Chapter 18: 12DQ (page 832)
List three methods to measure cost behavior.
Answer
The business entities generally use the Scatter diagram, the High-low method, and Regression to determine the cost behavior.
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How is a scatter diagram used to identify and measure the behavior of a company’s costs?
Aces Inc., a manufacturer of tennis rackets, began operations this year. The company produced 6,000 rackets and sold 4,900. Each racket was sold at a price of \(90. Fixed overhead costs are \)78,000, and fixed selling and administrative costs are \(65,200. The company also reports the following per unit costs for the year. Prepare an income statement under variable costing.
Variable production cost | \)25 |
Variable selling and administrative expenses | $2 |
Question: Stam Co. produces and sells two products, BB and TT. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 50,000 units of each product. Sales and costs for each product follow.
Product BB | Product TT | |
Sales | \(800,000 | \)800,000 |
Variable cost | 560,000 | 100,000 |
Contribution margin | 240,000 | 700,000 |
Fixed costs | 100,000 | 560,000 |
Income before taxes | 140,000 | 140,000 |
Income taxes (32% rate) | 44,800 | 44,800 |
Net income | \(95,200 | \)95,200 |
Required
1. Compute the break-even point in dollar sales for each product. (Round the answer to the next whole dollar.)
2. Assume that the company expects sales of each product to decline to 33,000 units next year with no change in the unit selling price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown here with columns for each of the two products (assume a 32% tax rate, and that any loss before taxes yields a 32% tax benefit).
3. Assume that the company expects sales of each product to increase to 64,000 units next year with no change in the unit selling prices. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown here with columns for each of the two products (assume a 32% tax rate).
Analysis Component
4. If sales greatly increase, which product would experience a greater increase in profit? Explain.
5. Describe some factors that might have created the different cost structures for these two products.
How do step-wise costs and curvilinear costs differ?
Praveen Co. manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding, that has not been as profitable as planned. Since Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next year’s plans call for a \(200 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be \)270,000, up to a maximum capacity of 700,000 yards of rope. Forecasted variable costs are \(140 per 100 yards of XT rope.
Required
1. Estimate Product XT’s break-even point in terms of (a) sales units and (b) sales dollars.
2. Prepare a CVP chart for Product XT like that in Exhibit 18.14. Use 7,000 units (700,000 yards/100 yards) as the maximum number of sales units on the horizontal axis of the graph, and \)1,400,000 as the maximum dollar amount on the vertical axis.
3. Prepare a contribution margin income statement showing sales, variable costs, and fixed costs for Product XT at the break-even point.
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