Problem 1: High Low, Profit Equation Rhetorix, Inc. produces stereo speakers. Each unit (a pair of speakers) sells for $900. Below is information on production/sales and costs for 2010.
Production and sales in unit Production costs Selling and Admin Costs
January 105 $88,860 $23,570
February 117 $97,600 $25,200
March 95 $83,007 $22,495
April 106 $89,600 $23,720
May 115 $96,200 $24,950
June 125 $103,500 $26,250
July 128 $105,670 $26,690
August 132 $108,550 $27,200
September 138 $112,978 $28,030
October 126 $104,200 $26,400
November 124 $102,750 $26,150
December 108 $91,050 $23,900
Total 1421 $1,183,965 $304,645
Average cost per unit $83,319,141 $21,438,776
Use the high low method to identify the fixed and variable cost components for both production costs and selling and administrative costs.
Problem 2: The company estimates that production and sales in 2011 will be 1,550 units. Based on this estimate, forecast income before taxes for 2011.
Michael Bordellet is the owner/pilot of Bordellet Air Service. The company flies a daily round trip from Seattle's Lake Union to a resort in Canada. In 2007, the company reported an annual income before taxes of $4,100 although that included a deduction of $60,000 reflecting Michael's "salary".
Revenue $449,280
($360 x 1,248 passengers)
Less costs:
Pilot (owner's salary) $70,000
Fuel (35,657 gallons x $4.15) $147,977
Maintenance (variable) $127,920
Depreciation of plane $25,000
Depreciation of office equipment $2800
Rent expense $40,000
Insurance $20,000
Miscellaneous (fixed) $7500 441,197
Income before taxes $8,083
Revenue of $449,280 reflects six round trips per week for 52 weeks with an average of four passengers paying $360 each per round trip (6 x 52 x4 x $360= $449,280). The flight to the resort is 400 miles one way. With 312 round trips (6 per week x 52 weeks), that amounts to 249,600 miles. The plane averages 7 miles per gallon.
Required to do:
Q1. How many round trips is Michael currently flying, and how many round trips are needed in total to break even?
Q2. How many round trips are needed so that Michael can draw a salary of $110,000 and still not show a loss?
Q3. What is the average before-tax profit of a round trip flight in 2010?
Q4. What is the incremental profit associated with adding a round trip flight?