Cost Behavior and Cost-Volume-Profit Analysis for Many Glacier Hotel
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 20X1 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 20X3. 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 20X3 fire destroyed the hotel’s accounting records. However, a new system put into place before the 20X4 season provides the following aggregated data for the hotel’s canoe and paddle manufacturing and marketing activities:
Manufacturing Data: | ||||||||||||||
Year | Number of Canoes Manufactured |
Total Canoe Manufacturing Costs |
Year | Number of Paddles Manufactured |
Total Paddle Manufacturing Costs |
|||||||||
20X9 | 250 | $103,000 | 20X9 | 900 | $38,500 | |||||||||
20X8 | 275 | 128,000 | 20X8 | 1,200 | 49,000 | |||||||||
20X7 | 240 | 108,000 | 20X7 | 1,000 | 44,000 | |||||||||
20X6 | 310 | 114,000 | 20X6 | 1,100 | 45,500 | |||||||||
20X5 | 350 | 141,500 | 20X5 | 1,400 | 52,000 | |||||||||
20X4 | 400 | 140,000 | 20X4 | 1,700 | 66,500 |
Marketing Data: | ||||||||||||||
Year | Number of Canoes Sold |
Total Canoe Marketing Costs |
Year | Number of Paddles Sold |
Total Paddle Marketing Costs |
|||||||||
20X9 | 250 | $45,000 | 20X9 | 900 | $7,500 | |||||||||
20X8 | 275 | 43,000 | 20X8 | 1,200 | 9,000 | |||||||||
20X7 | 240 | 44,000 | 20X7 | 1,000 | 8,000 | |||||||||
20X6 | 310 | 51,000 | 20X6 | 1,100 | 8,500 | |||||||||
20X5 | 350 | 62,000 | 20X5 | 1,400 | 10,000 | |||||||||
20X4 | 400 | 60,000 | 20X4 | 1,700 | 11,500 |
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.
Variable cost per unit | $ |
Total fixed cost | $ |
b. Use the high-low method to estimate the per-unit variable costs and total fixed costs for the paddle product line.
Variable cost per unit | $ |
Total fixed cost | $ |
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)
BE units | canoes |
b. The paddle product line only (i.e., single-product setting)
BE units | paddles |
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).
Canoe BE units | canoes |
Paddle BE units | paddles |
4. Cost Classification
a. Classify the manufacturing costs, marketing costs, and customer service hotline costs either as production costs or period costs.
All manufacturing costs are product costs. All marketing costs and customer hotline costs are period costs
b. For the period costs, further classify them into either selling expenses or general and administrative expenses.
Marketing costs are selling oriented; therefore, the marketing period costs would be further classified as selling expenses . Customer hotline costs relate to the customer service section of the value chain and would be further classified as general and administrative expense .
5. Sensitivity Cost-Volume-Profit Analysis and Production Versus Period Costs, Multiple- Product Setting
If both the variable and fixed production costs (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.
Canoe target income units | canoes |
Paddle target income units | paddles |
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 assuming that it sells 700 canoes and 2,500
paddles next year.
total MOS units above total BE units
$ MOS in sales dollars
Please find below table useful to compute desired results: -
End results would be as follows: -
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