ACCT 2200 Lecture Notes - Lecture 6: Contribution Margin, Weighted Arithmetic Mean, Earnings Before Interest And Taxes
Document Summary
Get access
Related Documents
Related Questions
Integrative Exercise
Cost Behavior and Cost-Volume-Profit Analysis for Many GlacierHotel
Using the High-Low Method to Estimate Variable and FixedCosts
Located on Swiftcurrent Lake in Glacier National Park, ManyGlacier Hotel was built in 1915 by the Great Northern Railway. Inan effort to supplement its lodging revenue, the hotel decided in20X1 to begin manufacturing and selling small wooden canoesdecorated with symbols hand painted by Native Americans living nearthe park. Due to the great success of the canoes, the hotel beganmanufacturing and selling paddles as well in 20X3. Many hotelguests purchase a canoe and paddles for use in self-guided tours ofSwiftcurrent Lake. Because production of the two products began indifferent years, the canoes and paddles are produced in separateproduction facilities and employ different laborers. Each canoesells for $500, and each paddle sells for $50. A 20X3 firedestroyed the hotelâs accounting records. However, a new system putinto place before the 20X4 season provides the following aggregateddata for the hotelâs canoe and paddle manufacturing and marketingactivities:
| Manufacturing Data: | ||||||||||||||
| Year | Number of Canoes Manufactured | Total Canoe Manufacturing Costs | Year | Number of Paddles Manufactured | Total Paddle Manufacturing Costs | |||||||||
| 20X9 | 250 | $103,000 | 20X9 | 900 | $38,500 | |||||||||
| 20X8 | 275 | 128,000 | 20X8 | 1,200 | 49,000 | |||||||||
| 20X7 | 240 | 108,000 | 20X7 | 1,000 | 44,000 | |||||||||
| 20X6 | 310 | 114,000 | 20X6 | 1,100 | 45,500 | |||||||||
| 20X5 | 350 | 141,500 | 20X5 | 1,400 | 52,000 | |||||||||
| 20X4 | 400 | 140,000 | 20X4 | 1,700 | 66,500 | |||||||||
| Marketing Data: | ||||||||||||||
| Year | Number of Canoes Sold | Total Canoe Marketing Costs | Year | Number of Paddles Sold | Total Paddle Marketing Costs | |||||||||
| 20X9 | 250 | $45,000 | 20X9 | 900 | $7,500 | |||||||||
| 20X8 | 275 | 43,000 | 20X8 | 1,200 | 9,000 | |||||||||
| 20X7 | 240 | 44,000 | 20X7 | 1,000 | 8,000 | |||||||||
| 20X6 | 310 | 51,000 | 20X6 | 1,100 | 8,500 | |||||||||
| 20X5 | 350 | 62,000 | 20X5 | 1,400 | 10,000 | |||||||||
| 20X4 | 400 | 60,000 | 20X4 | 1,700 | 11,500 | |||||||||
Required:
1. High-Low Cost Estimation Method
a. Use the high-low method to estimate the per-unit variablecosts and total fixed costs for the canoe productline.
| Variable cost per unit | $ |
| Total fixed cost | $ |
b. Use the high-low method to estimate the per-unit variablecosts and total fixed costs for the paddle productline.
| Variable cost per unit | $ |
| Total fixed cost | $ |
2. Cost-Volume-Profit Analysis, Single-ProductSetting
Use CVP analysis to calculate the break-even point in units for
a. The canoe product line only (i.e.,single-product setting)
| BE units | canoes |
b. The paddle product line only (i.e.,single-product setting)
| BE units | paddles |
3. Cost-Volume-Profit Analysis,Multiple-Product Setting
The hotel's accounting system data show an average sales mix ofapproximately 300 canoes and 1,200 paddles each season.Significantly more paddles are sold relative to canoes because someinexperienced canoe guests accidentally break one or more paddles,while other guests purchase additional paddles as presents forfriends and relatives. In addition, for this multiple-product CVPanalysis, assume the existence of an additional $30,000 of commonfixed costs for a customer service hotline used for both canoe andpaddle customers. Use CVP analysis to calculate the break-evenpoint in units for both the canoe and paddle product lines combined(i.e., the multiple-product setting).
| Canoe BE units | canoes |
| Paddle BE units | paddles |
4. Cost Classification
a. Classify the manufacturing costs, marketing costs, andcustomer service hotline costs either as production costs or periodcosts.
All manufacturing costs are costs. All marketing costs andcustomer hotline costs are costs
b. For the period costs, further classify them into eitherselling expenses or general and administrative expenses.
Marketing costs are selling oriented; therefore, the marketingperiod costs would be further classified as . Customer hotlinecosts relate to the customer service section of the value chain andwould be further classified as .
5. Sensitivity Cost-Volume-Profit Analysis andProduction Versus Period Costs, Multiple- Product Setting
If both the variable and fixed production costs (refer to youranswer to Requirement 1) associated with the canoe product lineincreased by 5% (beyond the estimate from the high-low analysis),how many canoes and paddles would need to be sold in order to earna target income of $96,000? Assume the same sales mix andadditional fixed costs as in Requirement 3.
| Canoe target income units | canoes |
| Paddle target income units | paddles |
6. Margin of Safety
Calculate the hotelâs margin of safety (both in units and insales dollars) for Many Glacier Hotel, assuming the same facts asin Requirement 3, and assuming that it sells 700 canoes and 2,500paddles next year.
total MOS units above total BE units
$ MOS in sales dollars
Kiwi Cellars has many competitors in the New Zealand domesticpremium wine market. The wines are judged similarly in quality& taste although KC employs different production and marketingmethods. Dissatisfied with its current profitability, KC managementis considering their competitive options. An accounting departmentanalyst compiled the following data for the most recent year tofacilitate our analysis.
Note: Assume that the company sells what itproduces, thus they do not produce wine to hold over ininventory.
KC | BenchmarkCompetitor | |
Sales price per unit (750 ml bottle) | $8.50 | $8.00 |
Variable materials (grapes, bottles, etc.) per unit | $2.25 | $2.75 |
Variable labor per unit | $1.25 | $2.00 |
Variable production overhead (utilities, etc.) perunit | $1.00 | $1.25 |
Fixed production overhead (depreciation, etc.) | $750,000 | $250,000 |
Marketing, administrative and other fixed costs | $250,000 | $150,000 |
Last yearâs sales in units | 350,000 | 400,000 |
Capacity in units | 500,000 | 450,000 |
1. Demand in recent years has been volatile varying from a lowof 200,000 to a high of 400,000 units. As a measure of the impactof this uncertain demand on profit by assuming demand increases ordecreases by 10%.
Interpret the relative changes in profit.
2. Recommend a coherent plan for how KC could increase profit inthe coming year and calculate the resulting profit for yourplan.
Explain your answer, evaluating their current position relativeto your recommendation.
3. Now assume that the data above for Kiwi actually consists oftwo wines with the following data:
KC-Chard | KC-Shiraz | |
Sales price per unit (750 ml bottle) | $ 7.50 | $ 11.00 |
Variable cost per unit | $ 4.20 | $ 5.25 |
Last yearâs sales in units | 250,000 | 100,000 |
a. Describe the KC's Unit Level Cost-Volume-Profit (CVP)relationship.
b. Describe the Cost Behavior Analysis - by analyzing the KiwiCellar's business problems.
c. What are the concepts underlying cost-volume-profit analysisfor Kiwi Cellars?
d. What can be said about the Breakeven and Profit Planning ofthe company
e. What can you conclude by conducting an Analysis of OperatingLeverage
