6-3B – High-Low Method, Scattergraph, Least-squares Regression

Charming Clothiers manufactures neckties and bow ties. The company has the following cost
data:
Unit Produced Utilities Cost
July 200 800
August 220 810
September 250 880
October 350 950
November 300 900
December 150 850

Required:
a.) Using the high-low method, estimate the cost formula (write it in y=mx+b format).
i. Using your answer from part a.) above, assuming in the following month the company
expects to make 100 units, what will be the company’s estimated utilities cost.
b.) Using the scattergraph method, estimate the cost formula.
c.) Using the least squares regression method, estimate the cost formula.
d.) Are there any factors other than the number of units produced that may contribute to a
variation in utilities cost?

Answer:
High Cost −Low Cost 950−800 150
a.) = = =¿ $1 /unit
High Activity−Low Activity 350−200 150
Y = mx + b 950 = 1(350) + b
Y = 1x + b b = 600

Y = x + 600
i) Y = 100 + 600
Y = 700
b.)
1000

950

900

850

800

750

700
100 150 200 250 300 350 400

Y = mx + b
850 = m(150) + 750
M = 0,66

Y = 0,66x + 750

c.) Y = 0,66x + 750

7-1A – CVP Analysis, Margin of Safety, Degree of Operating Leverage
Charming Clothiers manufactures neckties and bow ties. The company has the following
information:
The company’s sales price is $30 per unit. The variable costs of producing bowties is $18 per
unit. The company expects to have fixed costs of $60,000 next year. The company expects to
sell 8,000 bowties next year. Assume no taxes.
a.) Calculate the breakeven point in units.
b.) Calculate the breakeven point in dollars.
c.) How many units must the company sell to reach a target profit of $50,000?
d.) Prepare a budgeted contribution format income statement.
e.) Compute the margin of safety in both dollar and percentage terms.
f.) Compute the degree of operating leverage.
g.) If sales increase by 20% in the following year, how much would net income increase (use the
degree of operating leverage to compute your answer).

Answer:

¿ Expenses 60,000
a.) Breakeven unit = = =¿ 5,000 unit
CMunit 12

b.) Breakeven dolars = 5,000 x 30 = 150,000

¿ Expenses +Target Operating Profit 60,000+50,000

c.) Target sales in unit = = =¿ 9167 unit
CMperunit 12

d.) Sales revenue 240,000

Variable expenses 144,000
Contribution margin 96,000
Fixed expenses 60,000
Operating income $35,000

e.) Safety Margin = Budgeted Sales – Breakeven Sales

= 240,000 – 150,000
= $90,000
MoS / Budget Sales = 90,000 / 240,000
= 37,5%

f.) For every 1% decrease in sales profits will decrease by 2,667%

 g.) 20% x 2,667 = 53,333%
Old net income was 35,000 gonna up by 53,333% = $18,666
New net income = 35,000 + 18,666 = $53,666

7-1B – CVP Analysis, Margin of Safety, Degree of Operating Leverage

Flora’s Flats produces comfortable and portable women’s shoes designed to be worn as a second
pair of shoes after a formal event. The company has the following financial information:

The company’s sales price is $20 per unit. The variable costs of producing flats is $6 per unit.
The company expects to have fixed costs of $10,000 next year. The company expects to sell
1,000 pairs of flats next year. Assume no taxes.

a.) Calculate the breakeven point in units.

b.) Calculate the breakeven point in dollars.
c.) How many units must the company sell to reach a target profit of $25,000?
d.) Prepare a budgeted contribution format income statement.
e.) Compute the margin of safety in both dollar and percentage terms.
f.) Compute the degree of operating leverage.
g.) If sales increase by 20% in the following year, how much would net income increase (use the
degree of operating leverage to compute your answer).

Answer:

¿ Expenses 10,000
a.) Breakeven unit = = =¿ 714 unit
CMunit 14

b.) Breakeven dolars = 714 x 20 = 14,280

¿ Expenses +Target Operating Profit 1 0,000+25 , 000

c.) Target sales in unit = = =¿ 2500
CMperunit 14
unit

d.) Sales revenue 20,000

Variable expenses 6,000_
Contribution margin 14,000
Fixed expenses 10,000
 Operating income $4,000

e.) Safety Margin = Budgeted Sales – Breakeven Sales

= 20,000 – 14,280
= $5,720
MoS / Budget Sales = 5,720 / 20,000
= 28,6%

f.) For every 1% decrease in sales profits will decrease by 3,5%

g.) 20% x 3,5 = 70%

Old net income was 4,000 gonna up by 70% = $2,800
New net income = 4,000 + 2,800 = $6,800

7-2A – CVP Analysis, “What if?” Analysis

Hewins Inc’s projected contribution-format income statement for the upcoming year is shown
below:

Sales (10,000 units) $2,000,000

Variable expenses 1,400,000
Contribution margin 600,000
Fixed expenses 500,000
Net operating income $100,000

