Questions -
Q1. The controller of Hernandez Industries has collected the following monthly expense data for use in analyzing the cost behavior of maintenance costs.
Month Total Maintenance Costs Total Machine Hours
January $2,500 3,000
February 3,000 4,000
March 3,600 6,000
April 4,500 7,900
May 3,200 5,000
June 5,000 8,000
Instructions
(a) Determine the fixed and variable cost components using the high-low method.
(b) Prepare a graph showing the behavior of maintenance costs, and identify the fixed and variable cost elements. Use 2,000-hour increments and $1,000 cost increments. (either do a graph or list the costs at the various levels)
Q2. Mozena Corporation manufactures a single product. Monthly production costs incurred in the manufacturing process are shown below for the production of 3,000 units. The utilities and maintenance costs are mixed costs. The fixed portions of these costs are $300 and $200, respectively.
Production in Units 3,000
Production Costs
Direct materials $ 7,500
Direct labor 15,000
Utilities 2,100
Property taxes 1,000
Indirect labor 4,500
Supervisory salaries 1,800
Maintenance 1,400
Depreciation 2,400
(a) Identify the above costs as variable, fixed, or mixed.
Q3. In the month of March, Girard Spa services 550 clients at an average price of $120. During the month, fixed costs were $22,800 and variable costs were 60% of sales.
Instructions
(a) Determine the contribution margin in dollars, per unit, and as a ratio.
(b) Using the contribution margin technique, compute the break-even point in dollars and in units.
Q4. Jane Greinke is the advertising manager for Payless Shoe Store. She is current- ly working on a major promotional campaign. Her ideas include the installation of a new lighting system and increased display space that will add $24,000 in fixed costs to the $210,000 currently spent. In addition, Jane is proposing that a 62⁄3% price decrease (from $30 to $28) will produce an increase in sales volume from 16,000 to 20,000 units. Variable costs will remain at $15 per pair of shoes. Management is impressed with Jane's ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.
Instructions
(a) Compute the current break-even point in units, and compare it to the break-even point in units if Jane's ideas are used.
(b) Compute the margin of safety ratio for current operations and after Jane's changes are introduced. (Round to nearest full percent.)
(c) Prepare a CVP income statement for current operations and after Jane's changes are introduced. Would you make the changes suggested?