Question 126: Marksdundar Mifflin Manufactures And Sells The

Question 126 Marksdundar Mifflin Manufactures And Sells Three Prod

Question 1: (26 marks) Dundar Mifflin manufactures and sells three products: X, Y, and Z. Annual fixed costs are $515,250 and data about the three products follow for 2017. X, Y, and Z sales are $150,000, $480,000, and $790,000 respectively, with variable costs provided for each product. Required: 1) Determine the breakeven point. 2) The management expects sales to increase by 9% in 2018. What is the expected operating income in 2018?

Question 2: (24 marks) Dundar Mifflin makes electronic products for the RCMP. The following data is for the first six months: direct labor hours and manufacturing overhead cost for each month are given. Required: 1) Use the high-low method to estimate the cost formula. 2) Estimate the total overhead cost at an activity level of 48,000 machine hours, using the separate estimates you obtained for its components.

Question 3: (30 marks) Costco has recently started to take customer orders over the website. Data for the first six months including monthly web site costs and number of web site hits are provided. Required: 1) Using the high-low method, estimate the variable cost per web site hit and the monthly fixed costs. 2) Determine the cost equation to estimate the customer web site expenses for Costco Online. 3) If Costco expects 9,500 web site hits for July, what are their anticipated costs for July?

Question 4: (20 marks) Gandalf and Company manufactures table tennis equipment. The following activities and costs are listed. Please classify each activity as one of the following: fixed, mixed, contribution, cost behavior, variable, curvilinear, account analysis, regression analysis.

• 1. Changes in cost, but not in direct proportion to changes in volume
• 2. Costs that do not change while changes in volume
• 3. Sales – Variable Expense
• 4. Cost changes as volume changes
• 5. Cost that changes while changes in volume
• 6. Cost behavior is not linear
• 7. Equation which expresses how a cost behaves
• 8. Procedure that uses all the historical data points
• 9. Utility charges per kilowatt plus monthly fee
• 10. Monthly rent charges

Paper For Above instruction

Introduction:

The analysis of cost behavior, breakeven points, and cost estimation techniques are fundamental aspects of managerial accounting that enable organizations to make informed financial decisions. Understanding how costs vary with activity levels and identifying fixed versus variable components are critical in planning, controlling, and forecasting financial performance. This paper discusses these concepts through detailed analysis of four problem scenarios involving product sales, overhead estimation, web expenses, and activity classification in manufacturing operations.

Question 1: Breakeven Analysis and Income Projection

Dundar Mifflin's scenario involves three products: X, Y, and Z. To determine the breakeven point, we first identify the contribution margin per product. Given the sales and costs, the contribution margin for each can be calculated. For example, if the variable cost for product X is provided as $80,000 on sales of $150,000, then its contribution margin is $70,000, and per unit margin depends on the number of units sold. Similarly, calculations for Y and Z follow, enabling the weighted average contribution margin ratio.

The breakeven point in sales dollars is obtained by dividing total fixed costs by the contribution margin ratio. Once this is established, projecting operating income for 2018 with a 9% sales increase involves multiplying current sales figures by 1.09, calculating the new contribution margin, and subtracting fixed costs. This approach highlights how sales volume influences profitability.

Question 2: Overhead Cost Estimation Using High-Low Method

The high-low method isolates variable and fixed components by analyzing the months with the highest and lowest activity levels. For the given data, the month with the highest direct labor hours (e.g., February) and associated overhead costs are used to estimate the variable overhead rate per hour. For instance, if February has 60,000 hours and overhead of $320,000, and June has 25,000 hours and $162,500 overhead, the variable rate is calculated as the difference in overhead divided by the difference in hours.

Once the variable rate is estimated, fixed overhead is determined by subtracting the total variable overhead (variable rate multiplied by the activity level) from the total overhead at either the high or low activity point. To estimate overhead at 48,000 machine hours, the variable component is multiplied by 48,000, and fixed costs are added, providing an approximate total overhead figure.

Question 3: Web Expenses Cost Analysis

The high-low method is applied again to estimate the cost behavior of web site expenses. By choosing the months with the highest and lowest hits (e.g., June with 8,820 hits and the month with the lowest hits), the variable cost per hit is determined by dividing the difference in costs by the difference in hits. The fixed costs are then derived by substituting into the cost equation derived from the high-low data.

The cost equation models the total expense as a sum of fixed costs and variable costs per hit multiplied by the number of hits. For the projected 9,500 hits in July, this equation estimates the total expected costs, assisting in budgeting and financial planning.

Question 4: Classifying Cost Activities

Cost activity classification is vital for cost behavior analysis. Items like "changes in cost, but not in direct proportion to changes in volume" are classified as mixed or semi-variable activities. Costs that do not change with volume are fixed, such as rent or utility base charges. Activities like "sales minus variable expenses" are part of contribution margin analysis. When cost behavior is not linear, regression analysis may be used to model the pattern. The activity classification clarifies how costs respond to operational changes, guiding managerial decisions.

For example, utility charges that include a fixed monthly fee plus variable charges per kilowatt are "mixed" costs. Similarly, monthly rent is a fixed cost, unaffected by production volume. Regression and account analysis are analytical techniques to further interpret complex cost behaviors, especially where relationships are non-linear or data points vary significantly.

Conclusion:

Understanding and analyzing cost behavior, estimating overhead costs, and determining breakeven points are essential skills in managerial accounting. Effective application of methods such as the high-low technique and regression analysis enables organizations to make strategic financial decisions, optimize operations, and forecast future expenses accurately. Classifying costs into fixed, variable, or mixed categories provides clarity on how operational changes impact organizational expenses, ultimately supporting sustainable business growth and profitability.

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