | $63,600.00 |
Sales Mix
Biblio Files Company is making plans for its next fiscalyear, and decides to sell two new types of bookshelves, Basic andDeluxe. The company has compiled the following estimates for thenew product offerings.
| Type ofBookshelf | SalesPrice 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 typeof bookshelf would have to be sold in order to break even. If wethink of the Basic and Deluxe products as components of one overallenterprise product called âCombined,â the unit contribution marginfor the Combined product would be $2.31. Fixed costs for theupcoming year are estimated at $346,962. Recall that the totals ofall the sales mix percents must be 100%. Determine the amounts tocomplete 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-CoverCompany and Biblio Files Company on their respective IncomeStatement panels. Note that both companies have the same sales andnet income. Answer questions (1) - (3) that follow, assuming thatall data for the coming year is the same as the current year,except for the amount of sales. If required, round answers to thenearest dollar.
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?
3. What would explain the difference between your answers for(1) and (2)?
Cover-to-Cover Companyâs contribution margin ratio is lower,meaning that itâs more efficient in its operations.
Biblio Files Company has a higher contribution margin ratio, andso more of each sales dollar is available to cover fixed costs andprovide income from operations.
The companies have goals that are not in the relevant range.
The answers are not different; each company has the samerequired sales amount for the coming year to achieve the desiredtarget profit.