Applesauce Produced Energy Cost

Exercise 6-25

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Jonathan Macintosh is a highly successful Pennsylvania orchardman who has formed his own company to produce and package applesauce. Apples can be stored for several months in cold storage, so apple-sauce production is relatively uniform throughout the year. The recently hired controller for the firm is about to apply the high-low method in estimating the company’s energy cost behavior. The following costs were incurred during the past 12 months:

Month Pints of Applesauce Produced Energy Cost

January ……………………………………… 35,000 ……………………………………….\$23,400

February ……………………………………..21,000 ……………………………………….22,100

March …………………………………………22,000 ……………………………………….22,000

April …………………………………………..24,000 ……………………………………….22,450

May ……………………………………………30,000 ……………………………………….22,900

June ……………………………………………32,000 ……………………………………….23,350

July …………………………………………….40,000 ……………………………………….28,000

August ………………………………………..30,000 ……………………………………….22,800

September ……………………………………30,000 ……………………………………….23,000

October ……………………………………….28,000 ……………………………………….22,700

November ……………………………………41,000 ……………………………………….24,100

December ……………………………………39,000 ……………………………………….24,950

Required:

1. Use the high-low method to estimate the company’s energy cost behavior and express it in equation form.

2. Predict the energy cost for a month in which 26,000 pints of applesauce are produced.

Problem 7-37

Houston-based Advanced Electronics manufactures audio speakers for desktop computers. The following data relate to the period just ended when the company produced and sold 42,000 speaker sets:

Sales……………………………………………………………………………………………………………..\$3,360,000

Variable costs…………………………………………………………………………………………………….840,000

Fixed costs……………………………………………………………………………………………………….2,280,000

Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average \$18 per set; annual fixed costs are anticipated to be \$1,984,000. (In the following requirements, ignore income taxes.)

Required:

1. Calculate the company’s current income and determine the level of dollar sales needed to double that figure, assuming that manufacturing operations remain in the United States.

2. Determine the break-even point in speaker sets if operations are shifted to Mexico.

3. Assume that management desires to achieve the Mexican break-even point; however, operations will remain in the United States.

a. If variable costs remain constant, what must management do to fixed costs? By how much must fixed costs change?

b. If fixed costs remain constant, what must management do to the variable cost per unit? By how much must unit variable cost change?

4. Determine the impact (increase, decrease, or no effect) of the following operating changes.

a. Effect of an increase in direct material costs on the break-even point.

b. Effect of an increase in fixed administrative costs on the unit contribution margin.

c. Effect of an increase in the unit contribution margin on net income.

d. Effect of a decrease in the number of units sold on the break-even point.

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