Lancer Audio produces a high end DVD player that sells for $1,250. Tot

QUESTION

Lancer Audio produces a high end DVD player that sells for $1,250. Total operating expenses for July were as follows:Month Units produced and sold CostAugust 125 $112,670September 145 121,990October 150 129,500November 160 131,500December 165 139,700January 140 117,400February 145 125,600March 135 1
a.Use the high-low method to estimate fixed and variable costs. Units Cost High 165 $139,700 Low 125 $112,670 Difference 40 $27,030 Variable cots per unit $27,030 / 40 $675.75 Fixed costs = $139,700 (165 x $675.75) = $28,202 Alternatively, Fixed costs = $112,670 (125 x $675.75) = $28,202 b.Based on these estimates, calculate the break-even level of sales in units. Contribution per unit = $1,250 $675.75 = $574.25 BEP(units) = $28,202 / $574.25 = 50 units c.Calculate the margin of safety for the coming August assuming estimated sales of 160 units. Total sales 160 x $1,250 $200,000 Less : Break even sales ($28,202 $108,120) $136,322 Margin of safety

78 d.Estimate total profit assuming production and sales of 160 units. Contribution 160 x $574.25 $91,880 Less : Fixed costs $28,202 Total profit $63,678 e.Comment on the limitations of the high-low method in estimating costs for Lancer Audio. 1) High-low method does not provide us with a measure of goodness-of-fit 2) Relies on only two points, and the selection of those two points requires judgment (that is, it discards most of the data).

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