Managerial Accounting

Integrative Exercise Cost Behavior and Cost-Volume-Profit Analysis for Many Glacier Hotel

Using the High-Low Method to Estimate Variable and Fixed Costs

Located on Swiftcurrent Lake in Glacier National Park, Many Glacier Hotel was built in 1915 by the Great Northern Railway. In an effort to supplement its lodging revenue, the hotel decided in 20X1 to begin manufacturing and selling small wooden canoes decorated with symbols hand painted by Native Americans living near the park. Due to the great success of the canoes, the hotel began manufacturing and selling paddles as well in 20X3. Many hotel guests purchase a canoe and paddles for use in self-guided tours of Swiftcurrent Lake. Because production of the two products began in different years, the canoes and paddles are produced in separate production facilities and employ different laborers. Each canoe sells for $500, and each paddle sells for $50. A 20X3 fire destroyed the hotel’s accounting records. However, a new system put into place before the 20X4 season provides the following aggregated data for the hotel’s canoe and paddle manufacturing and marketing activities:

Manufacturing Data:
Year	Number of Canoes Manufactured	Total Canoe Manufacturing Costs		Year	Number of Paddles Manufactured	Total Paddle Manufacturing Costs
20X9		250			$103,000			20X9		900			$38,500
20X8		275			128,000			20X8		1,200			49,000
20X7		240			108,000			20X7		1,000			44,000
20X6		310			114,000			20X6		1,100			45,500
20X5		350			141,500			20X5		1,400			52,000
20X4		400			140,000			20X4		1,700			66,500

Marketing Data:
Year	Number of Canoes Sold	Total Canoe Marketing Costs		Year	Number of Paddles Sold	Total Paddle Marketing Costs
20X9		250			$45,000			20X9		900			$7,500
20X8		275			43,000			20X8		1,200			9,000
20X7		240			44,000			20X7		1,000			8,000
20X6		310			51,000			20X6		1,100			8,500
20X5		350			62,000			20X5		1,400			10,000
20X4		400			60,000			20X4		1,700			11,500

Required:

1.  High-Low Cost Estimation Method

a. Use the high-low method to estimate the per-unit variable costs and total fixed costs for the canoe product line.

Variable cost per unit	$fill in the blank 1
Total fixed cost	$fill in the blank 2

b. Use the high-low method to estimate the per-unit variable costs and total fixed costs for the paddle product line.

Variable cost per unit	$fill in the blank 3
Total fixed cost	$fill in the blank 4

2.  Cost-Volume-Profit Analysis, Single-Product Setting Use CVP analysis to calculate the break-even point in units for

a. The canoe product line only (i.e., single-product setting)

BE units

fill in the blank 5  canoes

b. The paddle product line only (i.e., single-product setting)

BE units

fill in the blank 6  paddles

3.   Cost-Volume-Profit Analysis, Multiple-Product Setting

The hotel's accounting system data show an average sales mix of approximately 300 canoes and 1,200 paddles each season. Significantly more paddles are sold relative to canoes because some inexperienced canoe guests accidentally break one or more paddles, while other guests purchase additional paddles as presents for friends and relatives. In addition, for this multiple-product CVP analysis, assume the existence of an additional $30,000 of common fixed costs for a customer service hotline used for both canoe and paddle customers. Use CVP analysis to calculate the break-even point in units for both the canoe and paddle product lines combined (i.e., the multiple-product setting).

Canoe BE units	fill in the blank 7  canoes
Paddle BE units	fill in the blank 8  paddles

4.  Cost Classification

a. Classify the manufacturing costs, marketing costs, and customer service hotline costs either as production costs or period costs.

All manufacturing costs are 

 costs. All marketing costs and customer hotline costs are 

 costs

b. For the period costs, further classify them into either selling expenses or general and administrative expenses.

Marketing costs are selling oriented; therefore, the marketing period costs would be further classified as 

. Customer hotline costs relate to the customer service section of the value chain and would be further classified as 

.

5.   Sensitivity Cost-Volume-Profit Analysis and Production Versus Period Costs, Multiple- Product Setting

If both the variable and fixed production costs (refer to your answer to Requirement 1) associated with the canoe product line increased by 5% (beyond the estimate from the high-low analysis), how many canoes and paddles would need to be sold in order to earn a target income of $96,000? Assume the same sales mix and additional fixed costs as in Requirement 3.

Canoe target income units	fill in the blank 13  canoes
Paddle target income units	fill in the blank 14  paddles

6.   Margin of Safety

Calculate the hotel’s margin of safety (both in units and in sales dollars) for Many Glacier Hotel, assuming the same facts as in Requirement 3, and assuming that it sells 700 canoes and 2,500 paddles next year. fill in the blank 15 total MOS units above total BE units

$fill in the blank 16 MOS in sales dollars

Contribution Margin, Break-Even Units, Break-Even Sales, Margin of Safety, Degree of Operating Leverage

Aldovar Company produces a variety of chemicals. One division makes reagents for laboratories. The division's projected income statement for the coming year is:

Sales (203,000 units @ $70)	$14,210,000
Total variable cost	8,120,000
Contribution margin	$6,090,000
Total fixed cost	4,945,500
Operating income	$1,144,500

Required:

1.  Compute the contribution margin per unit, and calculate the break-even point in units. Calculate the contribution margin ratio and use it to calculate the break-even sales revenue. (Note: Round contribution margin ratio to four significant digits, and round the break-even sales revenue to the nearest dollar.)

Unit contribution margin	$fill in the blank 1
Break-even point in units	fill in the blank 2
Contribution margin ratio	fill in the blank 3
Break-even sales revenue	$fill in the blank 4

2.  The divisional manager has decided to increase the advertising budget by $250,000. This will increase sales revenues by $1 million. By how much will operating income increase or decrease as a result of this action? Use your answers from part 1 to determine the amount. $fill in the blank 5  

3.  Suppose sales revenues exceed the estimated amount on the income statement by $1,500,000. Without preparing a new income statement, by how much are profits underestimated? Use your answers from part 1 to determine the amount. $fill in the blank 7

4.  Compute the margin of safety based on the original income statement. Round your answer to the nearest dollar. $fill in the blank 8

5.  Compute the degree of operating leverage based on the original income statement. Round your answer to two decimal places. fill in the blank 9

If sales revenues are 8% greater than expected, what is the percentage increase in operating income? Round your answer to four decimal places before converting to a percentage. For example, 0.88349 would be rounded to 0.8835 and entered as 88.35%. fill in the blank 10 %

10,000

400

1,000

500

2,000

product

period

selling expenses

general and administrative expense

700

125,000

300

30

164,850

0.4286

Increase

5.32

80,000

40