Newman Company expects to produce and sell 2,000 units next month. Data on costs

Question

Newman Company expects to produce and sell 2,000 units next month. Data on costs follows:

Required:

A. What is the variable cost per unit?
$

B. What is contribution margin per unit?
$

C. What is the variable cost ratio?
%

D. What is the contribution margin ratio?
%

The following six months of data were collected on electricity cost and the number of machine hours in a factory.

Required:

A. Using the high-low method compute the variable rate for the electricity cost.
$ per machine hour

B. Using the high-low method compute the fixed cost of electricity.
$

C. Estimate the total electricity cost to be incurred in December if 5,300 machine hours are incurred.
$

Per unit costs: Selling price $40 Variable manufacturing costs $10 Variable selling costs $6 Total costs: Fixed manufacturing costs $16,000 Fixed selling costs $8,000

Explanation / Answer

A./

VARIABLE COST PER UNIT = $10

B./

CONTRIBUTION MARGIN PER UNIT = SELLING PRICE PRICE - VARIABLE COST PER UNIT

= $40 - $10

= $30

C./

VARIABLE COST RATIO = VARIABLE COST PER UNIT / SELLING PRICE PER UNIT

= $10 / $40

   = 0.25 OR 25%

D./

CONTRIBUTION MARGIN RATIO = CONTRIBUTION MARGIN PER UNIT / SELLING PRICE PER UNIT

= $30 / $40

   = 0.75 OR 75%

--------------------------------------------------------------------------------------------------------------------------------------------------------------------

A./

VARIABLE COST PER UNIT

= ($27950 - $25160) / (5430 - 4500)

= $2790 / 930

= $3 PER MACHINE HOUR

B./

VARIABLE COST FOR JUNE (4500 * $3) = $13500

FIXED COST (TOTAL COST - VARIABLE COST)

FIXED COST ($25160 - $13500) = $11660

C./

TOTAL VARIABLE COST (5300 * $3) = $15900

TOTAL FIXED COST = $11660

TOTAL ELECTRICITY COST = $27560

THE COST FUNCTION

Y= A + BX

A= FIXED COST

B= VARIABLE COST PER MACHINE HOUR

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