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 April 6,200 5,700 $762,600 $701,100 402,800 378,594 Sales in units Sales revenue Less: Cost of goods sold May 7,050 $867,150 450,918 June 8,400 $1,033,200 526,932 $359,800 $322,506 $416,232 $ 506,268 $ Gross margin Less: Operating Expenses Shipping expense Advertising expense Salaries and commissions Insurance expense Amortization expense $ 63,900 88,000 164,400 15,000 48,000 $ 53,600 88,000 137,000 15,000 48,000 $ 67,400 88,000 167,500 15,000 48,000 65,000 88,000 171,500 15,000 48,000 Total operating expenses $379,300 $341,600 $385,900 $ 387,500 Net income $(19,500) $ (19,094) $ 30,332 $ 118,768 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 Shipping Salaries & commission + per unit per unit per unit +

Answer 1

Answer to 1.
Cost of goods sold
	units	cost of goods sold
Highest observed lebel (june)	8400	526932
Lowest observed level (may)	5700	378594
Change	2700	148338
The variable cost p.u is $ 54.94 (148338/2700)
Fixed cost of goods sold is $65,436
Cost equation for cost of goods sold Y= 54.94x+65436
where Y is total cost of goods sold and X is no. of units
Shipping Expense
	units	Shipping Expense
Highest observed lebel (june)	8400	65000
Lowest observed level (may)	5700	53600
Change	2700	11400
The variable cost p.u is 4.22 (11400/2700)
Fixed cost is $29,552
Cost Equation for shipping expenses sold is Y=4.22x+29552
where Y is total cost of goods sold and X is no. of units
Salaries & commission expense
	units	Salaries & commission expense
Highest observed lebel (june)	8400	171500
Lowest observed level (may)	5700	137000
Change	2700	34500
The variable cost p.u is 12.77 (34500/2700)
Fixed cost is $ 64,232
Cost equation for Salaries & commission expenses sold is Y=12.77x+64232
where Y is total cost of goods sold and X is no. of units
Answer to 2
Break Even Sales= Total fixed costs/ contribution margin p.u
Total fixed Costs per month
COGS	$              65,436
Shipping Expenses'	$              29,552
Salaries & commission expense	$              64,232
Insurance	$              15,000
advertisement	$              88,000
Amortisation	$              48,000
Total	310220
Total fixed cost for the year =310220*12 is $37,22,640
Calculation of contribution margin ratio
Sale price	$             123.00
Less: Varaiable costs
COGS	$                54.94
Shipping Expenses'	$                  4.22
Salaries & commission expense	$                12.77
Contribution margin	$                51.07
Break even sales =31722640/51.07
=72893 units
Annual profit when 79000 units are sold
Contribution margin	$        40,34,530
(51.07*79000)
Less: foxed Costs	$        37,22,640
Annual profit	$          3,11,890
Answer to 3
New Sales units (79000+7400)	86400
New Sales price p.u	$             112.50
Revised Contribution p.u	$                40.57
Total Contribution	$ 35,05,248.00
Less: fixed costs annually	$ 37,22,640.00
Profit	$   -2,17,392.00
Previous profit when 79000 units were sold	$          3,11,890
Change in profit	$   -5,29,282.00
Answer to 4
Revised Fixed Costs	$        50,66,640
(assuming advertising expenses is increased by $ 1,12,000 every month)
Revised total contribution	$        44,12,448
(79000+7400)*51.07
Total Profit	$         -6,54,192
Previous profit when 79000 units were sold	$          3,11,890
Change in profit	$        -9,66,082