High Low Method Exercises.doc 5j6k4u

Practice exercises (high low point, contribution margin, break even) 1. Assume the following hours of maintenance work and the total maintenance costs for six months. Month Hrs of Maintenance Maintenance Cost January 625 7,950 February 500 7,400 March 700 8,275 April 550 7,625 May 775 9,100 June 800 9,800 a.) Compute variable cost: High 800 9,800 Low 500 7,400 Change 300 $2,400 Variable cost per unit = 2,400/300 =$8.00 per hour b). Compute for fixed cost:

Total cost = Fixed cost+ variable cost Fixed cost =Total – variable cost Fixed cost = 9,800 - $8x800 hrs. Fixed cost = 9,800-6,400; Fixed cost = $3,400 7,400-$8 x 500 hrs 7,400-4,000;

fixed cost = $3,400

c.) Compute the maintenance cost if the number of maintenance hours is 750. 2. Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using high-low point method, what is the variable (a) portion of sales salaries and commission, (b) what is the fixed portion? Units__ Cost High level 120,000 $14,000 Low level 80,000 10,000 Change 40,000 $ 4,000 (a) Variable cost per unit = $4,000/40,000 = $0.10 (b) Fixed cost = $14,000 – 0.10 x 120,000 = $14,000 – 12,000 ; Fixed cost = $2,000 (c) Amount of sales salaries and commissions if units sold are 95,000 3.

Power costs and production data of the LMN Mfg Corp are as follows: Month Power cost Units produced January $800 120,000 February 710 98,000 March 700 94,000 April 600 70,000 May 740 105,000 June 700 96,000 Compute the variable and fixed elements of the power costs using high low points method. Variable cost per unit = high point 120,000 800 Low point 70,000 600 Difference 50,000 200, 200/50,000 = .004 per unit Fixed cost = 800 - .004 x 120,000;

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800-480 = 320

Based on a table of total costs and activity levels, determine the high and low activity levels of Xeon Company. Month production Total cost January 800 $ 93,000 February 1,100 114,000 March 1,200 119,000 April 950 103,000 May 1,300 126,000 June 1,250 124,000 July 1,000 107,000 August 1,050 110,000 September 1,000 105,000 October 900 100,000 November 1,050 110,000 December 1,200 119,500

(a.) Use the high and low activity levels to compute the variable cost per unit. 126,000 – 93,000 = $33,000 = $66 1,300 - 800 500 (b.) Figure out the total fixed cost. Total cost = FC + 66(production) 126,000 = FC + 66(1,300);

126,000=FC + 85,800; FC = 40,200

126,000-85,800=FC

(c.) Total cost to produce 1,000 units: Total cost = FC + variable costs of $66(1,000 units). Total cost = 40,200 + 66,000. Therefore, Total costs = $106,200: 5.

Eagle Manufacturing has incurred the following machine maintenance costs over the last twelve months. Month Machine Hours Cost January 10,000 $15,500 February 15,000 16,233 March 12,750 18,186 April 13,268 19,125 May 9,256 11,159 June 10,335 15,117 July 13,295 18,998 August 12,652 17,874 September 9,964 10,685 October 10,865 16,853 November 11,569 17,365 December 14,639 19,931 a. Use the high-low method to estimate the variable cost per machine hour and the fixed cost per month. 16,233-11,159 =5,074 =.883 15,000-9,256 5,744 16,233 = FC + .883(15,000) 11,159=FC + .883(9,256) 16,233-13,250.35 = FC; 2,982.65 = Fixed Cost 11,159-8,176.35 = FC; FC=2,982.65 b. Develop a formula to express the cost behavior of Eagle’s maintenance costs. Machine maintenance Cost = FC + variable cost per machine hour of .883 (machine hours) c. Predict the level of maintenance cost that would be incurred during a month when 13,000 machine hours are worked. X=2,982.65 + .883(13,000); X=2,982.65 + 11,479; X=14,461.65 d. Predict the level of maintenance cost that would be incurred during a month when 45,000 machine hours are worked. X=2,982.65 + .883(45,000); X=2,982.65 + 39,735; X=42,717.65

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Previous periods' costs and production levels for Oregon Corp. has the following data about its production of widgets: Month No. of units produced Total Cost January 100 $2,130 February 120 $2,185 March 90 $2,140 April 130 $2,200 May 125 $2,190 June 124 $2,190 July 132 $2,200 August 140 $2,214 September 135 $2,200 October 120 $2,180 November 114 $2,175 December 115 $2,175 Identify the high and low periods HIGH August LOW March

140 90

$2,214 $2,140

Find the variable cost per unit: Variable cost per unit = (Difference in cost)/(Difference in activity level) Variable cost per unit = $74 / 50 units = $1.48 per unit.

