Managerial Accounting

Determining mixed costs—the high-low method
The manager of Quick Car Inspection reviewed the monthly operating costs for the past year. The costs ranged from $4,400 for 1,400 inspections to $4,200 for 1,000 inspections.
Requirements
1. Calculate the variable cost per inspection.
2. Calculate the total fixed costs.
3. Write the equation and calculate the operating costs for 1,200 inspections.
4. Draw a graph illustrating the total cost under this plan. Label the axes, and show
the costs at 1,000, 1,200, and 1,400 inspections.

E21-31 Calculating contribution margin ratio, preparing contribution margin
income statements
For its top managers, Global Travel formats its income statement as follows:

GLOBAL TRAVEL
Contribution Margin Income Statement
Three Months Ended March 31, 2016
Sales Revenue                                                $ 318,500
Variable Costs                                                    111,475
Contribution Margin                                        207,025
Fixed Costs                                                         175,000
Operating Income                                             $ 32,025

Global’s relevant range is between sales of $250,000 and $360,000.
Requirements
1. Calculate the contribution margin ratio.
2. Prepare two contribution margin income statements: one at the $250,000 sales
level and one at the $360,000 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
Intersection Driving School charges $500 per student to prepare and administer written
and driving tests. Variable costs of $150 per student include trainers’ wages, study materials, and gasoline. Annual fixed costs of $140,000 include the training facility and fleet of cars.

Requirements
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 $250 per student.
c. Decrease variable costs to $100 per student.
d. Decrease fixed costs to $122,500.
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 Daniels Consulting situation from Problem P19-40 of Chapter 19. Daniels Consulting provides consulting service at an average price of $120 per hour and incurs variable cost of $60 per hour. Assume average fixed costs are $3,900 a month.
Requirements
1. What is the number of hours that must be billed to reach the breakeven point?
2. If Daniels desires to make a profit of $4,500, how many consulting hours must be
completed?
3. Daniels thinks it can reduce fixed cost to $3,190 per month, but variable cost will
increase to $62 per hour. What is the new breakeven point in hours?

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