Problem 19-2B

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Problem 19-2B solution

Break-even sales under present and proposed conditions
Gaelic Industries Inc., operating at full capacity, sold 22,350 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 $900,000 in yearly sales. The expansion will increase fixed costs by $242,500, but will not affect the relationship between sales and variable costs.

1. Determine for 2010 the total fixed costs and the total variable costs.
Fixed costs: $1,582,500
Variable costs: $1,117,500

2. Determine for 2010 (a) the unit variable cost and (b) the unit contribution margin.
Unit variable cost: $50
Unit contribution margin: $100

3. Compute the break-even sales (units) for 2010.
15,825 units

4. Compute the break-even sales (units) under the proposed program.
18,250 units

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $652,500 of income from operations that was earned in 2010.
24,775 units

6. Determine the maximum income from operations possible with the expanded plant.
$1,010,000

7. If the proposal is accepted and sales remain at the 2010 level, what will the income or loss from operations be for 2011?
$410,000 Income

Problem 19-1A

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Problem 19-1A solution

Classify costs

West Coast Apparel Co. manufactures a variety of clothing types for distribution to several major retail chains. The following costs are incurred in the production and sale of blue jeans. Identify each cost listed below as variable costs, fixed costs, or mixed cost.

a. Salary of production vice president: Fixed
b. Property taxes on property, plant, and equipment: Fixed
c. Electricity costs of $0.12 per kilowatt-hour: Variable
d. Salesperson's salary, $30,000 plus 2% of the total sales: Mixed
e. Consulting fee of $100,000 paid to industry specialist for marketing advice: Fixed
f. Shipping boxes used to ship orders: Variable
g. Dye: Variable
h. Thread: Variable
i. Salary of designers: Fixed
j. Brass buttons: Variable
k. Janitorial supplies, $2,000 per month: Fixed
l. Legal fees paid to attorneys in defense of the company in a patent infringement suit, $40,000 plus $150 per hour: Mixed
m. Straight-line depreciation on sewing machines: Fixed
n. Insurance premiums on property, plant, and equipment, $50,000 per year plus $4 per $20,000 of insured value over $10,000,000: Mixed
o. Hourly wages of machine operators: Variable
p. Fabric: Variable
q. Rental costs of warehouse, $4,000 per month plus $3 per square foot of storage used: Mixed
r. Rent on experimental equipment, $40,000 per year: Fixed
s. Leather for patches identifying the brand on individual pieces of apparel: Variable
t. Supplies: Variable

Exercise 19-13

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Exercise 19-13 solution

Break-even sales

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).
10,500 units

b. Compute the anticipated break-even sales (units), assuming that the unit selling price is increased and all costs remain constant.
7,500 units

Exercise 19-11

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Exercise 19-11 solution

Break-even sales and sales to realize income from operations.

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).
17,600 units

b. Compute the sales (units) required to realize income from operations of $90,000.
21,200 units

Exercise 19-9

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Exercise 19-9 solution

Contribution margin ratio

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?
Answer: 84%

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?
Answer: $75,000

Exercise 19-8

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Exercise 19-8 solution

High-low method for service company

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.

Variable cost: $2.2 per gross-ton mile
Total fixed cost: $160,000

Exercise 19-7

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Exercise 19-7 solution

High-low method
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:


1. Determine the variable cost per unit and the fixed cost.

Variable cost: $16 per unit
Total fixed cost: $480,000

2. Based on part 1, estimate the total cost for 10,000 units of production.

Total cost for 10,000 units: $640,000

Exercise 19-4

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Exercise 19-4 solution

Identify activity bases
From the following list of activity bases for an automobile dealership, select the base that would be most appropriate for each of these costs:

(1) preparation costs (cleaning, oil, and gasoline costs) for each car received,
(2) salespersons' commission of 4% of the sales price for each car sold,
(3) administrative costs for ordering cars.

a. Dollar amount of cars sold
b. Number of cars received
c. Dollar amount of cars on hand
d. Number of cars on hand
e. Dollar amount of cars ordered
f. Dollar amount of cars received
g. Number of cars ordered
h. Number of cars sold

For each of the costs, choose the activity base from the list of activity bases that would be the most appropriate.

1. Preparation costs (cleaning, oil, and gasoline costs) for each car received: (B)
2. Salespersons' commission of 4% of the sales price for each car sold: (A)
3. Administrative costs for ordering cars: (G)

Exercise 19-2

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Exercise 19-2 solution

Identify cost graphs
The following cost graphs illustrate various types of cost behavior:


For each of the following costs, identify the cost graph that best illustrates its cost behavior as the number of units produced increases.
a. Total direct materials cost: Graph Four
b. Electricity costs of $2,000 per month plus $0.09 per kilowatt-hour: Graph Three
c. Per-unit direct labor cost: Graph Two
d. Salary of quality control supervisor, $10,000 per month: Graph Two
e. Per-unit cost of straight-line depreciation on factory equipment: Graph One