High Low method exercises.doc

Practice exercises (high low point, contribution margin, break even) 1. Assume Assume the following following hours hours of maintenance maintenance work work and the total maintenance maintenance costs for for six months. months. Mo n t h Hrs of Maintenance Maintenance Cost January 62 5 !"5# $e%ruary 5# # !&## March # # '!25 A(ril 55 # !625 May  5 "!1## June '# # "!'## a.) Com(ute *aria%le *aria%le cost+ High '## "!'## ,ow 5## !&## Change -## 2!&## /aria% ria%le le cost cost (er (er unit unit 0 2!&# 2!&## #-# -## # 0'. 0'.## ## (er (er hour  hour 

 %). Com(ute for fixed cost+

otal otal cost 0 $ixed cost3 *aria%le cost $ixed cost 0otal 4 *aria%le cost $ixed cost 0 "!'##  'x'## hrs. $ixed cost 0 "!'##6!&## $ixed cost 0 $3,400 !&##' x 5## hrs !&##&!###

fixed cost 0 -!&##

c.) Com(ute the maintenance cost if the num%er of maintenance hours is 5#. 2. 7ales salaries and commissions are 1#!### when '#!### units are sold! and 1&!### when 12#!### units are sold. 8sing highlow  (oint method! what is the *aria%le 9a) (ortion of sales salaries and co mmission! 9%) what is the fixed (ortion: 8nits;; Cost High le*el 12#!### 1&!### ,ow le*el '#!### 1#!### Change &#!###  &!### 9a) /aria%le /aria%le cost (er unit 0 &!###&#!### 0 $0.10 9%) 9%) $ixed $ixed cost cost 0 1&! 1&!### ### 4 #.1# #.1# x 12#! 12#!## ### # 0 1& 1&!# !### ## 4 12!## 12!### #  $ixed $ixed cost cost = $2,000 9c) Amount of sales sales salaries and commissions commissions if units sold are "5!### -.

ifference 5#!### 2## ! 2##5#!### 0 .004 (er unit $ixed cost 0 '##  .##& x 12#!###

&.

'##&'# 0 320

?ased on a ta%le of total costs and acti*ity le*els! determine the high and low acti*ity le*els of @eon Com(any. Com(any. Month (roduction otal cost January '# #  "-!### $e%ruary 1!1## 11&!### March 1!2## 11"!### A(ril "5 # 1#-!### May 1!-## 126!### June 1!25# 12&!### July 1!### 1#!### August 1!#5# 11#!### 7e(tem%er 1!### 1#5!### cto%er "# # 1##!###  =o*em%er 1!#5# 11#!### >ecem%er 1!2## 11"!5##

9a.) 8se the high and low acti*ity le*els to com(ute the *aria%le cost (er unit. 126!### 4 "-!### 0 --!### = $66    1!-##  '## 5## 9%.) $igure out the total fixed cost. otal cost 0 $C 3 669(roduction) 126!### 0 $C 3 6691!-##)

126!###0$C 3 '5!'##

126!###'5!'##0$C

FC = 40,200

9c.) otal cost to (roduce 1!### units+ otal cost 0 $C 3 *aria%le costs of 6691!### units). otal cost 0 &#!2## 3 66!###. herefore! otal costs 0 1#6!2##+ 5.

Bagle Manufacturing has incurred the following machine maintenance costs o*er the last twel*e months. Month Machine Hours Cost January 1#!### 15!5## $e%ruary 15!### 16!2-  March 12!5# 1'!1'6 A(ril 1-!26' 1"!125 May "!256 11!15" June 1#!--5 15!11 July 1-!2"5 1'!""' August 12!652 1!'& 7e(tem%er "!"6& 1#!6'5 cto%er 1#!'65 16!'5 =o*em%er 11!56" 1!-65 >ecem%er 1&!6-" 1"!"-1 a. 8se the highlow method to estimate the *aria%le cost (er machine hour and the fixed cost (er month. 16!2--11!15" 05!#& =.883 15!###"!256 5!&& 16!2-- 0 $C 3 .''-915!###) 11!15"0$C 3 .''-9"!256) 16!2--1-!25#.-5 0 $C 2,982.65  0 $ixed Cost 11!15"'!16.-5 0 $C FC=2,982.65  %. >e*elo( a formula to ex(ress the cost %eha*ior of Bagles maintenance costs. Machine maintenance Cost 0 $C 3 *aria%le cost (er machine hour of .''- 9machine hours) c.
6.

ecem%er 115 2!15 Identif the high and low periods HEFH August ,G March

1&# "#

2!21& 2!1&#

!ind the variable cost per unit" /aria%le cost (er unit 0 9>ifference in cost)9>ifference in acti*ity le*el)

/aria%le cost (er unit 0 &  5# units 0 1.&' (er unit.

