Question

High-Low Cost Estimation and Profit Planning Comparative 2007 and 2008 income statements for Dakota Products Inc. follow: DAKOTA PRODUCTS INC. Comparative Income Statements For Years Ending December 31, 2007 and 2008 2007 2008 Unit sales 5,000 8,000 Sales revenue $60,000 $96,000 Expenses (64,000) (76,000) Profit (loss) $(4,000) $20,000 (a) Determine the break-even point in units. Answer units (b) Determine the unit sales volume required to earn a profit of $5,000. Answer

Answer 1

Answer:

(a)

5,500 units

(b)

6,125 units

Explanation:

First, we need to calculate the per unit selling price.

                        2007       2008

Unit sales        5,000      8,000

Sales revenue $60,000 $96,000

Selling Price    $12           $12

Now we need th separate the vairbale and fixed cost from total expense using high low method

Variable cost = ( Higher activity Expense - Lower activity Expense ) / ( Higher activity - Lower activity )

Variable cost = ( $76,000 - $64,000 ) / ( 8,000 units - 5,000 units )

Variable cost = $12,000 / 3,000 units = $4 per unit

Fixed cost = $76,000 - ( $4 x 8,000 units ) = $44,000

Contribution Margin = Selling Price - Variable cost = $12 - $4 = $8

(a)

Breakeven Point = Fixed Cost  / Contributin margin per unit

Breakeven Point = $44,000 / $8 = 5,500 units

(b)

Target sales = ( Fixed cost + Desired Profit ) / Contribution margin per unit

Target sales = ( $44,000 + $5,000 ) / $8 = 6,125 units