Practice exercises (high low point, contribution margin, break even)

1. Assume the following hours of maintenance work and the total maintenance costs for six months.
Month Hrs of Maintenance Maintenance Cost
January 625 7,950
February 500 7,400
March 700 8,275
April 550 7,625
May 775 9,100
June 800 9,800
a.) Compute variable cost:
High 800 9,800
Low 500 7,400
Change 300 $2,400
Variable cost per unit = 2,400/300 =$8.00 per hour

b). Compute for fixed cost: Total cost = Fixed cost+ variable cost
Fixed cost =Total – variable cost
Fixed cost = 9,800 - $8x800 hrs.
Fixed cost = 9,800-6,400; Fixed cost = $3,400

7,400-$8 x 500 hrs

7,400-4,000; fixed cost = $3,400

c.) Compute the maintenance cost if the number of maintenance hours is 750.

2. Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using high-low
point method, what is the variable (a) portion of sales salaries and commission, (b) what is the fixed portion?
Units__ Cost
High level 120,000 $14,000
Low level 80,000 10,000
Change 40,000 $ 4,000

(a) Variable cost per unit = $4,000/40,000 = $0.10

(b) Fixed cost = $14,000 – 0.10 x 120,000 = $14,000 – 12,000 ; Fixed cost = $2,000
(c) Amount of sales salaries and commissions if units sold are 95,000

3. Power costs and production data of the LMN Mfg Corp are as follows:
Month Power cost Units produced
January $800 120,000
February 710 98,000
March 700 94,000
April 600 70,000
May 740 105,000
June 700 96,000
Compute the variable and fixed elements of the power costs using high low points method.
Variable cost per unit = high point 120,000 800
Low point 70,000 600
Difference 50,000 200, 200/50,000 = .004 per unit

Fixed cost = 800 - .004 x 120,000; 800-480 = 320

4. Based on a table of total costs and activity levels, determine the high and low activity levels of Xeon Company.
Month production Total cost
January 800 $ 93,000
February 1,100 114,000
March 1,200 119,000
April 950 103,000
May 1,300 126,000
June 1,250 124,000
July 1,000 107,000
August 1,050 110,000
September 1,000 105,000
October 900 100,000
November 1,050 110,000
December 1,200 119,500
 (a.) Use the high and low activity levels to compute the variable cost per unit.
126,000 – 93,000 = $33,000 = $66
1,300 - 800 500

(b.) Figure out the total fixed cost.

Total cost = FC + 66(production)
126,000 = FC + 66(1,300); 126,000=FC + 85,800; 126,000-85,800=FC
FC = 40,200

(c.) Total cost to produce 1,000 units: Total cost = FC + variable costs of $66(1,000 units).
Total cost = 40,200 + 66,000.
Therefore, Total costs = $106,200:

5. Eagle Manufacturing has incurred the following machine maintenance costs over the last twelve months.
Month Machine Hours Cost
January 10,000 $15,500
February 15,000 16,233
March 12,750 18,186
April 13,268 19,125
May 9,256 11,159
June 10,335 15,117
July 13,295 18,998
August 12,652 17,874
September 9,964 10,685
October 10,865 16,853
November 11,569 17,365
December 14,639 19,931

a. Use the high-low method to estimate the variable cost per machine hour and the fixed cost per month.
16,233-11,159 =5,074 =.883
15,000-9,256 5,744
16,233 = FC + .883(15,000) 11,159=FC + .883(9,256)
16,233-13,250.35 = FC; 2,982.65 = Fixed Cost 11,159-8,176.35 = FC; FC=2,982.65

b. Develop a formula to express the cost behavior of Eagle’s maintenance costs.

