E21-30 Determing mixed costs—the high-low method
The manager of Able Car Inspection reviewed the monthly operating costs for the past
year. The costs ranged from $4,000 for 1,000 inspections to $3,600 for 600 inspections.
1. Calculate the variable cost per inspection.
2. Calculate the total fixed costs.
3. Write the equation and calculate the operating costs for 800 inspections.
4. Draw a graph illustrating the total cost under this plan. Label the axes, and
show the costs at 600, 800, and 1,000 inspections.
E21-31 Calculating contribution margin ratio, preparing contribution margin
For its top managers, Worldwide Travel formats its income statement as follows:
Learning Objective 2
2. $245,000 sales level, VC $73,500
Variable Costs $95,250
Sales Revenue $317,500
Fixed Costs $175,000
Contribution Margin $222,250
Operating Income $47,250
Contribution Margin Income Statement
Three Months Ended March 31, 2014
Worldwide’s relevant range is between sales of $245,000 and $364,000.
1. Calculate the contribution margin ratio.
2. Prepare two contribution margin income statements: one at the $245,000 sales
level and one at the $364,000 sales level. (Hint: The proportion of each sales
dollar that goes toward variable costs is constant within the relevant range.)
E21-37 Using sensitivity analysis
Dependable Drivers Driving School charges $250 per student to prepare and administer
written and driving tests. Variable costs of $100 per student include trainers’
wages, study materials, and gasoline. Annual fixed costs of $75,000 include the
training facility and fleet of cars.
1. For each of the following independent situations, calculate the contribution
margin per unit and the breakeven point in units by first referring to the
original data provided:
a. Breakeven point with no change in information.
b. Decrease sales price to $220 per student.
c. Decrease variable costs to $50 per student.
d. Decrease fixed costs to $60,000.
2. Compare the impact of changes in the sales price, variable costs, and fixed costs
on the contribution margin per unit and the breakeven point in units.
P21-63 Computing breakeven sales and sales needed to earn a target profit;
performing sensitivity analysis
This problem continues the Davis Consulting, Inc. situation from Problem P19-40
of Chapter 19. Davis Consulting provides consulting service at an average price of
$175 per hour and incurs variable cost of $100 per hour. Assume average fixed costs
are $5,250 a month.
1. What is the number of hours that must be billed to reach the breakeven point?
2. If Davis desires to make a profit of $3,000, how many consulting hours must be
3. Davis thinks it can reduce fixed cost to $3,990 per month, but variable cost will
increase to $105 per hour. What is the new breakeven point in hours?