Lance Audio produces a high-end dvd player that sells for $1250. Total operating
ID: 2665342 • Letter: L
Question
Lance Audio produces a high-end dvd player that sells for $1250. Total operating expenses for the past 12 months are as follows:
Unit Produced/ sold Cost
August 125units/ $112,670
September 145units/ 121,990
October 150units/ 129,500
November 160units/ 131,500
December 165units /139,700
January 140units/ 117,400
Feburary 145units/ 125,600
March 135units/ 115,400
April 130units/ 116,140
May 135units/ 119,220
June 145units/ 121,700
July 140units/ 119,050
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 profits 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.a. 139,700-112,670/(165-125)= $675.75 (165 is high number of units produced, 125 is low). Variable cost = $675.75 Y = Total cost X = high number of units produced b = fixed cost y= 675.75x +b
139,700= 675.75 (165) +b
b= 28,201 (rounded to nearest dollar). Fixed cost = $28,201
b. Break even point = Fixed cost/(selling price - variable cost)
At a price of $1,250 contribution margin is ($1,250-$675.75)= $574.25.
So break even is 28201/574.25= 49.1 or 50 units
c. Margin of safety at 160 units is 160-50= 110 units or $137,500.
d. Profit at 160 units is 160* 574.25- 28210= $63,679.
e. 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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