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 5,700 5,200 $735,300 $670,800 389,550 362,232 on Sales in units Sales revenue Less: Cost of goods sold May 6,300 $812,700 422,604 June 7,400 $954,600 486,846 $345,750 $308,568 $390,096 $467,754 Gross margin Less: Operating Expenses Shipping expense Advertising expense Salaries and commissions Insurance expense Amortization expense $ 62,900 80,500 162,900 12.500 45,500 $ 54,600 80,500 139,500 12.500 45,500 $ 66,400 80,500 165,000 12.500 45,500 $ 67,500 80,500 177,000 12.500 45,500 Total operating expenses $364,300 $332,600 $369,900 $383,000 Net income $(18,550) $ (24,032) $ 20,196 $ 84,754 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 2. Assume that fixed costs are incurred uniformly throughout the year. Compute the annual break-even sales, and the profit if 73,000 units are sold during the year. (Round "Break-even sales" answer to nearest whole number.) units Break-even sales Annual profit (73,000 units)

Answer 1

1) (a) Under high-low method, Variable cost per unit = Change in total costs / Change in total units (b) Total costs Total units Items High Low Difference High Low Difference Cost of Goods Sold $486,846 $362,232 $124,614 7,400 5,200 2,200 Shipping $67,500 $54,600 $12,900 7,400 5,200 2,200 Sal. & Commission $177,000 $139,500 $37,500 7,400 5,200 2,200 Variable Cost per unit $56.64 ($124614 / 2200 units] $5.86 ($12900 / 2200 units] $17.05 ($37500 / 2200 units] 2) Cost of Goods Sold Shipping Sal. & Commission At 7400 units (d)=7400 x(c) (a)-(d) Variable cost| Fixed Cost $419,156 $67,690 $43,391 $24,109 $126,136 $50,864 At 5200 units (d)=6300x(c) (a)-(d) Variable costFixed Cost $294,542 $67,690 $30,491 $24,109 $88,636 $50,864 Breakeven sales, in dollars = Fixed expenses / Contribution margin ratio

$281,163 [At 7400 units] Fixed cost of goods sold $67,690 Fixed shipping expense $24,109 Advertising expense $80,500 Fixed salary & commn. $50,864 Insurance expense $12,500 Amortization expense $45,500 Total Fixed costs & expenses Sales $954,600 Less: Variable cost of goods sold $419,156 Variable shipping exps. -$43,391 Variable sal. & commn. $126,136 Contribution margin, $ $365,917 Contribution margin ratio Breakeven sales, in dollars Selling price per unit a) Breakeven sales, in units [At 7400 units] [At 7400 units] [At 7400 units] 38.33% (CM/ Sales = $365917/$954600] $733,494 ($281162.545454545 / 38.3319238900634%] $129 ($954600 / 7400 units] 5,686 ($733494 / $129]

At 73,000 units $9,417,000 (73000 units x $129] Sales Variable costs & expenses: Variable cost of goods sold Variable shipping exps. Variable sal. & commn. Total variable costs & exps. Contribution margin Total Fixed costs & expenses b) Annual Profit $4,134,919 $428,045 $1,244,318 [73000 units x $56.64] (73000 units x $5.86] (73000 units x $17.05] $5,807,283 $3,609,717 $281,163 [As calculated in Part-(a)] $3,328,555 3) Sales increases by 6,400 units $777,600 [6400 units x ($129 - $7.5)] Sales Variable costs & expenses: Variable costs & expenses: Variable cost of goods sold Variable shipping exps. Total variable costs & exps. Change in Profit $362,513 $37,527 $109,091 [6400 units x $56.64] [6400 units x $5.86] [6400 units x $17.05] $509,132 $268,468

4) Sales increases by 6,400 units $825,600 [6400 units x $129] Sales Variable costs & expenses: Variable costs & expenses: Variable cost of goods sold Variable shipping exps. Total variable costs & exps. Contribution margin Less: Increase in advertising expenses Change in Profit $362,513 $37,527 $109,091 [6400 units x $56.64] [6400 units x $5.86] [6400 units x $17.05] $509,132 $316,468 $107,000 $209,468