Cost Behavior and Cost-Volume-Profit Analysis 1. Wyatt Inc.

expects to maintain the same inventories at the end of the year as at the beginning of the year. The estimated fixed costs for the year are $288,000, and the estimated variable costs per unit are $14. It is expected that 60,000 units will be sold at a price of $20 per unit. Maximum sales within the relevant range are 70,000 units. a. b. c. d. e. 2. What is (a) the contribution margin ratio and (b) the unit contribution margin? Determine the break-even point in units. Construct a cost-volume-profit chart, indicating the break-even point. Construct a profit-volume chart, indicating the break-even point. What is the margin of safety?

Shatner Inc. has decided to use the high-low method to estimate the total cost and the fixed and variable cost components of the total cost. The data for various levels of production are as follows:

a. Determine the variable cost per unit and the fixed cost. b. Based on part (a), estimate the total cost for 10,000 units of production. 3. Blowing Rock Railroad decided to use the high-low method and operating data from the past six months to estimate the fixed and variable components of transportation costs. The activity base used by Blowing Rock Railroad is a measure of railroad operating activity, termed gross-ton miles, which is the total number of tons multiplied by the miles moved.

Determine the variable cost per gross-ton mile and the fixed cost. 4. a) Bert Company budgets sales of $1,250,000, fixed costs of $450,000, and variable costs of $200,000. What is the contribution margin ratio for Bert Company? b) If the contribution margin ratio for Ernie Company is 40%, sales were $750,000, and fixed costs were $225,000, what was the income from operations? 5. For the current year ending March 31, Jwork Company expects fixed costs of $440,000, a unit variable cost of $50, and a unit selling price of $75. a. Compute the anticipated break-even sales (units). b. Compute the sales (units) required to realize income from operations of $90,000. Currently, the unit selling price of a product is $280, the unit variable cost is $230, and the total fixed costs are $525,000. A proposal is being evaluated to increase the unit selling price to $300. a. Compute the current break-even sales (units).

6.

b.

Compute the anticipated break-even sales (units), assuming that the unit selling price is increased and all costs remain constant. New Wave Technology Inc. manufactures and sells two products, MP3 players and satellite radios. The fixed costs are $300,000, and the sales mix is 40% MP3 players and 60% satellite radios. The unit selling price and the unit variable cost for each product are as follows:

7.

a. Compute the break-even sales (units) for the overall product, E. b. How many units of each product, MP3 players and satellite radios, would be sold at the break-even point? 8. Southwest Blue Airways provides air transportation services between Seattle and San Diego. A single Seattle to San Diego round-trip flight has the following operating statistics:

It is assumed that the fuel, crew salaries, and airplane depreciation are fixed, regardless of the number of seats sold for the round-trip flight. a. Compute the break-even number of seats sold on a single round-trip flight for the overall product. Assume that the overall product is 20% business class and 80% economy class tickets. b. How many business class and economy class seats would be sold at the breakeven point? 9. Varner Inc. and King Inc. have the following operating data:

a. b. c.

Compute the operating leverage for Varner Inc. and King Inc. How much would income from operations increase for each company if the sales of each increased by 20%? Why is there a difference in the increase in income from operations for the two companies? Explain.

10. Battonkill Company, operating at full capacity, sold 112,800 units at a price of $150 per unit during 2010. Its income statement for 2010 is as follows:

The division of costs between fixed and variable is as follows:

Management is considering a plant expansion program that will permit an increase of $1,500,000 in yearly sales. The expansion will increase fixed costs by $200,000, but will not affect the relationship between sales and variable costs. 1. Determine for 2010 the total fixed costs and the total variable costs. 2. Determine for 2010 (a) the unit variable cost and (b) the unit contribution margin. 3. Compute the break-even sales (units) for 2010. 4. Compute the break-even sales (units) under the proposed program. 5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $6,120,000 of income from operations that was earned in 2010. 6. Determine the maximum income from operations possible with the expanded plant. 11. For the coming year, Tolstoy Company anticipates a unit selling price of $100, a unit variable cost of $30, and fixed costs of $2,100,000. a. Compute the anticipated break-even sales (units) b. Compute the sales (units) required to realize income from operations of $350,000 c. Construct a cost-volume-profit chart, assuming maximum sales of 50,000 units within the relevant range. d. Determine the probable income (loss) from operations if sales total 40,000 units 12. Last year, Douthett Inc. had sales of $2,400,000, based on a unit selling price of $600. The variable cost per unit was $440, and fixed costs were $544,000. The maximum sales within Douthetts relevant range are 5,000 units. Douthett is considering a proposal to spend an additional $80,000 on billboard advertising during the current year in an attempt to increase sales and utilize unused capacity. a. Construct a cost-volume-profit chart indicating the break-even sales for last year. Verify your answer, using the break-even equation. b. Using the cost-volume-profit chart prepared in part (1), determine (a) the income from operations for last year and (b) the maximum income from operations that could have been realized during the year. Verify your answers arithmetically. c. Construct a cost-volume-profit chart indicating the break-even sales for the current year, assuming that a noncancelable contract is signed for the additional billboard advertising. No changes are expected in the unit selling price or other costs. Verify your answer, using the breakeven equation. d. Using the cost-volume-profit chart prepared in part (3), determine (a) the income from operations if sales total 4,000 units and (b) the maximum income from operations that could be realized during the year. Verify your answers arithmetically. 13. Steamboat Co. expects to maintain the same inventories at the end of 2010 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during 2010. A summary report of these estimates is as follows:

It is expected that 30,000 units will be sold at a price of $60 a unit. Maximum sales within the relevant range are 45,000 units. *Prepare an estimated income statement for 2010 *What is the expected contribution margin ratio? Round to nearest whole percent. *Determine the break-even sales in units. *Construct a cost-volume-profit chart (on your own paper) indicating the break-even sales. *What is the expected margin of safety in dollars and as a percentage of sales? *Determine the operating leverage. Round to nearest whole number.