Chapter 18: 3DQ (page 832)
When output volume increases, do fixed costs per unit increase, decrease, or stay the same within the relevant range of activity? Explain.
Answer
Fixed cost per unit will decline due to an increase in output level.
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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 \(65,200. The company also reports the following per unit costs for the year. Prepare an income statement under absorption costing.
Variable production cost | \)25 |
Variable selling and administrative expenses | $2 |
Alden Co.’s monthly unit sales and total cost data for its operating activities of the past year follow. Management wants to use these data to predict future fixed and variable costs.
Month | Unit sold | Total cost | Month | Unit sold | Total cost |
1 | 320,000 | \(160,000 | 7 | 340,000 | \)220,000 |
2 | 160,000 | 100,000 | 8 | 280,000 | 160,000 |
3 | 280,000 | 220,000 | 9 | 80,000 | 64,000 |
4 | 200,000 | 100,000 | 10 | 160,000 | 140,000 |
5 | 300,000 | 230,000 | 11 | 100,000 | 100,000 |
6 | 200,000 | 120,000 | 12 | 110,000 | 80,000 |
Required
1. Prepare a scatter diagram for these data with sales volume (in units) plotted on the horizontal axis and total cost plotted on the vertical axis.
2. Estimate both the variable costs per unit and the total monthly fixed costs using the high-low method. Draw the total costs line on the scatter diagram in part 1.
3. Use the estimated line of cost behavior and results from part 2 to predict future total costs when sales volume is (a) 200,000 units and (b) 300,000 units.
Google uses variable costing for several business decisions. How can variable costing income be converted to absorption costing income?
A jeans maker is designing a new line of jeans called Slims. The jeans will sell for \(205 per pair and cost \)164 per pair in variable costs to make.
1. Compute the contribution margin per pair.
2. Compute the contribution margin ratio.
3. Describe what the contribution margin ratio reveals about this new jeans line.
List three methods to measure cost behavior.
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