Chapter 18: Q16QS (page 834)
Singh Co. reports a contribution margin of \(960,000 and fixed costs of \)720,000. (1) Compute the company’s degree of operating leverage. (2) If sales increase by 15%, what amount of income will Singh Co. report?
Degree of operating leverage: 4.0
Income before tax: $384,000
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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.
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 |
Refer to the information from Exercise 18-6. Use spreadsheet software to use ordinary least-squares regression to estimate the cost equation, including fixed and variable cost amounts.
A manufacturer reports the information below for three recent years. Compute income for each of the three years using absorption costing.
Year 1 | Year 2 | Year 3 | |
Variable costing income | \(110,000 | \)114,400 | \(118,950 |
Beginning finished goods inventory (units) | 0 | 1,200 | 700 |
Ending finished goods inventory (units) | 1,200 | 700 | 800 |
Fixed manufacturing overhead per unit | \)2.50 | \(2.50 | \)2.50 |
Hudson Co. reports the contribution margin income statement for 2017 below. Using this information, compute Hudson Co.’s (1) break-even point in units and (2) break-even point in sales dollars.
HUDSON CO. | |
Contribution margin income statement | |
For the year ended December 31, 2017 | |
Sales (9,600 units @ \(225 each) | \)2,160,000 |
Less: Variable cost (9,600 units @ \(180 each) | 1,728,000 |
Contribution margin | 432,000 |
Less: Fixed cost | 324,000 |
Pre-tax income | \)108,000 |
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