L ancer Audio produces a high-end DVD player that sells for $1,300. Total operat
ID: 2421071 • Letter: L
Question
Lancer Audio produces a high-end DVD player that sells for $1,300. Total operating expenses for the past 12 months are as follows:
Units Produced and Sold
Cost
August
165
$140,345
September
130
116,990
October
150
130,650
November
145
127,670
December
155
133,790
January
170
143,910
February
140
123,520
March
150
130,950
April
145
127,385
May
150
129,865
June
140
122,720
July
135
120,255
Required
Use the high-low method to estimate fixed and variable costs.
Based on these estimates, calculate the break-even level of sales in units. (Round to the nearest whole unit.)
Calculate the margin of safety for the coming August assuming estimated sales of 175 units.
Estimate total profit assuming production and sales of 175 units.
Comment on the limitations of the high-low method in estimating costs for Lancer Audio.
Units Produced and Sold
Cost
August
165
$140,345
September
130
116,990
October
150
130,650
November
145
127,670
December
155
133,790
January
170
143,910
February
140
123,520
March
150
130,950
April
145
127,385
May
150
129,865
June
140
122,720
July
135
120,255
Explanation / Answer
Variable Cost per Unit = y2 y1/x2 x1 Where, y2 is the total cost at highest level of activity; y1 is the total cost at lowest level of activity; x2 are the number of units/labor hours etc. at highest level of activity; and x1 are the number of units/labor hours etc. at lowest level of activity y2 143910 x2 170 y1 116990 x1 130 Variable Cost per Unit 673 Total Fixed Cost 29500 Cost Volume Formula y = $29,500 + 673x Break-even level of sales in units Fixed Cost/(Sale Price - Cost) 47 units Margin of Safety = (Current Sales Level – Breakeven Point)/ Current Sales Level 73.14% Total profit assuming production and sales of 175 units 80225 The limitation of high low method is that it is unreliable since it takes two extreme activity levels from a set of data of various activity levels to calculate variable and fixed cost.
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