In-Class Assignment 1 Name: __Answer Key____ Presented below is the production data for the first six months

of the year showing the mixed costs incurred by the Bluth Company. Month Cost Model Houses Built January $13,000 7,500 February 7,500 4,000 March 11,500 9,000 April 11,700 11,500 May 13,500 12,000 June 11,850 6,000 1. Bluth Company uses the high low method to analyze mixed costs. Assume they expect to build 8,500 model houses in July. The fixed cost for July is expected to be _____ a. $10,875 b. $0.75 c. $7,375 d. $4,500 First thing to notice is the call of the question. It is asking for the FIXED cost of July. An assumption of the high-low analysis is that fixed costs are not expected to change from month to month. We also know that fixed costs do not vary with level of activity. In order to find expected fixed costs, we will need to derive the cost function for Bluth Company: Y = F + V(x) where Y=Total Cost, F = fixed costs per month, V = variable cost per model house built, and X = model houses built. The question essentially is asking for the F of this equation. The first step in solving for a high-low cost function is to determine the period with the highest and lowest cost driver activity. In this case it is May (12,000) and February (4,000). The next step is to determine the variable cost per unit of cost driver (model houses here). This is the slope and is defined as rise over run or, more formally, it is the change in cost over the change in the cost driver. Change in cost ____ 0.75 = V Change in cost driver = = $13,500 - $7,500 12,000 4,000 = = $6,000 8,000 =

Next, given V = .75, we can calculate F by plugging in X and Y from either the high or the low month. This is done for the low month (February) in this example. Y = F + V(x) $7,500 = F + .75(4,000) F = $7,500 - $3,000 = $4,500. Thus, the answer is D. Since F is constant, the number of model houses built in July is excess information.

2. If the sales price per unit is $30, the unit contribution margin is $8, and total fixed costs are $32,000, the break-even point in units is _____ a. 857 b. 1,200 c. 4,000 d. 8,533 This question asks for you to calculate the break-even point in units. In order to do this, you need to find the point where the total contribution margin from all the units sold exactly covers fixed costs: CM(x) = Fixed Costs Fixed Costs/ CM per unit ($) = break-even point in units (remember you can think of this as the dollar signs cancelling each other out in the fraction). Thus: $32,000/$8 = 4,000 units. The answer is C. 3. Given that a company breaks even when it sells 1,000 units has a profit of $250 when it sells 1,100 units. What are the companys fixed costs? _____ a. $2,500 b. $1,000 c. $250 d. none of the above This question asks for the companys fixed costs. The first thing we know is that the break-even point occurs when the company sells 1,000 units. Said otherwise, FC/CM($) = 1,000. Thus, we need to calculate the contribution margin per unit in dollars for the company. In order to do this we need to consider a fundamental fact about the contribution margin. Before the break-even point, the contribution margin contributes to covering fixed costs. Each unit sold beyond the break-even point, the contribution margin contributes to company profit. Thus, the 100 units (1,100 1,000) sold above the break-even point had a collective contribution margin of $250. This equates to a CM of $2.5 each (250/100). Plugging this number in to the prior equation results in FC/$2.5 = 1,000 FC = $2,500. Thus, the answer is A.