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Chapter 18: Q4E (page 836)

A company reports the following information about its unit sales and its cost of sales. Each unit sells for \(500. Use these data to prepare a scatter diagram. Draw an estimated line of cost behavior and determine whether the cost appears to be variable, fixed, or mixed.

Period

Unit sales

Cost of sales

Period

Unit sales

Cost of sales

1

22,500

\)15,150

4

11,250

\(8,250

2

17,250

11,250

5

13,500

\)9,000

3

15,750

10,500

6

18,750

$14,250

Short Answer

Expert verified

The cost appears to be curvilinear because it isnot increasing at a constant rate.

Step by step solution

01

Definition of Scatter Diagram

The diagram under which the data related to cost and the units manufactured is plotted on the graph is known as a scatter diagram.

02

Plotting on Scatter Diagram

03

Classification of cost

The above cost cannot be classified as fixed because it is increasing as the production does and also it is not increasing at a constant rate therefore, it is not a variable cost. It is a curvilinear cost because the cost is increasing as per the volume of production but not at a constant rate.

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Most popular questions from this chapter

This year Burchard Company sold 40,000 units of its only product for \(25 per unit. Manufacturing and selling the product required \)200,000 of fixed manufacturing costs and \(325,000 of fixed selling and administrative costs. Its per unit variable costs follow.

Material

\)8.00

Direct labor (paid on the basis of completed units)

5.00

Variable overhead cost

1.00

Variable selling and administrative costs

0.50

Next year the company will use new material, which will reduce material costs by 50% and direct labor costs by 60% and will not affect product quality or marketability. Management is considering an increase in the unit selling price to reduce the number of units sold because the factory’s output is nearing its annual output capacity of 45,000 units. Two plans are being considered. Under plan 1, the company will keep the selling price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will increase the selling price by 20%. This plan will decrease unit sales volume by 10%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same.

Required

1. Compute the break-even point in dollar sales for both (a) plan 1 and (b) plan 2.

2. Prepare a forecasted contribution margin income statement with two columns showing the expected results of plan 1 and plan 2. The statements should report sales, total variable costs, contribution margin, total fixed costs, income before taxes, income taxes (30% rate), and net income.

Vijay Company reports the following information regarding its production costs. Compute its product cost per unit under absorption costing.

Direct material

\(10 per unit

Direct labor

\)20 per unit

Overhead cost for the year

Variable overhead

\(10 per unit

Fixed overhead

\)160,000

Unit produced

20,000 units

Zhao Co. has fixed costs of \(354,000. Its single product sells for \)175 per unit, and variable costs are $116 per unit. Determine the break-even point in units.

Corme Company expects sales of \(34 million (400,000 units). The company’s total fixed costs are \)17.5 million and its variable costs are $35 per unit. Prepare a CVP chart from this information.

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.
See all solutions

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