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Chapter 20: Q3SE (page 1121)

Using the high-low method

Mark owns a machine shop. In reviewing the shop’s utility bills for the past 12 months, he found that the highest bill of \(2,600 occurred in August when the machines worked 1,200 machine hours. The lowest utility bill of \)2,300 occurred in December when the machines worked 600 machine hours.

Requirements

1. Use the high-low method to calculate the variable cost per machine hour and the total fixed utility cost.

2. Show the equation for determining the total utility cost for the machine shop.

3. If Mark anticipates using 800 machine hours in January, predict the shop’s total utility bill using the equation from Requirement 2.

Short Answer

Expert verified

1. Variable cost per units is $ 0.50 per machine hour

Total fixed cost is $2,000

2.Totalmixedcost=(Variablecostperunits×Numberofunits)+Totalfixedcost

3. Total mixed cost is $ 2,400


Step by step solution

01

Calculation of variable cost per machine hour and total fixed utility cost using high-low method.


Variablecostperunit=ChangeintotalcostChangeinvolumeactivity=(Costassociatedwithhigestvolume-Costassociatedwithlowestvolume)(Highestvolume-Lowestvolume)=($2,600-$2,300)(1200-600)=($300)($600)=$0.50permachinehour

Totalfixedcost=Totalmixedcost-Totalvariablecost=Totalmixedcost-(Variablecostperunit×Numberofunits)=$2,600-($0.50×1200)=$2,600-$6,00=$2,000

02

equation for determining the total utility cost for the machine shop.

Totalmixedcost=(Variablecostperunit×Numberofunits)+Totalfixedcost

03

Calculation of shop’s total utility bill using equation in step 2.

Totalmixedcost=(Variablecostperunit×Numberperunits)+Totalfixedcost=($0.50×800machinehoure)+$2,000=$400+$2,000=$2,400

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Most popular questions from this chapter

Use the following information to complete Short Exercises S20-10 through S20-15.

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month.

S20-14 Computing margin of safety

Refer to the original information (ignoring the changes considered in Short Exercises S20-12 and S20-13). If Funday Park expects to sell 8,100 tickets, compute the margin of safety in tickets and in sales dollars.

The budgets of four companies yield the following information:

Company

Blue Red Green Yellow

Net Sales Revenue \( 1,900,000 \) (d) \( 1,500,000 \) (j) Variable Costs (a) 47,250 1,050,000 256,200 Fixed Costs (b) 168,000 159,000 (k) Operating Income (Loss) 298,500 (e) (g) 97,800

Units Sold 190,000 9,000 (h) (l) Contribution Margin per Unit \( 3.00 \) (f) \( 75.00 \) 18.00

Contribution Margin Ratio (c) 80% (i) 30%

Requirements

1. Fill in the blanks for each missing value. (Round the contribution margin per unit to the nearest cent.)

2. Which company has the lowest breakeven point in sales dollars?

3. What causes the low breakeven point?

Computing margin of safety

Robbie’s Repair Shop has a monthly target profit of \(31,000. Variable costs are 20%of sales, and monthly fixed costs are \)19,000.

Requirements

1. Compute the monthly margin of safety in dollars if the shop achieves its income goal.

2. Express Robbie’s margin of safety as a percentage of target sales.

3. Why would Robbie’s management want to know the shop’s margin of safety?

You have just begun your summer internship at Omni Instruments. The company supplies sterilized surgical instruments for physicians. To expand sales, Omni is considering paying a commission to its sales force. The controller, Matthew Barnhill, asks you to compute: (1) the new breakeven sales figure, and (2) the operating profit if sales increase 15% under the new sales commission plan. He thinks you can handle this task because you learned CVP analysis in your accounting class.

You spend the next day collecting information from the accounting records, performing the analysis, and writing a memo to explain the results. The company president is pleased with your memo. You report that the new sales commission plan will lead to a significant increase in operating income and only a small increase in breakeven sales.

The following week, you realize that you made an error in the CVP analysis. You overlooked the sales personnel’s $2,800 monthly salaries, and you did not include this fixed selling cost in your computations. You are not sure what to do. If you tell Matthew Barnhill of your mistake, he will have to tell the president. In this case, you are afraid Omni might not offer you permanent employment after your internship.

Requirements

1. How would your error affect breakeven sales and operating income under the proposed sales commission plan? Could this cause the president to reject the sales commission proposal?

2. Consider your ethical responsibilities. Is there a difference between (a) initially making an error and (b) subsequently failing to inform the controller?

3. Suppose you tell Matthew Barnhill of the error in your analysis. Why might the consequences not be as bad as you fear? Should Barnhill take any responsibility for your error? What could Barnhill have done differently?

4. After considering all the factors, should you inform Barnhill or simply keep quiet?

On the CVP graph, where is the breakeven point shown? Why?
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