1) Boston Railroad decided to use the high-low method and operating data from th

Question

1) Boston Railroad decided to use the high-low method and operating data from the past six months to estimate the fixed and variable components of transportation costs. The activity base used by Boston Railroad is a measure of railroad operating activity, termed "gross-ton miles," which is the total number of tons multiplied by the miles moved.

Determine the variable cost per gross-ton mile and the total fixed cost.

2)

Zero Turbulence Airline provides air transportation services between Los Angeles, California, and Kona, Hawaii. A single Los Angeles to Kona round-trip flight has the following operating statistics:

It is assumed that the fuel, crew salaries, and airplane depreciation are fixed, regardless of the number of seats sold for the round-trip flight.

a. Compute the break-even number of seats sold on a single round-trip flight for the overall enterprise product, E. Assume that the overall product mix is 20% business class and 80% economy class seats.

b. How many business class and economy class seats would be sold at the break-even point?

seats

3)

If Canace Company, with a break-even point at $354,200 of sales, has actual sales of $460,000, what is the margin of safety expressed (1) in dollars and (2) as a percentage of sales? Round the percentage to the nearest whole number.

a. $

b.   %

c. If the margin of safety for Canace Company was 45%, fixed costs were $1,668,150, and variable costs were 55% of sales, what was the amount of actual sales (dollars)?
(Hint: Determine the break-even in sales dollars first.)
$

Transportation Costs Gross-Ton Miles January $825,300 347,000 February 920,100 388,000 March 650,300 251,000 April 882,200 375,000 May 739,900 302,000 June 948,600 408,000

Explanation / Answer

1)

variable cost per mile =change in cost/change per mile

       = 298300/157000

     = $ 1.9

Fixed cost at highest activity =Total cost -variable cost

=948600- [1.9*408000]

= 948600- 775200

= 173400

2)contribution from business class=525-55=470

contribution from economy class=305-45=260

Weighted average contribution :[470*.20]+[260*.80]

       = 94+ 208

     = $ 302

Total fixed cost= 15613+11959+5648=33220

a)Break even = Total fixed cost /weighted average contribution

       = 33220/302

      = 110 seats

b)Business class = 110*20% =22 seats

Economy class= 110*80%= 88 seats

3)a Margin of safety =actual sales -breakeven sales

    = 460000-354200

   = 105800

MOS(%)= Margin of safety ($) /actual sales

    = 105800/460000

   = .23 or 23%

c)Break even sales =Fixed cost /(1-variable cost ratio)

   = 1668150/(1-.55)

     = 1668150/.45

      = $ 3707000

Actual sales be "X" ,margin of safety sales be .45*x =.45x

Margin of safety sales =actual sales -BEP sales

.45x =x -3707000

x-.45x = 3707000

.55x = 3707000

x = 3707000/.55

= $ 6,740,000

actual sales = 6,740,000

Miles cost Highest activity 408000 948600 Lowest activity 251000 650300 change in cost/activity 157000   [408000-251000] 298300   [948600-650300]

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