Managerial Accounting: The Cornerstone of Business Decision-Making
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN: 9781337115773
Author: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher: Cengage Learning
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Textbook Question
Chapter 7, Problem 1MTC

Cost-Volume-Profit Analysis, Single-Product Setting

Use CVP analysis to calculate the break-even point in units for

  1. a. The canoe product line only (i.e., single-product setting)
  2. b. The paddle product line only (i.e., single-product setting)

a.

Expert Solution
Check Mark
To determine

Calculate per unit variable costs and total fixed costs for canoe product line by using high-low estimation method.

Explanation of Solution

High Low Method:

High and low points of data when used to classify the mixed cost into fixed and variable cost then this method is known as high low method. This is one among the three costs of separation methods.

The costs of canoes and paddle include manufacturing and marketing costs. Direct and variable cost includes a part of both manufacturing and marketing costs. The records for both marketing and manufacturing cost are kept separately which emphasizes on the requirement of four different high-low analyses. The variable cost of both marketing and manufacturing can be added to get variable cost per unit for both the product line. The same can be done for fixed costs of both the product line.

Use the following formula to calculate variable manufacturing cost:

Variable Rate=(High Point CostLow Point Cost)(High Point OutputLow Point Output)

Substitute $140,000 for high point cost, $108,000 or low point cost, 400 for high point output and 240 for low point output in the above formula.

Variable Rate=($140,00$108,00)(400240)=$32,000160=$200

Therefore, total manufacturing variable cost per unit is $200.

Use the following formula to calculate total manufacturing fixed cost:

Totalfixedcost=TotalcostTotalvariablecost

Substitute $140,000 for total cost and $80,0001 for total variable cost in the above formula.

Totalfixedcost=$140,000$80,000.=$60,000

Therefore total fixed cost is $60,000.

Use the following formula to calculate variable marketing cost:

Variable Rate=(High Point CostLow Point Cost)(High Point OutputLow Point Output)

Substitute $60,000 for high point cost, $44,000 or low point cost, 400 for high point output and 240 for low point output in the above formula.

Variable Rate=($60,000$44,000)(400240)=$16,000160=$100

Therefore, total manufacturing variable cost per unit is $100.

Use the following formula to calculate total manufacturing fixed cost:

Totalfixedcost=TotalcostTotalvariablecost

Substitute $44,000 for total cost and $24,0002 for total variable cost in the above formula.

Totalfixedcost=$44,000$24,000.=$20,000

Therefore total fixed cost is $20,000.

Use the following formula to calculate variable cost per unit of canoe:

Variablecostperunit=Manufacturingunitvariablecost+Marketingunitvariablecost

Substitute $200 for manufacturing unit variable cost and $100 for marketing unit variable cost in the above formula.

Variablecostperunit=$200+$100=$300

Therefore, per unit variable cost of canoe is $300.

Use the following formula to calculate fixed cost of canoe:

Fixedcost=Manufacturingfixedcost+Marketingfixedcost

Substitute $60,000 for manufacturing fixed cost and $20,000 for marketing fixed cost in the above formula.

Fixedcost=$60,000+$20,000=$80,000

Therefore, fixed cost of canoe is $80,000.

Working Note:

1.

Calculation of total variable cost of manufacturing:

Totalvariablecost=Unitvariablecost×Numberofunits=$200×400=$80,000

2.

Calculation of total variable cost of marketing:

Totalvariablecost=Unitvariablecost×Numberofunits=$100×240=$24,000

b.

Expert Solution
Check Mark
To determine

Calculate per unit variable costs and total fixed costs for paddle product line by using high-low estimation method.

Explanation of Solution

Use the following formula to calculate variable manufacturing cost:

Variable Rate=(High Point CostLow Point Cost)(High Point OutputLow Point Output)

Substitute $66,500 for high point cost, $38,500 or low point cost, 1,700 for high point output and 900 for low point output in the above formula.

Variable Rate=($66,500$38,500)(1,700900)=$28,000800=$35

Therefore, total manufacturing variable cost per unit is $35.

Use the following formula to calculate total manufacturing fixed cost:

Totalfixedcost=TotalcostTotalvariablecost

Substitute $38,500 for total cost and $31,5001 for total variable cost in the above formula.

Totalfixedcost=$38,500$31,500.=$7,000

Therefore total fixed cost is $7,000.

Use the following formula to calculate variable marketing cost:

Variable Rate=(High Point CostLow Point Cost)(High Point OutputLow Point Output)

Substitute $11,500 for high point cost, $7,500 or low point cost, 1,700 for high point output and 900 for low point output in the above formula.

Variable Rate=($11,500$7,500)(1,700900)=$4,000800=$5

Therefore, total manufacturing variable cost per unit is $5.

Use the following formula to calculate total manufacturing fixed cost:

Totalfixedcost=TotalcostTotalvariablecost

Substitute $7,500 for total cost and $4,5002 for total variable cost in the above formula.

Totalfixedcost=$7,500$4,500.=$3,000

Therefore, total fixed cost is $3,000.

Use the following formula to calculate variable cost per unit of paddle:

Variablecostperunit=(Manufacturingunitvariablecost+Marketingunitvariablecost)

Substitute $35 for manufacturing unit variable cost and $5 for marketing unit variable cost in the above formula.

Variablecostperunit=$35+$5=$40

Therefore, per unit variable cost of paddle is $40.

Use the following formula to calculate fixed cost of canoe:

Fixedcost=Manufacturingfixedcost+Marketingfixedcost

Substitute $7,000 for manufacturing fixed cost and $3,000 for marketing fixed cost in the above formula.

Fixedcost=$7,000+$3,000=$10,000

Therefore, fixed cost of paddle is $10,000.

Working Note:

1.

Calculation of total variable cost of manufacturing:

Totalvariablecost=Unitvariablecost×Numberofunits=$35×900=$31,500

2.

Calculation of total variable cost of marketing:

Totalvariablecost=Unitvariablecost×Numberofunits=$5×900=$4,500

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Chapter 7 Solutions

Managerial Accounting: The Cornerstone of Business Decision-Making

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