The Central Valley Company is a manufacturing firm that produces and sells a sin
ID: 2395544 • Letter: T
Question
The Central Valley Company is a manufacturing firm that produces and sells a single product. The company’s revenues and expenses for the last four months are given below. Central Valley CompanyComparative Income Statement March April May June Sales in units 5,800 5,300 6,450 7,600 Sales revenue $ 742,400 $ 678,400 $ 825,600 $ 972,800 Less: Cost of goods sold 392,200 366,336 429,312 496,128 Gross margin $ 350,200 $ 312,064 $ 396,288 $ 476,672 Less: Operating Expenses Shipping expense $ 63,100 $ 54,400 $ 66,600 $ 67,000 Advertising expense 82,000 82,000 82,000 82,000 Salaries and commissions 163,200 139,000 165,500 176,500 Insurance expense 13,000 13,000 13,000 13,000 Amortization expense 46,000 46,000 46,000 46,000 Total operating expenses $ 367,300 $ 334,400 $ 373,100 $ 384,500 Net income $ (17,100 ) $ (22,336 ) $ 23,188 $ 92,172 Required: 1. Management is concerned about the losses experienced during the spring and would like to know more about the cost behaviour. Develop a cost equation for each of the costs. (Do not round intermediate calculations. Round "Per Unit" answers to 2 decimal places.) 2. Assume that fixed costs are incurred uniformly throughout the year. Compute the annual break-even sales, and the profit if 74,000 units are sold during the year. (Round "Break-even sales" answer to nearest whole number.) 3. Calculate the change in profit if the selling price were reduced by $8.0 each and annual sales were to increase by 6,600 units. 4. Determine the change in profit if the company were to increase advertising by $108,000 and if this were to increase sales by 6,600 units. The Central Valley Company is a manufacturing firm that produces and sells a single product. The company’s revenues and expenses for the last four months are given below.
Explanation / Answer
1. Application of the high-low method for segregating mixed costs into variable costs and fixed costs:
a. Cost of goods sold:
7,600 V + F = 496,128
5,300 V + F = 366,336
Variable cost of goods sold per unit = $ 56.43
Fixed cost per month = $ 67,260.
Cost equation : Y = 56.43 x + 67,260
b. Shipping Expenses:
7,600 V + F = 67,000
5,300 V + F = 54,400
Variable shipping expenses per unit = $ 5.48
Fixed shipping expenses per month = $ 25,352
Cost equation : Y = 5.48 x + 25,352
c. Salaries and Commissions :
7,600 V + F = 176,500
5,300 V + F = 139,000
Variable salaries and commissions per unit = $ 16.30 per unit.
Fixed salaries and commissions per month = $ 52,620
Cost equation : Y = 16.30 x + 52,620
2. Total fixed cost per month = $ 286,232.
Total fixed cost per year = $ 3,434,784.
Contribution margin per unit = Unit sales price - Unit variable cost = $ 128 - $ ( 56.43 + 5.48 + 16.30) = $ 49.79
Annual break-even sales = Total Fixed Cost / Unit Contribution Margin = $ 3,434,784 / $ 49.79 = 68,985.42 units
Profit if 74,000 units are sold during the year = 74,000 x $ 49.79 - $ 3,434,784 = $ 249,676.
3. If selling price were to be reduced by $ 8 per unit, and unit sales were to increase by 6,600 units, change in profit = 6,600 x $ ( 49.79 - 8.00) = $ 275,814 Increase.
4. Change in profit = 6,600 x $ 49.79 - $ 108,000 = $ 220,614. Increase.