High-Low Method
Method to separate mixed costs into variable and fixed components
Identify the highest and lowest levels of activity over a period of time
STEP 1: Calculate variable cost per unit
STEP 2: Calculate total fixed cost
STEP 3: Create and use e
Problem 1
Compute the missing amount in the accounting equation for each entity:
Assets
A
B
C
=
68,000
85,000
102,000
Liabilities +
Equity
25,000
31,000
49,000
43,000
54,000
53,000
Problem 2
Given the following information calculate net income for each of
Multiple Product Lines
Selling prices and variable costs differ for each product
Different contribution to profits
Weighted-average contribution margin computed
Sales mix provides weights to make up total product sales
Weights equal 100% of total product
Wonderland sells individual and family tickets, which include a meal, three
beverages, and unlimited use of the swimming pools. Wonderland has the
following ticket prices and variable costs for 2012:
It expects to sell two individual tickets for every fou
1
Primers on pricing
Price Elasticity of Demand
This note is linked to the discussion on pg 274. While you should read the
material in the textbook, please read this note to understand the math
related to price elasticity.
This is the key formula you shou
Contribution Margin Approach
Given fixed costs total $12,000. The contribution margin per event is $120
($200 sale price $80 variable cost)
Check your answer
Contribution Margin Ratio
Ratio of contribution margin to sales revenue
Used to compute the break
Breakeven Point
Sales level at which
operating income is zero:
Total revenues equal total costs (expenses)
Sales above breakeven result in a profit
Sales below breakeven result in a loss
Two methods to compute breakeven point:
Income statement approach
Sa
Water Park competes with Splash World by providing a variety of rides.
Story sells tickets at $50 per person as a one-day entrance fee. Variable
costs are $10 per person, and fixed costs are $240,000 per month.
Computing contribution margin, breakeven poi
Use the contribution margin ratio CVP formula to determine the sales
revenue Story Park needs to break even.
Use CVP analysis for profit planning, and graph the CVP relations
Using CVP to Plan Profits
Managers more interested in:
Sales level needed to ear
Types of Costs
The effect of volume of activity on costs
Variable costs
Increase or decrease in total in direct proportion to changes in the volume of activity
Fixed costs
Do not change over wide ranges of volume
Mixed costs
Have both variable and fixed c
Steps for Computing Breakeven Point with Multiple Product Lines
To compute breakeven sales in units for multiple products, complete the following three
steps:
STEP 1: Calculate the weighted-average contribution margin per unit
STEP 2: Calculate the breake
Used to compute the breakeven point in terms of sales dollars
Contribution margin is equal to:
Sales price variable cost
Contribution margin divided by sales revenue yields a percentage
Percentage of each dollar of sales revenue that contributes toward fi
2. Show the equation for determining the total utility cost for Martins.
$ 0.40 per machine hour + $2,240
Vijay owns a machine shop. In reviewing his utility bill for the last 12 months, he found
that his highest bill of $2,800 occurred in August when his
Breakeven Point
Sales level at which
operating income is zero:
Total revenues equal total costs (expenses)
Sales above breakeven result in a profit
Sales below breakeven result in a loss
Two methods to compute breakeven point:
Income statement approach
Sa
Absorption costing:
Considers fixed manufacturing costs as inventoriable product costs
Variable costing:
Considers fixed manufacturing costs as period costs (expenses)
Summary of Differences Between Absorption Costing and Variable Costing
Chapter 19 Summa
Range of volume:
Where total fixed costs remain constant and variable cost per unit remains constant
Outside the relevant range, costs can differ
S19-1: Variable, fixed, and mixed costs
Philadelphia Acoustics builds innovative speakers for music and home
Types of Costs
The effect of volume of activity on costs
Variable costs
Increase or decrease in total in direct proportion to changes in the volume of activity
Fixed costs
Do not change over wide ranges of volume
Mixed costs
Have both variable and fixed c
Graphing Cost-Volume-Profit Relations
Graph provides a picture that shows how changes in the levels of sales will affect profits
Four steps:
1. Choose a sales volume and plot the point for total sales revenue at that
volume
2. Draw the fixed cost line
3.