Required:
a.) Compute the breakeven point in units.
b.) Compute the breakeven point in dollars.
c.) If the company wishes to earn a target profit of $300,000, how many units must be sold?
d.) Compute the company’s margin of safety. State your answer in both dollar and percentage
terms.
e.) The company’s manager thinks that increasing advertising by $150,000 will increase sales by
$250,000. If he is correct, what will be the net dollar advantage or disadvantage of making this
change?
f.) Refer to the original data, the company’s manager believes that using a slightly cheaper direct
material will decrease variable expenses (per unit) by 10% will reduce units sold by 5%. If he is
correct, what will be the net dollar advantage or disadvantage of making this change?
g.) Refer to the original data, the company’s direct labour workforce received a raise that will
increase variable expenses by $10 per unit. The manager wishes to maintain the exact same
contribution margin ratio as the original data. What sales price will need to be charged to
maintain the same contribution margin ratio?

Answer:
¿ Expenses 50 0,000
a.) Breakeven unit = = =¿ 8,333unit
CMunit 60

b.) Breakeven dolars = 8,333 x 200 = 1,666,600

¿ Expenses +Target Operating Profit 50 0,000+300 , 000

c.) Target sales in unit = = =¿
CMperunit 60
13,333

d.) Safety Margin = Budgeted Sales – Breakeven Sales

= 2,000,000 – 1,666,600
= $333,400
MoS / Budget Sales = 333,400 / 2,000,000
= 16,6%

e.) Itu benar, keuntungannya adalah meningkatkan volume penjualan, membantu

pengenalan produk dengan mudah ke pasaran, membantu menciptakan citra dan
reputasi, memperlancar permintaan produk, menciptakan pasar yang sangat
responsive.

f.) Perubahan tersebut sudah benar, karena perusahaan tidak perlu mengeluarkan
pengeluaran yang besar untuk membeli bahan langsung, dapat menghemat
pengeluaran, dan keuntungan bertambah, tetapi unit yang dijual dapat berkurang
akibat kebijakan tersebut.

g.) Biaya variabel per unit yang semula $140 bertambah $10 menjadi $150. Untuk
mempertahankan rasio konstribusi margin yang sama seperti sebelumnya maka
perusahaan harus menetapkan harga perjualan yang semula $200 per unit menjadi
$165 per unit

7-2B – CVP Analysis, “What if?” Analysis

Kevin Co.’s projected contribution-format income statement for the upcoming month is shown
below:

Sales (500 units) $10,000

Variable expenses 4,000
Contribution margin 6,000
Fixed expenses 1,000
Net operating income $5,000

Required:
a.) Compute the breakeven point in units.
b.) Compute the breakeven point in dollars.
c.) If the company wishes to earn a monthly target profit of $10,000, how many units must be
sold each month?
d.) Compute the company’s margin of safety. State your answer in both dollar and percentage
terms.
e.) The company’s manager thinks that adding a salaried sales staff member at a cost of $2,000
per month will increase sales by $4,000 per month. If he is correct, what will be the net dollar
advantage or disadvantage of making this change?
f.) Refer to the original data, the company’s manager believes that a new production process will
improve profitability. He plans to add new machinery that will cut variable expenses in half.
This will increase fixed expenses by $3,000. He expects after this change the company’s unit
sales will increase by 25%. If he is correct, what will be the net dollar advantage or disadvantage
of making this change? g.) Refer to the original data, the company expects to decrease variable
expenses by 5% and wishes to pass the savings along to customers. The manager wishes to
maintain the exact same contribution margin ratio as the original data. What sales price will
need to be charged to maintain the same contribution margin ratio?

Answer:
¿ Expenses 1 ,000
a.) Breakeven unit = = =¿ 83 unit
CMunit 12

b.) Breakeven dolars = 83 x 20 = 1,660

¿ Expenses +Target Operating Profit 1 , 000+1 0,000

c.) Target sales in unit = = =¿
CMperunit 12
916

d.) Safety Margin = Budgeted Sales – Breakeven Sales

= 10,000 – 1,660
= $8,340
MoS / Budget Sales = 8,340 / 10,000
= 83,4%

e.) Jika kenaikan biaya operasional kantor tidak sebanding atau malah tidak
berkorelasi positif dengan peningkatan prouktivitas, maka bisnis berjalan tidak
 efisien. Akibatnya, perusahaan menjadi tidak kompetitif dan kehilangan pasar,
sehingga dapat menyebabkan penurunan pendapatan.

f.) Kebijakan tersebut sudah benar, karena penambahan mesin dapat meningkatkan
tingkat produksi lebih banyak lagi sehingga pendapatan juga akan naik walaupun
akan mengalami kenaikan biaya tetap akibat kebijakan tersebut.

g.) Biaya variabel yang semula $4,000 dikurangi 5% menjadi $3,800. Untuk
mempertahankan rasio konstribusi margin yang sama seperti sebelumnya maka
perusahaan harus menetapkan harga perjualan yang semula $20 per unit menjadi
$19,9 per unit