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    High-low methods, accounting analysis, CVP, and leverage

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    EXERCISE4-5. High-Low Method

    Campus Copy & Printing wants to predict copy machine repair expense at different levels of copying activity (number of copies made). The following data have been gathered: (see attached)

    Required
    Determine the fixed and variable components of repair expense using the high-low
    method. Use copies made as the measure of activity.

    EXERCISE 4-8. Account Analysis

    Reef Office Supplies is interested in estimating
    the cost involved in hiring new employees. The following information is available regarding
    the costs of operating the Human Resource department at Reef Office Supplies
    in May when there were 50 new hires.

    Human Resource Department
    May
    Staff salaries $25,000
    Manager salary 7,000
    Office supplies 200
    Depreciation of office equipment 300
    Share of building cost (based
    on square feet occupied by
    Human Resources) 1,500
    Total $34,000

    Required
    a. Use account analysis to determine fixed cost per month and variable cost per new
    hire.
    b. The company is planning to hire 60 employees in June. Estimate the total cost of
    Human Resources for June..
    c. What is the expected incremental cost associated with hiring 10 more employees
    than were hired in May?

    EXERCISE 4-12. CVP Analysis, Profit Equation

    Clyde's Marina has estimated that fixed costs per month
    are $240,000 and variable cost per dollar of sales is $0.60.

    Required
    a. What is the break-even point per month in sales?
    b. What level of sales is needed for a monthly profit of $60,000?
    c. For the month of July, the marina anticipates sales of $1,200,000: What is the expected level of profit?

    EXERCISE 4-17. Operating Leverage
    (see attached for data)
    Required
    a. Calculate profit as a percent of sales in the prior year.
    b. Suppose sales in the current year increase by 20 percent. Calculate profit as a percent
    of sales for the new level of sales and explain why the percent is greater than the
    one calculated in Part a.

    EXERCISE 4-18. Constraints

    Dvorak Music produces two durable music stands:

    Stand A Stand B
    Selling price $80 $70
    Less variable costs 20 40
    Contribution margin $60 $30

    Stand Arequires 5 labor hours and standB requires 2 labor hours. The company has
    only 320 available labor hours per week. Further, the company can sell all it can produce
    of either product.

    Required
    a. Which stand(s) should the company produce?
    b. What would be the incremental benefit of obtaining 10 additional labor hours?

    PROBLEM 4-12. Multiproduct CVP

    Fidelity Multimedia sells audio and video equipment
    and car stereo products. After performing a study of fixed and variable costs in the
    prior year, the company prepared a product-line profit statement as follows:

    Fidelity Multimedia
    Profitability Analysis
    For the Year Ended December 31,2007
    Audio Video Car Total
    Sales $3,000,000 $1,800,000 $1,200,000 $6,000,000
    Less variable costs:
    Cost of merchandise 1,800,000 1,260,000 600,000 3,660,000
    Salary part-time staff 120,000 80,000 30,000 230,000
    Total variable costs 1,920,000 1,340,000 630,000 3,890,000
    Contribution margin 1,080,000 460,000 570,000 2,110,000
    Less direct fixed costs:
    Salary, full-time staff 300,000 250,000 210,000 760,000
    Less common fixed costs:
    Advertising 110,000
    Utilities 20,000
    Other administrative costs 560,000
    Total common fixed costs 690,000
    Profit $660,000

    Required
    a. Calculate the contribution margin ratios for the audio, video, and car product lines.
    b. What would be the effect on profit of a $100,000 increase in sales of audio equipment
    compared with a $100,000 increase in sales of video equipment, or a $100,000
    increase in sales of car equipment? Based on this limited information, which product
    line would you recommend expanding?
    c. Calculate the break-even level of sales for the company as a whole.
    d. Calculate sales needed to achieve a profit of $1,500,000 assuming the current mix.
    e. Determine the sales of audio, video, and car products in the total sales amount calculated
    for Part d.

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    Attachments

    Solution Preview

    Please see attachment.

    EXERCISE4-5. HIGH-LOW METHOD
    Campus Copy & Printing wants to predict copy machine repair expense at different levels of copying activity (number of copies made). The following data have been gathered:

    Required
    Determine the fixed and variable components of repair expense using the high-low method. Use copies made as the measure of activity.

    TUTORIAL
    The high-low technique is a cost apportionment technique that utilizes two extremes: high and low in separating costs.
    Cost Activity
    High $10,000.00 800,000
    Low $4,000.00 200,000
    Difference = 10,000 - 4,000 $6,000.00 600,000

    Variable cost = 6,000/600,000 $0.01
    Fixed cost = $10,000 - ($0.01 * 800,00) or $4,000 - ($0.01*200,000) $2,000.00

    EXERCISE 4-8. ACCOUNT ANALYSIS
    Reef Office Supplies is interested in estimating the cost involved in hiring new employees. The following information is available regarding the costs of operating the Human Resource department at Reef Office Supplies in May when there were 50 new hires.
    Human Resource Department
    May
    Staff salaries $25,000
    Manager salary 7,000
    Office supplies 200
    Depreciation of office equipment 300
    Share of building cost (based
    on square feet occupied by
    Human Resources) 1,500
    Total $34,000

    Required
    a. Use account analysis to determine fixed cost per month and variable cost per new hire.
    Human Resource Department
    May
    Staff salaries $25,000 Variable
    Manager salary 7,000 Fixed
    Office supplies 200 Variable
    Depreciation of office equipment 300 Fixed
    Share of building cost (based
    on square feet occupied by
    Human Resources) 1,500 Fixed
    Total $34,000

    Employee 50
    Per unit
    Total fixed cost 8,800
    Variable cost 25,200 504.00 =25,200/50
    b. The company is planning to hire 60 employees in June. Estimate the total cost of Human Resources for June.
    Total cost = fixed cost + (variable cost * total employees) = 25,200 + (504 * (60 + 50)) = 80,640

    c. What is the expected incremental cost associated with hiring 10 more employees than were hired in May?
    Employees
    Cost at May 50 50,400
    Cost with new staff 60 55,440
    Incremental cost 5,040

    EXERCISE 4-12. CVP ANALYSIS, PROFIT EQUATION
    Clyde's Marina has ...

    Solution Summary

    The expert examines the high-low methods for accounting analysis, CVP and leverages.

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