A company reports the following information about its unit sales and its cost of sales. Each unit sells for $500. Use these data to prepare a scatter diagram. Draw an estimated line of cost behavior and determine whether the cost appears to be variable, fixed, or mixed.
Cost of sales
Cost of sales
The cost appears to be curvilinear because it is not increasing at a constant rate.
The diagram under which the data related to cost and the units manufactured is plotted on the graph is known as a scatter diagram.
The above cost cannot be classified as fixed because it is increasing as the production does and also it is not increasing at a constant rate therefore, it is not a variable cost. It is a curvilinear cost because the cost is increasing as per the volume of production but not at a constant rate.
Following are five series of costs A through E measured at various volume levels. Identify each series as either fixed, variable, mixed, step-wise, or curvilinear.
Patriot Co. manufactures and sells three products: red, white, and blue. Their unit selling prices are red, $20; white, $35; and blue, $65. The per unit variable costs to manufacture and sell these products are red, $12; white, $22; and blue, $50. Their sales mix is reflected in a ratio of 5:4:2 (red:white:blue). Annual fixed costs shared by all three products are $250,000. One type of raw material has been used to manufacture all three products. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: red, by $6; white, by $12; and blue, by $10. However, the new material requires new equipment, which will increase annual fixed costs by $50,000. (Round answers to whole composite units.)
1. If the company continues to use the old material, determine its break-even point in both sales units and sales dollars of each individual product.
2. If the company uses the new material, determine its new break-even point in both sales units and sales dollars of each individual product.
3. What insight does this analysis offer management for long-term planning?
Refer to the information in Exercise 18-16. The marketing manager believes that increasing advertising costs by $81,000 in 2018 will increase the company’s sales volume to 11,000 units. Prepare a forecasted contribution margin income statement for 2018 assuming the company incurs the additional advertising costs.
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