Reference no: EM13863516

Using the High-Low Method to Estimate Variable and Fixed Costs

Located on Swiftcurrent Lake in Glacier National Park, Many Glacier Hotel was built in 1915 by the Great Northern Railway. In an effort to supplement its lodging revenue, the hotel decided in 2003 to begin manufacturing and selling small wooden canoes decorated with symbols hand painted by Native Americans living near the park. Due to the great success of the canoes, the hotel began manufacturing and selling paddles as well in 2006. Many hotel guests purchase a canoe and paddles for use in self-guided tours of Swiftcurrent Lake. Because production of the two products began in different years, the canoes and paddles are produced in separate production facilities and employ different laborers. Each canoe sells for $500, and each paddle sells for $50. A 2006 fire destroyed the hotel's accounting records. However, a new system put into place before the 2007 season provides the following aggregated data for the hotel's canoe and paddle manufacturing and marketing activities:

Using the High-Low Method to Estimate Variable and Fixed Costs Enlarge Image

Using the High-Low Method to Estimate Variable and Fixed Costs Enlarge Image

Required:

1. High-Low Cost Estimation Method

a. Use the high-low method to estimate the per-unit variable costs and total fixed costs for the canoe product line.

b. Use the high-low method to estimate the per-unit variable costs and total fixed costs for the paddle product line.

2. Cost-Volume-Profit Analysis, Single-Product Setting

Use CVP analysis to calculate the break-even point in units for

a. The canoe product line only (i.e., single-product setting)

b. The paddle product line only (i.e., single-product setting)

3. Cost-Volume-Profit Analysis, Multiple-Product Setting

The hotel's accounting system data show an average sales mix of approximately 300 canoes and 1,200 paddles each season. Significantly more paddles are sold relative to canoes because some inexperienced canoe guests accidentally break one or more paddles, while other guests purchase additional paddles as presents for friends and relatives. In addition, for this multiple-product CVP analysis, assume the existence of an additional $30,000 of common fixed costs for a customer service hotline used for both canoe and paddle customers. Use CVP analysis to calculate the break-even point in units for both the canoe and paddle product lines combined (i.e., the multiple-product setting).

4. Cost Classification

a. Classify the manufacturing costs, marketing costs, and customer service hotline costs either as production expenses or period expenses.

b. For the period expenses, further classify them into either selling expenses or general and administrative expenses.

5. Sensitivity Cost-Volume-Profit Analysis and Production Versus Period Expenses, Multiple-Product Setting

If both the variable and fixed production expenses (refer to your answer to Requirement 1) associated with the canoe product line increased by 5% (beyond the estimate from the high-low analysis), how many canoes and paddles would need to be sold in order to earn a target income of $96,000? Assume the same sales mix and additional fixed costs as in Requirement 3.

6. Margin of Safety

Calculate the hotel's margin of safety (both in units and in sales dollars) for Many Glacier Hotel, assuming the same facts as in Requirement 3, and it sells 700 canoes and 2,500 paddles next year.