Grand Canyon Manufacturing Inc. produces and sells a product with a price of $100 per unit. The following cost data have been prepared for its estimated upper and lower limits of activity:
Selling and administrative expenses:
Required:
- 1. Classify each cost element as either variable, fixed, or semi-variable. (Hint: Recall that variable expenses must go up in direct proportion to changes in the volume of activity.)
- 2. Calculate the break-even point in units and dollars. (Hint: First use the high-low method illustrated in Chapter 4 to separate costs into their fixed and variable components.)
- 3. Prepare a break-even chart.
- 4. Prepare a contribution income statement, similar in format to the statement appearing on page 540, assuming sales of 5,000 units.
- 5. Recompute the break-even point in units, assuming that variable costs increase by 20% and fixed costs are reduced by $50,000.
1.
Classify the each cost element as either variable, fixed or semi-variable.
Explanation of Solution
Classify the each cost element as either variable, fixed or semi-variable as follows:
- Variable costs vary with the number of units produced or for the services provided. For example, the labor costs increase if the number of labor hours is increased, and the labor costs decrease if the number of labor hours is decreased. Direct material, direct labor and indirect material are considered as the variable costs.
- Fixed Cost is a cost which is constant in the short run, it is not related to any change in the production of goods or service, it will be fixed disregarding of increase or decrease in output. Fixed cost is generally incurred on fixed assets in long run. Depreciation, office salary and advertising are considered as the fixed cost.
- Semi variable costs are the cost that changes based on the changes in the production, but it is not proportionately. Indirect labor, sales salaries and other expense are considered as semi-variable cost.
2.
Calcualte the break even point in units and dollars.
Explanation of Solution
Calcualte the break even point in units and dollars as follows:
Working note (1):
Calcualte the vairable cost per unit:
Working note (2):
Calculate the variable cost for 4,000 units.
Working note (3):
Calcualte the fixed cost:
3.
Prepare a break-even chart.
Explanation of Solution
Prepare a break-even chart as follows:
4.
Prepare a contribution income statement of company G.
Explanation of Solution
Prepare a contribution income statement of company G as follows:
Company G | |
Income statement | |
For the year ended --- | |
Particulars | Amount ($) |
Sales | $ 500,000 |
Less: Variable cost | $281,250 |
Contribution margin | $218,250 |
Less: Fixed costs (3) | $140,000 |
Net operating income | $ 78,750 |
Table (1)
5.
Calculate the break-even point in units, assume that the variable costs is increased by 20% and fixed cost is decreased by $50,000.
Explanation of Solution
Calculate the break-even point in units, assume that the variable costs is increased by 20% and fixed cost is decreased by $50,000 as follows:
Working note (4):
Calcualte the decrase in fixed cost:
Working note (5):
Calcualte the increase in variable cost:
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