Chapter 5

> DO IT!

Types of Costs Helena Company reports the following total costs at two levels of production.

10,000 Units 20,000 Units

Direct materials $20,000 $40,000
Maintenance 8,000 10,000
Action Plan Direct labor 17,000 34,000
✔ Recall that a variable Indirect materials 1,000 2,000
cost varies in total Depreciation 4,000 4,000
directly and propor- Utilities 3,000 5,000
tionately with each Rent 6,000 6,000
change in activity level.
✔ Recall that a fixed cost Classify each cost as variable, fixed, or mixed.
remains the same in
total with each change Solution
in activity level.
✔ Recall that a mixed Direct materials, direct labor, and indirect materials are variable costs.
cost changes in total Depreciation and rent are fixed costs.
but not proportion- Maintenance and utilities are mixed costs.
ately with each change
in activity level. Related exercise material: BE5-1, BE5-2, E5-1, E5-2, E5-4, and DO IT! 5-1.

> DO IT!

High-Low Method Byrnes Company accumulates the following data concerning a mixed cost, using units
produced as the activity level.

Units Produced Total Cost

March 9,800 $14,740
April 8,500 13,250
May 7,000 11,100
June 7,600 12,000
July 8,100 12,460
Action Plan
✔ Determine the highest (a) Compute the variable- and fixed-cost elements using the high-low method.
and lowest levels of
activity. (b) Estimate the total cost if the company produces 6,000 units.
✔ Compute variable cost Solution
per unit as: Change in
total costs 4 (High 2
low activity level) 5 (a) Variable cost: ($14,740 2 $11,100) 4 (9,800 2 7,000) 5 $1.30 per unit
Variable cost per unit. Fixed cost: $14,740 2 $12,740 ($1.30 3 9,800 units) 5 $2,000
✔ Compute fixed cost as: or $11,100 2 $9,100 ($1.30 3 7,000) 5 $2,000
Total cost 2 (Variable (b) Total cost to produce 6,000 units: $2,000 1 $7,800 ($1.30 3 6,000) 5 $9,800
cost per unit 3 Units
produced) 5 Fixed cost. Related exercise material: BE5-3, BE5-4, BE5-5, E5-3, E5-5, E5-6, and DO IT! 5-2.

D-1
D-2 DO IT!

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Break-Even Lombardi Company has a unit selling price of $400, variable costs per unit of $240, and
fixed costs of $180,000. Compute the break-even point in units using (a) a mathematical
Analysis equation and (b) contribution margin per unit.
Action Plan Solution
✔ Apply the formula:
Sales 5 Variable (a) The equation is $400Q 2 $240Q 2 $180,000 5 $0; ($400Q 2 $240Q) 5 $180,000.
costs 1 Fixed costs 1 The break-even point in units is 1,125. (b) The contribution margin per unit is $160
Net income. ($400 2 $240). The formula therefore is $180,000 4 $160, and the break-even point in
✔ Apply the formula: units is 1,125.
Fixed costs 4
Contribution margin Related exercise material: BE5-6, BE5-7, BE5-8, BE5-9, E5-8, E5-9, E5-10, E5-11, E5-12,
per unit 5 Break-even E5-13, and DO IT! 5-3.
point in units.

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Break-Even, Zootsuit Inc. makes travel bags that sell for $56 each. For the coming year, management
expects fixed costs to total $320,000 and variable costs to be $42 per unit. Compute the
Margin of Safety, following: (a) break-even point in dollars using the contribution margin (CM) ratio; (b) the
Target Net Income margin of safety and margin of safety ratio assuming actual sales are $1,382,400; and
(c) the sales dollars required to earn net income of $410,000.
Action Plan Solution
✔ Apply the formula for
the break-even point in (a) Contribution margin ratio 5 [($56 2 $42) 4 $56] 5 25%
dollars. Break-even sales in dollars 5 $320,000 4 25% 5 $1,280,000
✔ Apply the formulas for (b) Margin of safety 5 $1,382,400 2 $1,280,000 5 $102,400
the margin of safety in
dollars and the margin Margin of safety ratio 5 $102,400 4 $1,382,400 5 7.4%
of safety ratio. (c) Required sales in dollars 5 ($320,000 1 $410,000) 4 25% 5 $2,920,000
✔ Apply the formula for
the required sales in Related exercise material: BE5-10, BE5-11, BE5-12, E5-14, E5-15,
dollars. E5-16, and DO IT! 5-4.