Machine maintenance Cost = FC + variable cost per machine hour of .883 (machine hours)
c. Predict the level of maintenance cost that would be incurred during a month when 13,000 machine hours are worked.
X=2,982.65 + .883(13,000); X=2,982.65 + 11,479; X=14,461.65
d. Predict the level of maintenance cost that would be incurred during a month when 45,000 machine hours are worked.
X=2,982.65 + .883(45,000); X=2,982.65 + 39,735; X=42,717.65

6. Previous periods' costs and production levels for Oregon Corp. has the following data about its production of widgets:
Month No. of units produced Total Cost
January 100 $2,130
February 120 $2,185
March 90 $2,140
April 130 $2,200
May 125 $2,190
June 124 $2,190
July 132 $2,200
August 140 $2,214
September 135 $2,200
October 120 $2,180
November 114 $2,175
December 115 $2,175

Identify the high and low periods

HIGH August 140 $2,214
LOW March 90 $2,140

Find the variable cost per unit: Variable cost per unit = (Difference in cost)/(Difference in activity level)

Variable cost per unit = $74 / 50 units = $1.48 per unit.

Find the total fixed costs: Total cost = Total fixed cost + (Variable cost per unit)(No. of units produced)

$2,214.00 = Total FC + ($1.48)(140); $2,214.00 = Total FC + $207.20

$2,214.00 - $207.20 = Total fixed cost; $2,006.80 = Total fixed cost

Use the formula to estimate total costs in any reasonable production scenario. Suppose that Oregon plans to produce 110 units:

1. Total cost = Total fixed cost + (Variable cost per unit)(No. of units produced)
2. Total cost = $2,006.80 + $1.48(No. of units produced)
3. Total cost = $2,006.80 + $1.48(110)
4. Total cost = $2,136.60

7. Here is an example concerning the electricity bill in a factory:

Year Units Produced Bill Cost
2000 50 units $100
2001 67 units $130
2002 20 units $70
2003 120 units $200
2004 88 units $104
2005 112 units $93

Change in cost / change in unit volume = $130/100 units. Variable cost is $1.30 per unit produced.
Plugging this value into either the 2002 or 2003 data, we find that $200 = $1.30(120 units) + b where b = $44. Therefore, using the high
low method, we conclude that from the above data that the electricity cost behaviour has a fixed cost of $44 and a variable cost of $1.30 per
unit produced.

8. Assume the following data for X company for the coming year:
Fixed Expenses $100,000
Variable cost per unit 5.00
Selling price per unit 9.00
Required: (a) How many units must be sold to break even?
(b) How many units must be sold to yield a profit equal to 20% of sales?
(c) How many units must be sold to make a net income of $20,000 assuming selling price per unit is
increased by $1.00

(a) break even sales in units:

9X = 100,000+5X; 9X-5X = 100,000 4X = 100,000; X=100,000/4; BES = 25,000 units

(b) units to be sold to yield a profit equal to 20% of sales

9X = 100,000 +5X + 20% (9X); 4X=100,000 + 1.8X; 4X-1.8X = 100,000
2.2X = 100,000; X = 45,454 units
(c) Units to be sold to make a profit of 20,000 if selling price is increased by $1.00:
New selling price = $10.00
10X = 100,000 +5X +20,000; 10X-5X = 100,000+20,000; 5X = 120,000; X=120,000/5 = 24,000 units

9. Below is the income statement of MNO Company:

Net Sales 100,000
Less Expenses:
Variable 70,000 (70%)
Fixed 48,000 118,000
Net Loss 18,000

Required: (a) what amount of sales is needed to break even?

(b) If fixed expenses are increased by $12,000, what is the new break even point?
(c) With the proposed increase in fixed expenses, what amount of sales will yield a net income after taxes of 21,000
assuming the income tax rate is 30%
Answer:
(a)Break even sales: CM formula: Sales-VC; ($100,000-70,000 = 30,000)
CM ratio= CM = 30,000 = 30%
Sales 100,000
break even sales= FC__ = 48,000 = 160,000 BES
CM ratio 30%
Sales 160,000
VC 112,000
CM 48,000
 FC ( 48,000)
Profit -_____

(b) Break even if fixed expenses are increased by $12,000:

BES = 48,000+12,000 =200,000 Sales 200,000
30% VC 140,000
CM 60,000
FC (60,000)
Profit -____

(c) Amount of sales which will yield a net income of 21,000 assuming income tax rate of 30%
Sales = 48,000+12,000 21,000/.7) = 60,000+30,000 = 90,000 = 300,000 Sales
.3 .3 .3

To check: Sales 300,000

VC (70%) 210,000
CM 90,000
FC 60,000
Profit 30,000
Income tax (30%) 9,000
Net income 21,000