Practice exercises (high low point, contribution margin, break even)

1. Assume the following hours of maintenance work and the total maintenance costs for six months.
Month
Hrs of Maintenance
Maintenance Cost
January
625
7,950
February
500
7,400
March
700
8,275
April
550
7,625
May
775
9,100
June
800
9,800
a.) Compute variable cost:
High
800
9,800
Low
500
7,400
Change 300
$2,400
Variable cost per unit = 2,400/300
=$8.00 per hour
b). Compute for fixed cost:

Total cost = Fixed cost+ variable cost

Fixed cost =Total variable cost
Fixed cost = 9,800 - $8x800 hrs.
Fixed cost = 9,800-6,400;
Fixed cost = $3,400
7,400-$8 x 500 hrs
7,400-4,000;

fixed cost = $3,400

c.) Compute the maintenance cost if the number of maintenance hours is 750.
2. Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using high-low
point method, what is the variable (a) portion of sales salaries and commission, (b) what is the fixed portion?
Units__
Cost
High level
120,000
$14,000
Low level
80,000
10,000
Change
40,000
$ 4,000
(a) Variable cost per unit = $4,000/40,000 = $0.10
(b) Fixed cost = $14,000 0.10 x 120,000
= $14,000 12,000 ; Fixed cost = $2,000
(c) Amount of sales salaries and commissions if units sold are 95,000
3.

Power costs and production data of the LMN Mfg Corp are as follows:
Month
Power cost
Units produced
January
$800
120,000
February
710
98,000
March
700
94,000
April
600
70,000
May
740
105,000
June
700
96,000
Compute the variable and fixed elements of the power costs using high low points method.
Variable cost per unit =
high point
120,000
800
Low point
70,000
600
Difference
50,000
200,
200/50,000 = .004 per unit
Fixed cost = 800 - .004 x 120,000;

4.

800-480 = 320

Based on a table of total costs and activity levels, determine the high and low activity levels of Xeon Company.
Month
production
Total cost
January
800
$ 93,000
February
1,100
114,000
March
1,200
119,000
April
950
103,000
May
1,300
126,000
June
1,250
124,000
July
1,000
107,000
August
1,050
110,000
September
1,000
105,000
October
900
100,000
November
1,050
110,000
December
1,200
119,500

(a.) Use the high and low activity levels to compute the variable cost per unit.
126,000 93,000 = $33,000
= $66
1,300 - 800
500
(b.) Figure out the total fixed cost.
Total cost = FC + 66(production)
126,000 = FC + 66(1,300);

126,000=FC + 85,800;
FC = 40,200

126,000-85,800=FC

(c.) Total cost to produce 1,000 units: Total cost = FC + variable costs of $66(1,000 units).
Total cost = 40,200 + 66,000.
Therefore, Total costs = $106,200:
5.

Eagle Manufacturing has incurred the following machine maintenance costs over the last twelve months.
Month
Machine Hours
Cost
January
10,000
$15,500
February
15,000
16,233
March
12,750
18,186
April
13,268
19,125
May
9,256
11,159
June
10,335
15,117
July
13,295
18,998
August
12,652
17,874
September
9,964
10,685
October
10,865
16,853
November
11,569
17,365
December
14,639
19,931
a. Use the high-low method to estimate the variable cost per machine hour and the fixed cost per month.
16,233-11,159
=5,074 =.883
15,000-9,256
5,744
16,233 = FC + .883(15,000)
11,159=FC + .883(9,256)
16,233-13,250.35 = FC; 2,982.65 = Fixed Cost
11,159-8,176.35 = FC; FC=2,982.65
b. Develop a formula to express the cost behavior of Eagles maintenance costs.
Machine maintenance Cost = FC + variable cost per machine hour of .883 (machine hours)
c. Predict the level of maintenance cost that would be incurred during a month when 13,000 machine hours are worked.
X=2,982.65 + .883(13,000); X=2,982.65 + 11,479;
X=14,461.65
d. Predict the level of maintenance cost that would be incurred during a month when 45,000 machine hours are worked.
X=2,982.65 + .883(45,000); X=2,982.65 + 39,735;
X=42,717.65

6.

