Managers at marc Corp. are concerned that the company’s costs of production have
ID: 2542957 • Letter: M
Question
Managers at marc Corp. are concerned that the company’s costs of production have gone wild. The chief financial officer brings you the following historic data:
Period
Units
Costs
Quarter 1, 2016
1,120
$111,502.00
Quarter 2, 2016
980
$111,009.00
Quarter 3, 2016
1,260
$114,012.00
Quarter 4, 2016
1,3401
$115,452.00
Quarter 1, 2017
1,280
$114,301.00
Quarter 2, 2017
1,300
$114,689.00
Quarter 3, 2017
1,420
$116,735.00
Quarter 4, 2017
1,500
$118,209.00
marc corp selling price is $80 per unit
Use Excel. Using the High-low method:
Estimate the company’s cost formula.
Estimate the total cost of producing 1,200 units.
Calculate the breakeven point in dollar sales.
Prepare the contribution format income statement when 1,200 units are sold.
Compute the degree of operating leverage when 1,200 units are sold. Compute Net operating income if sales increased 120 units above this level.
Period
Units
Costs
Quarter 1, 2016
1,120
$111,502.00
Quarter 2, 2016
980
$111,009.00
Quarter 3, 2016
1,260
$114,012.00
Quarter 4, 2016
1,3401
$115,452.00
Quarter 1, 2017
1,280
$114,301.00
Quarter 2, 2017
1,300
$114,689.00
Quarter 3, 2017
1,420
$116,735.00
Quarter 4, 2017
1,500
$118,209.00
Explanation / Answer
Cost at highest level of activity 118,209.00 Cost at Lowest level of activity 111,009.00 Highest level of activity 1,500.00 Lowest Level of activity 980.00 Variable cost per unit = (118209 - 111009)/(1500 - 980) Variable cost per unit = 7200/520 Variable cost per unit = $13.85 Fixed Costs = 111009 - 980*13.85 Fixed Costs = $97436 company’s cost formula = 97436 + 13.85x total cost of producing 1,200 units= 97436 + 1200*13.85 114,056.00 Selling price per unit 80.00 Variable cost per unit 13.85 Contribution per unit 66.15 CM Ratio = 66.15/80 82.69% Fixed costs 97,436.00 breakeven point in dollar sales = 97436/82.69% 117,836.43 Sales 96,000.00 Less Variable Expenses 16,620.00 Contribution Margin 79,380.00 Fixed cost 97,436.00 Net operating income (18,056.00) DOL = (4.40) Increase in net income = 4.40*10% 44% New NOI= 18056 - 18056*44% (10,111.36)
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