Cost Function Using High-Low Method

Q1.Abdul Karim Company manufactures a product A. The company estimates the cost function for the total costs. The cost driver is number of units. The following information were collected:MonthUnitsTotal CostsJanuary3,560SAR 242,400February3,800SAR252,000March4,000SAR260,000April3,600SAR244,000May3,200SAR228,000June3,040 SAR221,600Compute a cost function using the high-low method. (3 Marks)Q2. Hashim Corporation sells its product for SAR17 per unit. Its variable cost is SAR10 per unit, and total fixed costs are SAR800. Assuming next periods estimated sales are 300, calculate the following amounts:a.Degree of operating leverage(1Mark)b.Margin of safety in units (1Mark)c.Margin of safety in revenues (1Mark) Q3. TTL Corporation is in the manufacturer of several plastic products. TTL sells its one of the plastic product for SAR 500. The variable costs per unit are SAR 200, and the total fixed costs are SAR 510,000. Based on cost-volume profit analysis, calculate: (6 Marks)a) Contribution margin per unit and contribution margin ratio.b) Break-even point in units and sales SAR.c) Pretax profit if the company sells 2,200 units.d) Profit/loss if the company sells 1,500 units.e) Units needed to reach target pretax profit of SAR 180,000.f) Sales SAR needed to reach the target pretax profit of SAR 180,000.Q4.Which types of companies would most likely use the job costing? Provide example of one Saudi Company.How actual allocation rates and estimated allocation rates are analyzedin these compagnies? Share on Facebook Tweet Follow us Sample Answer   Answer to the Given Questions: Q1: Cost Function Using High-Low Method To calculate the cost function using the high-low method, we will first identify the highest and lowest activity levels to determine the variable cost per unit and the fixed cost component. – Highest Activity Level:- Month: March – Units: 4,000 – Total Costs: SAR 260,000 – Lowest Activity Level:- Month: June – Units: 3,040 – Total Costs: SAR 221,600 Calculation: 1. Determine Variable Cost per Unit: – Variable Cost = (Total Costs at High Activity Level – Total Costs at Low Activity Level) / (Units at High Activity Level – Units at Low Activity Level) – Variable Cost = (260,000 – 221,600) / (4,000 – 3,040) – Variable Cost = SAR 38,400 / 960 – Variable Cost = SAR 40 per unit 2. Compute Fixed Costs: – Total Costs at High Activity Level = Fixed Costs + (Variable Cost per Unit * Units at High Activity Level) – 260,000 = Fixed Costs + (40 * 4,000) – Fixed Costs = 260,000 – 160,000 – Fixed Costs = SAR 100,000 Cost Function: – Total Costs = Fixed Costs + (Variable Cost per Unit * Number of Units) – Total Costs = 100,000 + (40 * Number of Units) Q2: Hashim Corporation Calculations a. Degree of Operating Leverage: – Degree of Operating Leverage = Contribution Margin / Net Income – Contribution Margin = Selling Price – Variable Cost per Unit – Contribution Margin = SAR 17 – SAR 10 = SAR 7 – Degree of Operating Leverage = 7 * 300 / (7 * 300 – 800) b. Margin of Safety in Units: – Margin of Safety in Units = (Actual Sales – Break-Even Sales) c. Margin of Safety in Revenues: – Margin of Safety in Revenues = (Actual Sales – Break-Even Sales) * Selling Price Q3: TTL Corporation Cost-Volume Profit Analysis a. Contribution Margin per Unit and Contribution Margin Ratio: – Contribution Margin per Unit = Selling Price – Variable Cost per Unit – Contribution Margin Ratio = (Contribution Margin per Unit / Selling Price) * 100 b. Break-Even Point in Units and Sales: – Break-Even Point in Units = Fixed Costs / Contribution Margin per Unit – Break-Even Sales = Fixed Costs / Contribution Margin Ratio c. Pretax Profit for Selling 2,200 Units: – Profit = (Selling Price * Units) – (Variable Cost per Unit * Units) – Fixed Costs d. Profit/Loss for Selling 1,500 Units: – Profit/Loss = (Selling Price * Units) – (Variable Cost per Unit * Units) – Fixed Costs e. Units Needed for Target Pretax Profit: – Units = (Fixed Costs + Target Profit) / Contribution Margin per Unit f. Sales Needed for Target Pretax Profit: – Sales = (Fixed Costs + Target Profit) / Contribution Margin Ratio Q4: Job Costing and Allocation Rates Analysis – Companies like construction firms, custom manufacturers, and service providers use job costing. – Example: Saudi Aramco uses job costing to allocate costs to specific projects or contracts. Analysis of Actual vs. Estimated Allocation Rates: – Actual allocation rates are compared with estimated rates to identify cost discrepancies. – Variance analysis is conducted to understand the reasons for differences between actual and estimated allocation rates. – Adjustments may be made based on the analysis to improve accuracy in cost allocations. By following these calculations and analyses, companies can make informed decisions regarding pricing strategies, cost management, and profitability. This question has been answered. Get Answer

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