Previous periods' costs and production levels for Oregon Corp. has the following data about its production of widgets:
Month No. of units produced
Total Cost
January
100
$2,130
February
120
$2,185
March
90
$2,140
April
130
$2,200
May
125
$2,190
June
124
$2,190
July
132
$2,200
August
140
$2,214
September
135
$2,200
October
120
$2,180
November
114
$2,175
December
115
$2,175
Identify the high and low periods
HIGH
August
LOW
March

140
90

$2,214
$2,140

Find the variable cost per unit: Variable cost per unit = (Difference in cost)/(Difference in activity level)
Variable cost per unit = $74 / 50 units = $1.48 per unit.

Find the total fixed costs: Total cost = Total fixed cost + (Variable cost per unit)(No. of units produced)
$2,214.00 = Total FC + ($1.48)(140); $2,214.00 = Total FC + $207.20
$2,214.00 - $207.20 = Total fixed cost;
$2,006.80 = Total fixed cost
Use the formula to estimate total costs in any reasonable production scenario. Suppose that Oregon plans to produce 110 units:
1. Total cost = Total fixed cost + (Variable cost per unit)(No. of units produced)
2. Total cost = $2,006.80 + $1.48(No. of units produced)
3. Total cost = $2,006.80 + $1.48(110)
4. Total cost = $2,136.60
7.

Here is an example concerning the electricity bill in a factory:

Year
Units Produced
Bill Cost
2000
50 units
$100
2001
67 units
$130
2002
20 units
$70
2003
120 units
$200
2004
88 units
$104
2005
112 units
$93

Change in cost / change in unit volume = $130/100 units. Variable cost is $1.30 per unit produced.
Plugging this value into either the 2002 or 2003 data, we find that $200 = $1.30(120 units) + b where b = $44. Therefore, using the high
low method, we conclude that from the above data that the electricity cost behaviour has a fixed cost of $44 and a variable cost of $1.30 per
unit produced.
8.

Assume the following data for X company for the coming year:
Fixed Expenses
$100,000
Variable cost per unit
5.00
Selling price per unit
9.00
Required: (a) How many units must be sold to break even?
(b) How many units must be sold to yield a profit equal to 20% of sales?
(c) How many units must be sold to make a net income of $20,000 assuming selling price per unit is
increased by $1.00
(a) break even sales in units:
9X = 100,000+5X; 9X-5X = 100,000

4X = 100,000; X=100,000/4;

BES = 25,000 units

(b) units to be sold to yield a profit equal to 20% of sales

9X = 100,000 +5X + 20% (9X); 4X=100,000 + 1.8X;
4X-1.8X = 100,000
2.2X = 100,000; X = 45,454 units
(c) Units to be sold to make a profit of 20,000 if selling price is increased by $1.00:
New selling price = $10.00
10X = 100,000 +5X +20,000; 10X-5X = 100,000+20,000; 5X = 120,000; X=120,000/5 = 24,000 units
9. Below is the income statement of MNO Company:
Net Sales
100,000
Less Expenses:
Variable
70,000
(70%)
Fixed
48,000 118,000
Net Loss
18,000
Required: (a) what amount of sales is needed to break even?
(b) If fixed expenses are increased by $12,000, what is the new break even point?
(c) With the proposed increase in fixed expenses, what amount of sales will yield a net income after taxes of 21,000
assuming the income tax rate is 30%
Answer:
(a)Break even sales: CM formula: Sales-VC; ($100,000-70,000 = 30,000)
CM ratio= CM = 30,000 =
30%
Sales 100,000
break even sales=
FC__ = 48,000 = 160,000 BES
CM ratio
30%
Sales
160,000
VC
112,000

CM
FC
Profit

48,000
( 48,000)
-_____

(b) Break even if fixed expenses are increased by $12,000:

BES = 48,000+12,000
=200,000
Sales
30%
VC
CM
FC
Profit

200,000
140,000
60,000
(60,000)
-____

(c) Amount of sales which will yield a net income of 21,000 assuming income tax rate of 30%
Sales = 48,000+12,000 21,000/.7) = 60,000+30,000
= 90,000 = 300,000 Sales
.3
.3
.3
To check:

Sales
300,000
VC (70%)
210,000
CM
90,000
FC
60,000
Profit
30,000
Income tax (30%)
9,000
Net income
21,000