Find the total fixed costs: Total cost = Total fixed cost + (Variable cost per unit)(No. of units produced) $2,214.00 = Total FC + ($1.48)(140); $2,214.00 = Total FC + $207.20 $2,214.00 - $207.20 = Total fixed cost; $2,006.80 = Total fixed cost Use the formula to estimate total costs in any reasonable production scenario. Suppose that Oregon plans to produce 110 units: 1. Total cost = Total fixed cost + (Variable cost per unit)(No. of units produced) 2. Total cost = $2,006.80 + $1.48(No. of units produced) 3. Total cost = $2,006.80 + $1.48(110) 4. Total cost = $2,136.60 7.

Here is an example concerning the electricity bill in a factory: Year Units Produced Bill Cost 2000 50 units $100 2001 67 units $130 2002 20 units $70 2003 120 units $200 2004 88 units $104 2005 112 units $93

Change in cost / change in unit volume = $130/100 units. Variable cost is $1.30 per unit produced. Plugging this value into either the 2002 or 2003 data, we find that $200 = $1.30(120 units) + b where b = $44. Therefore, using the high low method, we conclude that from the above data that the electricity cost behaviour has a fixed cost of $44 and a variable cost of $1.30 per unit produced. 8.

Assume the following data for X company for the coming year: Fixed Expenses $100,000 Variable cost per unit 5.00 Selling price per unit 9.00 Required: (a) How many units must be sold to break even? (b) How many units must be sold to yield a profit equal to 20% of sales? (c) How many units must be sold to make a net income of $20,000 assuming selling price per unit is increased by $1.00 (a) break even sales in units: 9X = 100,000+5X; 9X-5X = 100,000

4X = 100,000; X=100,000/4;

BES = 25,000 units

(b) units to be sold to yield a profit equal to 20% of sales 9X = 100,000 +5X + 20% (9X); 4X=100,000 + 1.8X; 4X-1.8X = 100,000 2.2X = 100,000; X = 45,454 units (c) Units to be sold to make a profit of 20,000 if selling price is increased by $1.00: New selling price = $10.00 10X = 100,000 +5X +20,000; 10X-5X = 100,000+20,000; 5X = 120,000; X=120,000/5 = 24,000 units 9. Below is the income statement of MNO Company: Net Sales 100,000 Less Expenses: Variable 70,000 (70%) Fixed 48,000 118,000 Net Loss 18,000 Required: (a) what amount of sales is needed to break even? (b) If fixed expenses are increased by $12,000, what is the new break even point? (c) With the proposed increase in fixed expenses, what amount of sales will yield a net income after taxes of 21,000 assuming the income tax rate is 30% Answer: (a)Break even sales: CM formula: Sales-VC; ($100,000-70,000 = 30,000) CM ratio= CM = 30,000 = 30% Sales 100,000 break even sales= FC__ = 48,000 = 160,000 BES CM ratio 30% Sales 160,000 VC 112,000

CM FC Profit

48,000 ( 48,000) -_____

(b) Break even if fixed expenses are increased by $12,000: BES = 48,000+12,000 =200,000 Sales 30% VC CM FC Profit

200,000 140,000 60,000 (60,000) -____

(c) Amount of sales which will yield a net income of 21,000 assuming income tax rate of 30% Sales = 48,000+12,000 21,000/.7) = 60,000+30,000 = 90,000 = 300,000 Sales .3 .3 .3 To check:

Sales 300,000 VC (70%) 210,000 CM 90,000 FC 60,000 Profit 30,000 Income tax (30%) 9,000 Net income 21,000