Question

The Central Valley Company is a manufacturing firm that produces and sells a single product. The company's revenues and expenses for the last four months are given below. Central Valley Company Comparative Income Statement March 5,800 $742,400 392,200 April 5,300 $678,400 366,336 Мay 6,450 $825,600 429,312 June Sales in units 7,600 $972,800 496,128 Sales revenue Less: Cost of goods sold Gross margin Less: Operating Expenses Shipping expense Advertising expense Salaries and commissions $312,064 $396,288 $476,672 $350,200 $ 63,100 82,000 163,200 13,000 46,000 $ 67,000 82,000 176,500 13,000 46,000 $ 54,400 82,000 139,000 13,000 46,000 $66,600 82,000 165,500 13,000 46,000 Insurance expense Amortization expense Total operating expenses $367,300 $334,400 $373,100 $384,500 $ 23,188 $(22,336) $92,172 $(17,100) Net income Required: 1. Management is concerned about the losses experienced during the spring and would like to know more about the cost behaviour. Develop a cost equation for each of the costs. (Do not round intermediate calculations. Round "Per Unit" answers to 2 decimal places.) Cost of goods sold per unit Shipping per unit Salaries & commission per unit

Answer 1

1.
Cost of Goods Sold
Variable cost per unit = ($496128-366336)/(7600-5300) = $56.43 per unit
Fixed Cost per unit = $496128 - 7600 x 56.43 = $67260

Equation = $67260 + $56.43 per unit

Shipping
Variable cost per unit = ($67000-54400)/(7600-5300) = $5.48 per unit
Fixed Cost per unit = $67000 - 7600 x 5.48 = $25352

Equation = $25352 + $5.48 per unit

Salaries and Commission
Variable cost per unit = ($176500-139000)/(7600-5300) = $16.30 per unit
Fixed Cost per unit = $176500 - 7600 x 16.30 = $52620

Equation = $52620 + $16.30 per unit

2.
Fixed Costs per month = $67260+25352+52620+82000+13000+46000 = $286232
Fixed Costs for year = $286232 x 12 = $3434784
Contribution Margin per unit = $128 - 56.43-5.48-16.3 = $49.79 per unit

Break Even = Fixed Cost / Contribution Margin per unit
= $3434784/49.79 = 68986 units

Annual profit (74000 units) = 74000 x 49.79 - 3434784 = $249676

3.
New Contribution Margin per unit = $49.79 - 8 = $41.79
Annual Profit = 80600 x 41.79 - 3434784 = ($66510)

Change in profit = Decreased by $316186

4.
Fixed Cost = 3434784+108000 = $3542784
Annual profit = 80600 x 49.79 - 3542784 = $470290

Change in Profit = Increased by $220614