I. Estimating Cost Behavior; High-Low Method
Jonathan Macintosh is a highly successful upstate New York orchardman who has formed his own company to produce and package applesauce. Apples can be stored for several months in cold storage, so applesauce production is relatively uniform throughout the year. The recently hired controller for the firm is about to apply the high-low method in estimating the company's energy cost behavior. The following costs were incurred during the past 12 months:
|
Month
|
Pints of Applesauce Produced
|
Energy Cost
|
|
January
|
35,000
|
$23,400
|
|
February
|
21,000
|
22,100
|
|
March
|
22,000
|
22,000
|
|
April
|
24,000
|
22,450
|
|
May
|
30,000
|
22,900
|
|
June
|
32,000
|
23,350
|
|
July
|
40,000
|
28,000
|
|
August
|
30,000
|
22,800
|
|
September
|
30,000
|
23,000
|
|
October
|
28,000
|
22,700
|
|
November
|
41,000
|
24,100
|
|
December
|
39,000
|
24,950
|
Required:
1. Use the high-low method to estimate the company's energy cost behavior and express it in equation form.
2. Predict the energy cost for a month in which 26,000 pints of applesauce are produced.
II. CVP Analysis; Ipact of operating changes
Houston-based Advanced Electronics manufactures audio speakers for desktop computers. The following data relates to the period just ended when the company produced and sold 42,000 speaker sets:
Sales $3,360,000
Variable Costs 840,000
Fixed Costs 2,280,000
Management is considering relocating its manufacturing facilities to Northern Mexico to reduce costs. Variable costs are expected to average $18 per set; annual fixed costs are anticipated to be $1,984,000. (Ingors income taxes)
1. Calculate the company's current income and determine the level of dollar sales needed to double that figure, assuming that manufacturing operations remain in the United States.
2. Determine the break even point in speaker sets if operations are shifted to Mexico
3. Assume that management desires to achieve the Mexican break even point; however, operations remain in the United States.
a) If variable costs remain constant, what must management do to fixed costs? By how much must fixed costs change?
b) If fixed costs remain constant, what must management do to the variable cost per unit? By how much must unit variable cost change?
4. Determine the impact (increase, decrease, or no effect) of the following operating changes.
a) Effect of an increase in direct material costs on the break-even point
b) Effect of an increase in fixed administration costs on the unit contribution margin.
c) Effect of an increase in the un it contribution margin on net income.
d) Effect of an decrease in the number of units sold on the break even point.