> Comprehensive DO IT!

Mabo Company makes calculators that sell for $20 each. For the coming year, manage-
ment expects fixed costs to total $220,000 and variable costs to be $9 per unit.

Instructions
(a) Compute break-even point in units using the mathematical equation.
(b) Compute break-even point in dollars using the contribution margin (CM) ratio.
(c) Compute the margin of safety percentage assuming actual sales are $500,000.
Action Plan (d) Compute the sales required in dollars to earn net income of $165,000.
✔ Know the formulas. Solution to Comprehensive
✔ Recognize that variable
costs change with sales (a) Sales 2 Variable costs 2 Fixed costs 5 Net income
volume; fixed costs do $20Q 2 $9Q 2 $220,000 5 $0
not.
$11Q 5 $220,000
✔ Avoid computational Q 5 20,000 units
errors.
 DO IT! D-3

(b) Contribution margin per unit 5 Unit selling price 2 Unit variable costs
$11 5 $20 2 $9
Contribution margin ratio 5 Contribution margin per unit 4 Unit selling price
55% 5 $11 4 $20
Break-even point in dollars 5 Fixed costs 4 Contribution margin ratio
5 $220,000 4 55%
5 $400,000
Actual sales 2 Break-even sales
(c) Margin of safety 5
Actual sales
$500,000 2 $400,000
5
$500,000
5 20%
(d) Required sales 2 Variable costs 2 Fixed costs 5 Net income
$20Q 2 $9Q 2 $220,000 5 $165,000
$11Q 5 $385,000
Q 5 35,000 units
35,000 units 3 $20 5 $700,000 required sales

> DO IT! REVIEW

DO IT! 5-1 Helena Company reports the following total costs at two levels of production. Classify types of costs.
5,000 Units 10,000 Units (LO 1, 3), C
Indirect labor $ 3,000 $ 6,000
Property taxes 7,000 7,000
Direct labor 28,000 56,000
Direct materials 22,000 44,000
Depreciation 4,000 4,000
Utilities 5,000 7,000
Maintenance 9,000 11,000
Classify each cost as variable, fixed, or mixed.
DO IT! 5-2 Westerville Company accumulates the following data concerning a mixed cost, Compute costs using high-
using units produced as the activity level. low method and estimate
total cost.
Units Produced Total Cost
(LO 3), AP
March 10,000 $18,000
April 9,000 16,650
May 10,500 18,580
June 8,800 16,200
July 9,500 17,100
(a) Compute the variable- and fixed-cost elements using the high-low method.
(b) Estimate the total cost if the company produces 9,200 units.
DO IT! 5-3 Larissa Company has a unit selling price of $250, variable costs per unit of Compute break-even point
$170, and fixed costs of $140,000. Compute the break-even point in units using (a) the in units.
mathematical equation and (b) contribution margin per unit. (LO 6), AP
DO IT! 5-4 Presto Company makes radios that sell for $30 each. For the coming year, Compute break-even point,
management expects fixed costs to total $220,000 and variable costs to be $18 per unit. margin of safety ratio, and
sales for target net income.
(a) Compute the break-even point in dollars using the contribution margin (CM) ratio.
(b) Compute the margin of safety ratio assuming actual sales are $800,000. (LO 6, 7, 8), AP
(c) Compute the sales dollars required to earn net income of $140,000.