Question

Blue, Inc., produces amplifiers. Each unit sells for $900. Below is information on production/sales and costs for 2016: Production and Sales in Units Production Costs Selling and Admin. Costs January 105 $88,900 $23,500 February 118 97,200 25,400 March 97 83,200 22,700 April 107 89,900 23,400 May 114 96,700 25,200 June 124 103,100 26,300 July 127 106,300 26,900 August 133 107,600 27,100 September 138 113,417 28,194 October 126 105,200 26,300 November 124 102,400 26,000 December 108 90,800 24,000 Total 1,421 $1,184,717 $304,994 Average cost per unit $833.72062 $214.63336

(a) Your answer is correct. Use the high-low method to identify the fixed and variable cost components for both production costs and selling and administrative costs. Fixed cost Variable cost Production costs $ $ Selling and administrative costs $ $ SHOW SOLUTION LINK TO TEXT Attempts: 2 of 3 used

(b) The company estimates that production and sales in 2017 will be 1,640 units. Based on this estimate, forecast income before taxes for 2017. (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Income (loss)SalesProduction costsSelling and admin. costs $ AddLess : Production costsSalesIncome (loss)Selling and admin. costs AddLess : SalesIncome (loss)Production costsSelling and admin. costs SalesSelling and admin. costsProduction costsIncome (loss) $ LINK TO TEXT

Answer 1

Answer a :

	Fixed cost	Variable cost
Production costs	$11,711	$737 per unit
Selling and administrative costs	$9,702	$134 per unit

Explanation :

Highest activity level = September : 138 units

Lowest activity level = March : 97 units

• Production costs :

Variable cost per unit :

($113,417 - $83,200) / (138 units - 97 units)

= $30,217 / 41 units

= $737 per unit

Fixed cost : Substituting variable cost per unit in highest level of activity.

(138 units * $737) + Fixed cost = $113,417

Fixed cost = $113,417 - 101,706

= $11,711

• Selling and Admin. Costs :

Variable cost per unit :

($28,194 - $22,700) / (138 units - 97 units)

= $5,494 / 41 units

= $134 per unit

Fixed cost : Substituting variable cost per unit in highest level of activity.

(138 units * $134) + Fixed cost = $28,194

Fixed cost = $28,194 - $18,492

= $9,702

Answer (b)

Sales (1,640 units * $900)		$1,476,000
Less: Production costs [(1,640 units * $737) + $11,711]	1,220,391
Less : Selling and admin. costs [(1,640 units * $134) + $9,702]	229,462	1,449,853
Income (loss)		$26,147