Question 1 Blacken Company manufactures motorcycles. The company\'s management a

Question

Question 1

Blacken Company manufactures motorcycles. The company's management accountant wants to calculate the fixed and variable costs associated with utility cost incurred by the factory. Data for the past six months were collected.

Required:

A. Using the high-low method calculate the variable rate per machine hour for the utility cost. Round your answer to two decimal places.
$ per machine hour

B. Using the high-low method calculate the fixed cost of utilities. Round your answer to two decimal places.
$

C. Construct a cost formula for total utility cost. Round your answers to two decimal places.

D. Estimate the cost of utilities if 2,425 machine hours are used. Round your answer to two decimal places.
$

Question 2

Income statements for two different companies in the same industry are as follows:

Required:

A. Calculate the degree of operating leverage for each firm.

B. Calculate the margin of safety in dollars for each firm.

C. Determine the operating income for each firm if sales increase by 20%.

Month Utility cost Machine hours March $30,255 2,200 April 32,750 2,525 May 34,712 2,710 June 31,850 2,410 July 30,720 2,290 August 29,980 2,150

Explanation / Answer

ANSWER 1

A

Variable rate per machine hour for the utility cost. => (34712 -29980) / (2710 -2150) => $8.45 per machine hour

B

Fixed cost of utilities. => 34712 - (8.45*2710) => $11812.5

C

Total cost of utilities => 11812.5 + ( 8.45 * Total No. of MAchine hours ie 14285) => $132520.75

D

Cost of utilities if 2,425 machine hours are used => 11812.5 + ( 8.45*2425) => $ 32303.75

ANSWER 2

A

Degree of operating leverage => ( Sales - variable Cost) / (Operating Income)

Company A => (400000 - 300000) / 50000 => 2

Company B => (400000 - 200000) / 50000 => 4

B

Breakeven sales in dollar => fixed cost / Contribtuion margin

Margin of safety => Sales ($) - breakeven sales ($)

Company A

Breakeven sales in dollar => 50000 / (100000 / 400000)*100 => $200000

Margin of safety => 400000 - 200000 => $200000

Company B

Breakeven sales in dollar => 150000 / ( 200000 / 400000) *100 => $300000

Margin of safety => 400000 - 300000 => $ 100000

C

Operating income for each firm if sales increase by 20%.

Company A ($) Company B($) Sales 480000 480000 variable cost 360000 (75%) 240000(50%) Contributuion 120000 240000 Fixed Cost 50000 150000 Operating Income 70000 90000

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