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100 %
295 of 848
Q
C
III
attempt to operate in desires to achieve a maximum return on us investment?
Antioch Extraction, which mines ore in Montana, uses a calendar year for both financial-reporting and
tax purposes. The following selected costs were incurred in December, the low point of activity, when
1,500 tons of ore were extracted:
Problem 6-37
Cost Behavior and Analysis;
High-Low Method
(LO 6-2, 6-4, 6-5)
Royalties
Trucking and hauling
$ 25,000
11,000
345,000
$135,000
275,000
2. Total cost for 1,650 tons:
$823,500
B
Straight-line depreciation
Charitable contributions*
Mining labor/fringe benefits
*Incurred only in December.
Peak activity of 2,600 tons occurred in June, resulting in mining labor/fringe benefit costs of $598,000,
royalties of $201,000, and trucking and hauling outlays of $325,000. The trucking and hauling outlays
exhibit the following behavior:
Less than 1,500 tons
From 1,500–1,899 tons
From 1,900–2,299 tons
From 2,300–2,699 tons
$250,000
275,000
300,000
325,000
Antioch uses the high-low method to analyze costs.
Required:
1. Classify the five costs listed in terms of their behavior: variable, step-variable, committed fixed,
discretionary fixed, step-fixed, or semivariable. Show calculations to support your answers for
mining labor/fringe benefits and royalties.
2. Calculate the total cost for next February when 1,650 tons are expected to be extracted.
3. Comment on the cost-effectiveness of hauling 1,500 tons with respect to Antioch’s trucking/haul-
ing cost behavior. Can the company’s effectiveness be improved? How?
4. Distinguish between committed and discretionary fixed costs. If Antioch were to experience severe
economic difficulties, which of the two types of fixed costs should management try to cut? Why?
5. Specu
as to why the company’s charitable contribution cost arises only in December.
Nation’s Capital Fitness, Inc. operates a chain of fitness centers in the Washington, D.C., area. The
firm’s controller is accumulating data to be used in preparing its annual profit plan for the coming year.
The cost behavior pattern of the firm’s equipment maintenance costs must be determined. The account-
ing staff has suggested the use of an equation, in the form of Y = a + bx, for maintenance costs. Data
regarding the maintenance hours and costs for last year are as follows:
Problem 6–38
High-Low Method; Fitness
Centers
(LO 6-1, 6-2, 6-5)
с
3. Cost prediction at 590
hours of activity, mainte-
nance cost: $4,995
5
Hours of
Maintenance Service
Maintenance
Costs
Month
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341
of 848
a
C
III
b. If fixed costs remain constant, what must management do to the variable cost per unit? By
how much must unit variable cost change?
4. Determine the impact (increase, decrease, or no effect) of the following operating changes.
a. Effect of an increase in direct material costs on the break-even point.
b. Effect of an increase in fixed administrative costs on the unit contribution margin.
C. Effect of an increase in the unit contribution margin on net income.
d. Effect of a decrease in the number of units sold on the break-even point.
B
Lawrence Corporation sells two ceiling fans, Deluxe and Basic. Current sales total 60,000 units, consist-
ing of 39,000 Deluxe units and 21,000 Basic units. Selling price and variable cost information follow.
Problem 7-38
Sales Mix and Employee
Compensation; Operating
Changes
(LO 7-4, 7-5)
Selling price
Variable cost
Deluxe
$86
65
Basic
$74
41
2(C). Commissions, total:
$535,600
Salespeople currently receive flat salaries that total $400,000. Management is contemplating a change
to a compensation plan that is based on commissions in an effort to boost the company’s presence in the
marketplace. Two plans are under consideration:
Plan A:
10% commission computed on gross dollar sales. Deluxe sales are expected to total
45,500 units; Basic sales are anticipated to be 19,500 units.
30% commission computed on the basis of production contribution margins. Deluxe
sales are anticipated to be 26,000 units; Basic sales are expected to total 39,000 units.
Plan B:
a.
Required:
1. Define the term sales mix.
2. Comparing Plan A to the current compensation arrangement:
Will Plan A achieve management’s objective of an increased presence in the marketplace?
Briefly explain.
b. From a sales-mix perspective, will the salespeople be promoting the product that one would
logically expect? Briefly discuss.
C. Will the sales force likely be satisfied with the results of Plan A? Why?
d. Will Lawrence likely be satisfied with the resulting impact of Plan A on company
profitability? Why?
312
Chapter 7 Cost-Volume-Profit Analysis
с
3. Assume that Plan B is under consideration.
a. Compare Plan A and Plan B with respect to total units sold and the sales mix. Comment on the
results.
b. In comparison with flat salaries, is Plan B more attractive to the sales force? To the company?
Show calculations to support your answers.
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