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    Scattergraph, High-Low Method, Contribution income statement, Analytical thinking

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    BRIEF EXERCISE 5-2 Scattergraph Analysis (LO2)

    The data below have been taken from the cost records of the Atlanta Processing Company. The data relate to the cost of operating one of the company's processing facilities at various levels of activity:

    Month Units
    Processed Total
    August.......... 8,000

    1. Prepare a scattergraph by plotting the above data on a graph. Plot cost on the vertical axis and activity on the horizontal axis.
    Fit a line to your plotted ruler.

    2. Using the quick-and-dirty method, what is the approximate monthly fixed cost? The approximate variable cost per unit processed?

    Show your computations.

    PROBLEM 5-10 High-Low Method and Predicting Cost (LO1, LO3)

    Black Forest Clinic contains 340 beds. The average occupancy rate is 85% per month. In other words, an average of 85% of the clinic's beds are occupied by patients. At this level of occupancy, the clinic's operating costs are $40 per occupied bed per day, assuming a 30-day month. This $40 cost contains both variable and fixed cost elements.

    During November, the clinic's occupancy rate was only 70%. A total of $339,150 in ioperating cost was incurred during the month.

    1. Using the high-low method, estimate:
    a. The variable cost per occupied bed on a daily basis.
    b. The total fixed operating costs per month.
    2. Assume an occupancy rate of 80% per month. What amount of total operating cost would you expect the clinic to incur?

    PROBLEM 5-11 Contribution Format Income Statement (LO4)

    The Fun Store, Inc., purchases very large and heavy toys form a manufacturer and sells them at eh retail level. The toys cost, on an average, $9 each from the manufacturer. The Fun Store, Inc., sells the toys to its customers at an average price of $40 each. Because of their size and weight, the toys must be delivered to customers. The selling and administrative costs that the company incurs in a typical month are presented below:

    Costs Cost Formula
    Selling: $1,000 per month
    Advertising $800 per month, plus 5% of sales
    Sales salaries and comissions $6 per toy sold
    Delivery or toys to customers $700 per month
    Utilities $900 per month
    Depreciation of sales facilities
    Administrative: $3,500 per month
    Exectuive salaries $500 per month
    Insurance $500 per month, plus $5 per toy sold
    Clerical $600 per month
    Depreciation of office equiptment

    During October, The Fun Store, Inc., sold delivered 450 toys.

    1. Prepare an income statement for The Fun Store, Inc., for October. Use the traditional format, with costs organized by function.
    2. Redo (1) above, this time using the contribution format, with costs organized by behavior. Show costs and revenues on both total and per unit basis down through contribution margin.
    3. Refer to the income statement you prepared in (2) above, Why might it be misleading to show the fixed costs per unit basis?


    Jasmine Park encountered her boss, Bubba Gompers, at the pop machine in the lobby. Bubba is the vice president of marketing at Down South Lures Corporation. Jasmine was puzzled by some calculations she had been doing, so she asked him:

    Jasimne: " Bubba, I'm not sure how to go about answering the questions that came up at the meeting with the president yesterday."
    Bubba: " What's the problem?"
    Jasmine: " The president wanted to know the break-even for each of the company's products, but I am having trouble figuring them out."
    Bubba: "I'm sure you can handle it, Jasmine. And, by the way, I need your analysis on my desk tomorrow morning at 8:00 sharp so I can look at it before the follow-up meeting at 9:00."

    Down South Lures makes three fishing lures in its manufacturing facility in Alabama. Data concentrating these products appear below.

    Frog Minnow Worm
    Normal annual sales volume...
    Unit selling price................
    Variable cost per unit ......... 100,000
    $1.20 200,000
    $.080 300,000

    Total fixed expenses for the entire company are $282,000 per year.
    All three products are sold in highly competitive markets, so the company is unable to raise its prices without losing unacceptable numbers of cutomers.
    The company has no work in process or finished goods inventories due to an extremely effective just-in-time manufacturing system.

    1. What is the company's overall break-even in total sales dollars?
    2. Of the total fixed costs of $282,000, $18,000 could be avoided if the Frog lure product were dropped, $96,000 if the minnow lure product were dropped, and $60,000 if the Worm lure product were dropped. The remaining fixed costs of $108,000 consist of common fixed costs such as administrative salaries and rent of the factory building that could be avoided by going out of business entirely.
    a. What is the break-even quantity of each product?
    b. If the company sells exactly the break-even quantity of product, what will the overall profit of the company? Explain this result.

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    Solution Summary

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