Lancer Audio produces a high-end DVD player that sells for $1,250. Total operati
ID: 2434255 • Letter: L
Question
Lancer Audio produces a high-end DVD player that sells for $1,250. Total operating expenses for the past 12 months are as follows:Units Produced
And sold Cost
August 125 $112,670
September 145 $121,990
October 150 $129,500
November 160 $131,500
December 165 $139,700
January 140 $117,400
February 145 $125,600
March 135 $115,400
April 130 $116,140
May 135 $119,220
June 145 $121,700
July 140 $119,050
Required:
A. Use the high-low method to estimate fixed and variable costs.
B. Based on these estimates, calculate the break-even level of sales in units.
C. Calculate the margin of safety for the coming August assuming estimated sales of 160 units.
D. Estimate total profit assuming production and sales of 160 units.
E. Comment on the limitations of the high-low method in estimating costs for lancer Audio.
Explanation / Answer
Hi-low method. 139,700-112,670/(165-125)= 675.75 (165 is high number of units produced, 125 is low). y= 675.75x +b 139,700= 675.75 (165) +b b= 28,201 (rounded to nearest dollar). Formula for costs in terms of units produced is Y= 675.75x +28,201. At a price of $1,250 variable margin is ($1,250-$675.75)= $574.25. So break even is 28201/574.25= 49.1 or 50 units Margin of safety at 160 units is 160-50= 110 units or $137,500. Profit at 160 units is 160* 574.25- 28210= $63,679. High low method only uses two data points, so definitely has shortcomings. Better to use ordinary least squares regression which takes into account all the data points.
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