Integrative Exercise Cost Behavior and Cost-Volume-Profit Analysis for Many Glac

Question

Integrative Exercise
Cost Behavior and Cost-Volume-Profit Analysis for Many Glacier Hotel

Using the High-Low Method to Estimate Variable and Fixed Costs

Located on Swiftcurrent Lake in Glacier National Park, Many Glacier Hotel was built in 1915 by the Great Northern Railway. In an effort to supplement its lodging revenue, the hotel decided in 20X1 to begin manufacturing and selling small wooden canoes decorated with symbols hand painted by Native Americans living near the park. Due to the great success of the canoes, the hotel began manufacturing and selling paddles as well in 20X3. Many hotel guests purchase a canoe and paddles for use in self-guided tours of Swiftcurrent Lake. Because production of the two products began in different years, the canoes and paddles are produced in separate production facilities and employ different laborers. Each canoe sells for $500, and each paddle sells for $50. A 20X3 fire destroyed the hotel’s accounting records. However, a new system put into place before the 20X4 season provides the following aggregated data for the hotel’s canoe and paddle manufacturing and marketing activities:

Required:

1. High-Low Cost Estimation Method

a. Use the high-low method to estimate the per-unit variable costs and total fixed costs for the canoe product line.

b. Use the high-low method to estimate the per-unit variable costs and total fixed costs for the paddle product line.

2. Cost-Volume-Profit Analysis, Single-Product Setting
Use CVP analysis to calculate the break-even point in units for

a. The canoe product line only (i.e., single-product setting)

b. The paddle product line only (i.e., single-product setting)

3. Cost-Volume-Profit Analysis, Multiple-Product Setting

The hotel's accounting system data show an average sales mix of approximately 300 canoes and 1,200 paddles each season. Significantly more paddles are sold relative to canoes because some inexperienced canoe guests accidentally break one or more paddles, while other guests purchase additional paddles as presents for friends and relatives. In addition, for this multiple-product CVP analysis, assume the existence of an additional $30,000 of common fixed costs for a customer service hotline used for both canoe and paddle customers. Use CVP analysis to calculate the break-even point in units for both the canoe and paddle product lines combined (i.e., the multiple-product setting).

4. Cost Classification

a. Classify the manufacturing costs, marketing costs, and customer service hotline costs either as production costs or period costs.

All manufacturing costs are costs. All marketing costs and customer hotline costs are costs

b. For the period costs, further classify them into either selling expenses or general and administrative expenses.

Marketing costs are selling oriented; therefore, the marketing period costs would be further classified as . Customer hotline costs relate to the customer service section of the value chain and would be further classified as .

5. Sensitivity Cost-Volume-Profit Analysis and Production Versus Period Costs, Multiple- Product Setting

If both the variable and fixed production costs (refer to your answer to Requirement 1) associated with the canoe product line increased by 5% (beyond the estimate from the high-low analysis), how many canoes and paddles would need to be sold in order to earn a target income of $96,000? Assume the same sales mix and additional fixed costs as in Requirement 3.

6. Margin of Safety

Calculate the hotel’s margin of safety (both in units and in sales dollars) for Many Glacier Hotel, assuming the same facts as in Requirement 3, and assuming that it sells 700 canoes and 2,500 paddles next year.
total MOS units above total BE units

$ MOS in sales dollars

Manufacturing Data: Year Number of
Canoes
Manufactured Total Canoe
Manufacturing
Costs Year Number of
Paddles
Manufactured Total Paddle
Manufacturing
Costs 20X9 250 $103,000 20X9 900 $38,500 20X8 275 128,000 20X8 1,200 49,000 20X7 240 108,000 20X7 1,000 44,000 20X6 310 114,000 20X6 1,100 45,500 20X5 350 141,500 20X5 1,400 52,000 20X4 400 140,000 20X4 1,700 66,500

