The Central Valley Company is a manufacturing firm that produces and sells a sin
ID: 2557433 • 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 Company Comparative Income Statement March April June May 5,850 4,900 Sales in units Sales revenue Less: Cost of goods sold 5.400 6,800 5704,000 634.000 $745,000 5844,000 372,000 344,000 381,000 430,000 5332,000 290,000 364.000 5414,000 Gross margin Less: Operating Expenses Shipping expense Advertising expense Salaries and commissions nsurance expense Amortization expense 5 62.300 55,200 76,000 141.000 11,000 44,000 76,000 162.000 11,000 44,000 76,000 163.500 11,000 44,000 65,800 S 69,000 76,000 178,500 11,000 44,000 Total operating expenses 5355.300 327,200 360,300 5378,500 Net income 5 (23,300) (37,200) 3,700 35,500 Required 1. Management is concerned about the losses experienced during the sp ing and would like to know more about the cost behaviour. Develop a cost equation for each of the costs. Cost of goods sold Shipping Salaries & commission - per unit per unit per unit 2. Assume that fixed costs are incurred uniformly throughout the year. Compute the annual profit if 70,000 units are sold during the year ual profit (70000 units) 3. Calculate the change in profit if the selling price were reduced by 56.0 each and annual sales were to increase by 5,800 units. 4. Determine the change in profit if the company were to increase advertising by $104,000 and if this were to increase sales by 5,800 units.Explanation / Answer
Answer to Part 1.
As per high Low Method, Variable Cost per unit = y2 – y1 / x2 – x1
Cost of Goods sold:
y2 = Total cost at highest level of activity = $430,000
y1 = total cost at Lowest level of activity = $344,000
X2 = No. of Units at Highest Level of activity = 6800 units
x1 = No. of Units at Lowest Level of activity = 4900 Units
Variable Cost per unit = (430,000 – 344,000) / (6,800 – 4,900)
Variable Cost per unit = 86,000 / 1,900
Variable Cost per unit = $ 45.26
Calculation of Fixed Cost:
$344000 = ($45.26 * 4,900) + Fixed Cost
Fixed Cost = $ 122226
Shipping:
y2 = Total cost at highest level of activity = $69000
y1 = total cost at Lowest level of activity = $55200
X2 = No. of Units at Highest Level of activity = 6800 units
x1 = No. of Units at Lowest Level of activity = 49000 Units
Variable Cost per unit = (69000-55200)/ (6,800 – 4,900)
Variable Cost per unit = 13800 / 1900
Variable Cost per unit = $7.26
Calculation of Fixed Cost:
$55200 = ($7.26 * 4,900) + Fixed Cost
Fixed Cost = $19610.52
Salaries and Commission:
y2 = Total cost at highest level of activity = $178500
y1 = total cost at Lowest level of activity = $141000
X2 = No. of Units at Highest Level of activity = 4,900 units
x1 = No. of Units at Lowest Level of activity = 6,800 Units
Variable Cost per unit = (178500 – 141000) / (6,800 – 4,900)
Variable Cost per unit = 37500 / 1900
Variable Cost per unit = $ 19.73
Calculation of Fixed Cost:
$141000 = ($19.73 * 4,900) + Fixed Cost
Fixed Cost = $ 44289.47
PART 2
PART 3
PART 4
Sales $91,25,925.93 Less: COGS $31,68,200.00 Salaries $13,81,100.00 Shipping $5,08,200.00 Contribution $40,68,425.93 COGS $1,22,226.00 Fixed Salaries $44,289.47 Fixed Shipping $19,610.52 Advertising $76,000.00 Insurance $11,000.00 Depreciation $44,000.00 Operating Profit $37,51,299.94PART 3
Sales $94,27,274.07 Less: COGS $34,30,708.00 Salaries $14,95,534.00 Shipping $5,50,308.00 Contribution $39,50,724.07 COGS $1,22,226.00 Fixed Salaries $44,289.47 Fixed Shipping $19,610.52 Advertising $76,000.00 Insurance $11,000.00 Depreciation $44,000.00 Operating Profit $36,33,598.08PART 4
Sales $98,82,074.07 Less: COGS $31,68,200.00 Salaries $13,81,100.00 Shipping $5,08,200.00 Contribution $48,24,574.07 COGS $1,22,226.00 Fixed Salaries $44,289.47 Fixed Shipping $19,610.52 Advertising $1,80,000.00 Insurance $11,000.00 Depreciation $44,000.00 Operating Profit $44,03,448.08