Buggs-Off Corporation produces and sells a line of mosquito repellants that are sold usually all year round. The product sells at $100 per box. The following cost data has been prepared for its estimated upper and lower limits of activity for the year ended December 31, 2020. Lower Limit Upper Limit Production (# of boxes) 4,000 6,000 Production Costs: Direct Materials …………$60,000 $90,000 Direct Labour …................. $80,000 $120,000 Overhead: Indirect Materials…………... $25,000 $ 37,500 Indirect Labour ……………. $40,000
Buggs-Off Corporation produces and sells a line of mosquito repellants that are sold usually all year round.
The product sells at $100 per box. The following cost data has been prepared for its estimated upper and lower
limits of activity for the year ended December 31, 2020.
Lower Limit Upper Limit
Production (# of boxes) 4,000 6,000
Production Costs:
Direct Materials …………$60,000 $90,000
Direct Labour …................. $80,000 $120,000
Overhead:
Indirect Materials…………... $25,000 $ 37,500
Indirect Labour ……………. $40,000 $50,000
Selling & Administrative Expenses:
Sales Salaries ……………………$50,000 $65,000
Office Salaries …………………$30,000 $30,000
Advertising …………………… $ 45,000 $45,000
Other ………………………………$415,000 $20,000
Total $365,000 $477,50
a) Classify each cost element as either fixed, variable, or mixed
b) Calculate:
i) the variable production cost per unit and the total fixed production overhead.
ii) The total variable cost per unit and the total fixed costs
Hint: Use the high-low method to separate mixed costs into their fixed and variable components.
c) Assuming sales of 5,000 units, prepare a contribution margin income statement for the year ended
December 31, 2020, detailing the components of total variable costs and total fixed costs, and clearly
showing contribution and net income.
d) Assuming sales of 5,000 units, calculate Buggs-Off break-even point and margin of safety in units and
sales dollars.
e) Recompute the break-even point in units, assuming that variable costs increased by 20% and fixed
costs are reduced by $50,625. How will this impact the margin of safety ratio?
f) The President of Buggs-Off is under pressure from shareholders to increase operating income by 20%
in 2021. Management expects per unit data and total fixed costs to remain the same in 2021. Using the
equation method, compute the number of units that would have to be sold in 2021 to reach the
shareholders desired profit level. Is this a realistic goal?
g) Briefly explain the impact of each of the following scenarios on the contribution margin per unit and the
break-even point:
(i) Sales volume increases
(ii) Total fixed cost decreases
(iii) Selling price per unit increases
(iv) Variable cost per unit increases
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