Explanation / Answer

1 Under High low method,Consider the Highest and Lowest activity and then apply the following equation Variable cost per unit=Change in Total cost/Change in activity a. For Canoe product line: Highest activity=400 units Lowest activity=250 units For manufacturing data: Variable cost per unit=(140000-103000)/(400-250)=37000/150=$ 247 per unit To find fixed cost, Apply variable cost per unit in Lowest activity Fixed cost=103000-(250*247)=$ 41250 For marketing data: Variable cost per unit=(60000-45000)/(400-250)=15000/150=$ 100 per unit To find fixed cost, Apply variable cost per unit in Lowest activity Fixed cost=45000-(250*100)=$ 20000 Variable cost per unit: Manufacturing cost 247 Marketing cost 100 Total 347 Fixed cost: Manufacturing cost 41250 Marketing cost 20000 Total 61250 b. For Paddle product line: Highest activity=900 units Lowest activity=1700 units 5 For manufacturing data: Variable cost per unit=(66500-38500)/(1700-900)=28000/800=$35 per unit To find fixed cost, Apply variable cost per unit in Lowest activity Fixed cost=38500-(900*5)=$ 34000 For marketing data: Variable cost per unit=(11500-7500)/(1700-900)=4000/800=$ 5 per unit To find fixed cost, Apply variable cost per unit in Lowest activity Fixed cost=7500-(900*5)=$ 3000 Variable cost per unit: Manufacturing cost 35 Marketing cost 5 Total 40 Fixed cost: Manufacturing cost 34000 Marketing cost 3000 Total 37000 2 Break-even point in units=Fixed cost/Contribution margin per unit a. For canoe: Fixed cost=$ 61250 Contribution margin per unit=Sales-Variable cost=500-347=$ 153 Break-even point in units=61250/153=400.32=400 units b. For Paddles: Fixed cost=$ 37000 Contribution margin per unit=Sales-Variable cost=50-40=$ 10 Break-even point in units=37000/10=3700 units 3 Break-even point in units for sales mix=Total fixed cost/Weighted average contribution margin per unit Total fixed cost: Canoe 61250 Paddles 37000 Common 30000 Total fixed cost 128250 Weighted average contribution margin per unit: Canoe Paddles Sales price per unit 500 50 Less: Variable cost per unit 347 40 Contribution margin per unit 153 10 * Sales mix % 20% 80% (300/1500) (1200/1500) Weighted average contribution margin per unit 30.6 8 38.6 Break-even point in units for sales mix=128250/38.6=3322.54=3323 units Seperation of break-even point based on sales mix: Canoe=3323*20%=665 units Paddles=3323*80%=2658 units 4 a. Cost Nature Manufacturing cost Product cost Marketing cost Period cost Customer service hotline cost Period cost b. Cost Nature Marketing cost Selling expense Customer service hotline cost general and administrative expenses 5 Units required to earn a target income of $96000=(Total fixed cost+Tearget income)/Weighted averahe contribution margin per unit Total fixed cost: Canoe (61250*1.05) 64313 Paddles (37000*1.05) 38850 Common 30000 Total fixed cost 133163 Weighted average contribution margin per unit: Canoe Paddles Sales price per unit 500 50 Less: Variable cost per unit 364.35 42 (347*1.05) (40*1.05) Contribution margin per unit 135.65 8 * Sales mix % 20% 80% (300/1500) (1200/1500) Weighted average contribution margin per unit 27.13 6.4 33.53 Units required to earn a target income of $96000=(133163+90000)/33.53=6655.62=6656 units Seperation of units required to earn a targe income $90000 based on sales mix: Canoe=6656*20%=1331 units Paddles=6656*80%=5325 units 6 Margin of safety in units=Actual sales units-Break-even point sales units Canoe Margin of safety=700-665=35 units Paddles Margin of safety=2500-2658=-158 units Margin of safety in $=Margin of safety in units*Sales price per unit Canoe Margin of safety=35*500=$ 17500 Paddles Margin of safety=-158*50=$ -7900

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