Biblio Files Company is the chief competitor of Cover-to-Cover Company in the bookshelf business. Biblio Files is analyzing its manufacturing costs, and has compiled the following data for the first six months of the year. After reviewing the data, answer questions (1) through (3) that follow. Number of Units Produced Total Cost January 4,360 $65,600 February 275 6,250 March 1,000 15,000 April 5,025 101,250 May 1,750 32,500 June 3,015 48,000 1. From the data previously provided, help Biblio Files Company estimate the fixed and variable portions of its total costs using the high-low method. Recall that Total Costs = (Variable Cost Per Unit x Number of Units Produced) + Fixed Cost. Complete the following table. Total Fixed Cost Variable Cost per Unit 2. With your Total Fixed Cost and Variable Cost per Unit from the high-low method, compute the total cost for the following values of N (Number of Units Produced). Number of Units Produced Total Cost 3,500 4,360 5,025 3. Why does the total cost computed for 4,360 units not match the data for January in the table at the top of this panel? The high-low method is accurate only for months in which production is at full capacity. The high-low method gives a formula for the estimated total cost and may not match levels of production other than the highest and lowest. The high-low method gives accurate data only for levels of production outside the relevant range. The high-low method only gives accurate data when fixed costs are zero.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question 1.

Biblio Files Company is the chief competitor of Cover-to-Cover Company in the bookshelf business. Biblio Files is analyzing its manufacturing costs, and has compiled the following data for the first six months of the year. After reviewing the data, answer questions (1) through (3) that follow.

	Number of Units Produced	Total Cost
January	4,360	$65,600
February	275	6,250
March	1,000	15,000
April	5,025	101,250
May	1,750	32,500
June	3,015	48,000

1. From the data previously provided, help Biblio Files Company estimate the fixed and variable portions of its total costs using the high-low method. Recall that Total Costs = (Variable Cost Per Unit x Number of Units Produced) + Fixed Cost. Complete the following table.

Total Fixed Cost	Variable Cost per Unit

2. With your Total Fixed Cost and Variable Cost per Unit from the high-low method, compute the total cost for the following values of N (Number of Units Produced).

Number of Units Produced	Total Cost
3,500
4,360
5,025

3. Why does the total cost computed for 4,360 units not match the data for January in the table at the top of this panel?

The high-low method is accurate only for months in which production is at full capacity.

The high-low method gives a formula for the estimated total cost and may not match levels of production other than the highest and lowest.

The high-low method gives accurate data only for levels of production outside the relevant range.

The high-low method only gives accurate data when fixed costs are zero.

Question 2.

Review the contribution margin income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statements panels. Complete the following table from the data provided in the income statements. Each company sold 84,800 units during the year.

	Cover-to-Cover Company	Biblio Files Company
Contribution margin ratio (percent)
Unit contribution margin
Break-even sales (units)
Break-even sales (dollars)

Question 3.

Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings.

Type of Bookshelf	Sales Price per Unit	Variable Cost per Unit
Basic	$5.00	$1.75
Deluxe	9.00	8.10

The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called “Combined,” the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $346,962. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.

Type of Bookshelf	Percent of Sales Mix	Break-Even Sales in Units	Break-Even Sales in Dollars
Basic
Deluxe

Question 4.

Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement panels. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales.

1. If Cover-to-Cover Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be?

2. If Biblio Files Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be?

3. What would explain the difference between your answers for (1) and (2)?

The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.

The companies have goals that are not in the relevant range.

Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide income from operations.

Cover-to-Cover Company’s contribution margin ratio is lower, meaning that it’s more efficient in its operations.

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