Using High-Low to Calculate Fixed Cost, Calculate the Variable Rate, and Construct a Cost Function

Pizza Vesuvio makes specialty pizzas. Vesuvio’s controller wants to calculate the fixed and variable costs associated with labor used in the restaurant. Data for the past eight months were collected:

Month Labor Cost($) Employee Hours

January 6,900 350

February 8,040 540

March 9,799 640

April 9,687 600

May 8,390 470

June 7,350 340

July 9,390 560

August 7,431 300

In your calculations, round the variable rate per employee to the nearest cent. If required, round your final answers to the nearest cent.

1. Using the high-low method, calculate the fixed cost of labor.

$

2. Using the high-low method, calculate the variable rate.

$ per employee hour

3. Using the high-low method, construct the cost formula for total labor cost.

Total labor cost = $ + ($ × Employee hours)

Variable Cost, Fixed Cost, Contribution Margin Income Statement

Head-First Company plans to sell 5,210 bicycle helmets at $75 each in the coming year. Product costs include:

Direct materials per helmet $30

Direct labor per helmet 8

Variable factory overhead per helmet 4

Total fixed factory overhead 20,000

Variable selling expense is a commission of $3 per helmet; fixed selling and administrative expense totals $29,500.

1. Calculate the total variable cost per unit. Round your answer to the nearest dollar.

$

2. Calculate the total fixed expense for the year. Round your answer to the nearest dollar.

$

Hide

3. Prepare a contribution margin income statement for Head-First Company for the coming year. Round your answer to the nearest dollar.

Head-First Company

Contribution Margin Income Statement

For the Coming Year

Variable Cost Ratio, Contribution Margin Ratio

Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Fixed factory overhead is $20,000 and fixed selling and administrative expense is $29,500.

1. Calculate the variable cost ratio. Round your answer to the nearest whole.

2. Calculate the contribution margin ratio. Round your answer to the nearest whole

Hide

3. Prepare a contribution margin income statement based on the budgeted figures for next year. In a column next to the income statement, show the percentages based on sales for sales, total variable cost, and total contribution margin. Enter percentages as whole numbers.

Head-First Company

Contribution Margin Income Statement

For the Coming Year

Units to Earn Target Income

Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense).

1. Calculate the number of helmets Head-First must sell to earn operating income of $81,900.

helmets

Hide

2. Check your answer by preparing a contribution margin income statement based on the number of units calculated.

Head-First Company

Contribution Margin Income Statement

Based on number of units calculated in part 1

Total

Break-Even Point in Units for a Multiple-Product Firm

Suppose that Head-First Company now sells both bicycle helmets and motorcycle helmets. The bicycle helmets are priced at $74 and have variable costs of $53 each. The motorcycle helmets are priced at $226 and have variable costs of $149 each. Total fixed cost for Head-First as a whole equals $58,900 (includes all fixed factory overhead and fixed selling and administrative expense). Next year, Head-First expects to sell 5,000 bicycle helmets and 2,000 motorcycle helmets.

Hide

1. Form a package of bicycle and motorcycle helmets based on the sales mix expected for the coming year. Any package with 5 bicycle helmets for every 2 motorcycle helmet is fine. For example, 5:2, or 10:4, or 30:12. Throughout the rest of this exercise, we will use 5:2.

Product

Price

Unit Variable Cost

Unit Contribution Margin

Sales Mix

Package Unit Contribution Margin

Bicycle helmets

Motorcycle helmets

Package total

2. Calculate the break-even point in units for bicycle helmets and for motorcycle helmets. Round interim calculations to nearest whole number.

Break-even bicycle helmets helmets

Break-even motorcycle helmets helmets

Hide

3. Check your answer by preparing a contribution margin income statement. Round your answer to the nearest dollar. If an amount is zero, enter “0”.

Head-First Company

Contribution Margin Income Statement

At Break-Even Point

Total

Contribution Margin Ratio, Variable Cost Ratio, Break-Even Sales Revenue

The controller of Sandoval Company prepared the following projected income statement:

Sales $90,000

Total Variable costs 74,000

Contribution margin $16,000

Total Fixed cost 6,600

Operating income $9,400

1. Calculate the contribution margin ratio. Round your answer to the nearest whole.

2. Calculate the variable cost ratio. Round your answer to the nearest whole.

3. Calculate the break-even sales revenue for Sandoval. If required, round your answer to nearest dollar.

4. Conceptual Connection: How could Andreston increase projected operating income without increasing the total sales revenue?

Calculating the Predetermined Overhead Rate, Applying Overhead to Production, Reconciling Overhead at the end of the Year, Adjusting Cost of Goods Sold for Under- and Overapplied Overhead

At the beginning of the year, Gaudi Company estimated the following:

Overhead $ 280,000

Direct labor hours 70,000

Gaudi uses normal costing and applies overhead on the basis of direct labor hours. For the month of January, direct labor hours were 8,550. By the end of the year, Gaudi showed the following actual amounts:

Overhead $ 286,000

Direct labor hours 69,600

Assume that unadjusted Cost of Goods Sold for Gaudi was $416,000.

1. Calculate the predetermined overhead rate for Gaudi. Round your answer to two decimal places, if rounding is required.

$ per direct labor hour

2. Calculate the overhead applied to production in January.

3. Calculate the total applied overhead for the year.

Was overhead over- or underapplied? By how much?