!ind the total fixed costs" otal cost 0 otal fixed cost 3 9/aria%le cost (er unit)9=o. of units (roduced)

2!21&.## 0 otal $C 3 91.&')91&#) 2!21&.## 0 otal $C 3 2#.2# 2!21&.##  2#.2# 0 otal fixed cost $2,006.80  0 otal fixed cost 8se the formula to estimate total costs in any reasona%le (roduction scenario. 7u((ose that regon (lans to (roduce 11# units+ 1. otal cost 0 otal fixed cost 3 9/aria%le cost (er unit)9=o. of units (roduced) 2. otal cost 0 2!##6.'# 3 1.&'9=o. of units (roduced) -. otal cost 0 2!##6.'# 3 1 .&'911#) &. otal cost 0 2!1-6.6# #.

Here is an exam(le concerning the ear 8nits
electricity %ill in a factory+ ?ill Cost 1## 1-# # 2## 1#& "-

Change in cost  change in unit *olume 0 1-#1## units. /aria%le cost is 1.-# (er unit (roduced.
Assume the following data for @ com(any for the coming year+ $ixed Bx(enses 1##!### /aria%le cost (er unit 5.## 7elling (rice (er unit ".## Ieuired+ 9a) How many units must %e sold to %reak e*en:  9%) How many units must %e sold to yield a (rofit eual to 2#K of sales:  9c) How many units must %e sold to make a net income of 2#!### assuming selling (rice (er unit is increased %y 1.## 9a) %reak e*en sales in units+ "@ 0 1##!###35@ "@5@ 0 1##!###

&@ 0 1##!### @01##!###&  BES = 25,000 units

9%) units to %e sold to yield a (rofit eual to 2#K of sales "@ 0 1##!### 35@ 3 2#K 9"@) &@01##!### 3 1.'@ &@1.'@ 0 1##!### 2.2@ 0 1##!### @ 0 45,454 units  9c) 8nits to %e sold to make a (rofit of 2#!### if selling (rice is increased %y 1.##+  =ew selling (rice 0 1#.## 1#@ 0 1##!### 35@ 32#!### 1 #@5@ 0 1##!###32#!### 5@ 0 12#!### @012#!###5 0 24,000 units %. ?elow is the income statement of M= Com(any+  =et 7ales 1##!### ,ess Bx(enses+   /aria%le #!### 9#K)   $ixed &'!### 11'!###  =et ,oss 1'!###

Ieuired+ 9a) what amount of sales is needed to %reak e*en:  9%) Ef fixed ex(enses are increased %y 12!###! what is the new %reak e*en (oint:  9c) Gith the (ro(osed increase in fixed ex(enses! what amount of sales will yield a net income after taxes of 21!### assuming the income tax rate is -#K Answer+ 9a)?reak e*en sales+ CM formula+ 7ales/C 91##!####!### 0 -#!###) CM ratio0 CM 0 -#!### 0 30% 7ales 1##!###  %reak e*en sales0 $C;; 0 &'!### 0 160,000 BES  CM ratio -#K 7ales 16#!### /C 112!###

CM $C
&'!### 9 &'!###) ;;;;;  

9%) ?reak e*en if fixed ex(enses are increased %y 12!###+ 7ales  BES  & &'!###312!### =200,000 -#K /C CM $C
2##!### 1&#!### 6#!### 96#!###) ;;;;  

9c) Amount of sales which will yield a net income of 21!### assuming income tax rate of -#K 7ales 0 &'!###312!### 21!###.) 0 6#!###3-#!### 0 "#!### 0 300,000 Sales ...o check+

7ales -##!### /C 9#K) 21#!### CM "#!### $C 6#!###