Chapter 5 – Cost Behavior

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Exercise 5-10 Estimating Cost Behavior Using Scattergraph and High-Low Exercise 5-10
Methods
Exercise 5-14 Determining Cost Behavior, Preparing Contribution Margin Income Exercise 5-14
Statement
Exercise 5-15 Predicting How Sustainability Initiatives Will Impact the Exercise 5-15
Contribution Margin
Income Statement
Exercise 5-16 Calculating Contribution Margin and Contribution Ratio, Preparing Exercise 5-16
Contribution Margin Income Statement

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 Exercise 5-10

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Following is the cost information for Adventure Camp’s operations last summer:

Week Number of Campers Cost to Run Camp

1 80 $ 7,030
2 115 7,340
3 140 9,750
4 156 10,860
5 165 11,985
6 163 12,400
7 130 9,635
8 145 10,200

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Required:
1. Prepare a scattergraph of Adventure Camp’s operating cost and draw the line you believe best fits the data.
2. Based on this graph, estimate Adventure Camp’s total fixed costs per month.
3. Using the high-low method, calculate Adventure Camp’s total fixed operating costs and variable operating
cost per child.
4. Using the high-low method results, calculate the camp’s expected operating cost if 160 children attend a
session.

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 Week Number of Campers Cost to Run Camp
1 80 $ 7,030
2 115 7,340
3 140 9,750
4 156 10,860
5 165 11,985
6 163 12,400
7 130 9,635
8 145 10,200

Scattergraph: Cost to Camper

$14,000

$12,000

$10,000
Total Cost

$8,000

$6,000

$4,000

$2,000
Total fixed cost per month - $1,800
$-
70 80 90 100 110 120 130 140 150 160 170

Number of Campers

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 Week Number of Campers Cost to Run Camp
1 80 $ 7,030
2 115 7,340
3 140 9,750
4 156 10,860
5 165 11,985
6 163 12,400
7 130 9,635
8 145 10,200

Difference in Total Cost

Variable Cost per Unit =
Difference in Activity
$11,985 − $7,030
=
165 − 80
$4,955
=
85
= $58.29 per camper

Note that all extended calculations are based on the variable cost per unit of $58.29412.
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 Week Number of Campers Cost to Run Camp
1 80 $ 7,030
2 115 7,340
3 140 9,750
4 156 10,860
5 165 11,985
6 163 12,400
7 130 9,635
8 145 10,200

Variable cost per unit = $58.29 per camper

Total Fixed Cost = Total Cost − Total Variable Cost
= $11,985 − ($58.29 × 165)
= $11,985 − $9,618.53
= $2,366.47
OR

= $7,030 − ($58.29 × 80)

= $7,030 − $4,663.53
= $2,366.47
Note that all extended calculations are based on the variable cost per unit of $58.29412.
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 Week Number of Campers Cost to Run Camp
1 80 $ 7,030
2 115 7,340
3 140 9,750
4 156 10,860
5 165 11,985
6 163 12,400
7 130 9,635
8 145 10,200
Req. 5 160

Variable cost per unit = $58.29 per camper

Total fixed cost = $2,366.47
Expected operating cost = $2,366.47 + ($58.29 × 160)
= $2,366.47 + $9,327.04
= $11,693.51

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 Exercise 5-14

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Waterbay Inc. makes one model of wooden canoe. Partial information for it follows:

Number of Canoes Produced and Sold

560 640 800
Total costs
Variable costs $ 57,680 ? ?
Fixed costs 140,000 ? ?
Total costs $197,680 ? ?
Cost per unit
Variable cost per unit ? ? ?
Fixed cost per unit ? ? ?
Total cost per unit ? ? ?

Required:
1. Complete the preceding table.
2. Identify three costs that would be classified as fixed costs and three that would be classified as variable
costs for Waterbay.
3. Suppose Riverside sells its canoes for $450 each. Calculate the contribution margin per canoe and the
contribution margin ratio.
4. Next year Waterbay expects to sell 750 canoes. Prepare a contribution margin income statement for the
company.

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 Number of Canoes Produced and Sold
560 640 800
Total costs
Variable costs $ 57,680 ? ?
Fixed costs 140,000 ? ?
Total costs $197,680 ? ?
Cost per unit
Variable cost per unit $103.00
? ? ?
Fixed cost per unit ? ? ?
Total cost per unit ? ? ?

Total Variable Cost

Variable Cost per Unit =
Number of Units
$57,680
=
560
= $103

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 Number of Canoes Produced and Sold
560 640 800
Total costs
Variable costs $ 57,680 ? ?
Fixed costs 140,000 ? ?
Total costs $197,680 ? ?
Cost per unit
Variable cost per unit $103.00
? ? ?
Fixed cost per unit 250.00
? ? ?
Total cost per unit ?
$353.00 ? ?

Total Fixed Cost

Fixed Cost per Unit =
Number of Units
$140,000
=
560
= $250.00

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 Number of Canoes Produced and Sold
560 640 800
Total costs
Variable costs $ 57,680 $ 65,920
? ?
Fixed costs 140,000 ?
140,000 140,000
?
Total costs $197,680 ?
$205,920 ?
Cost per unit
Variable cost per unit $103.00
? ?
$103.00 $103.00
?
Fixed cost per unit 250.00
? ? ?
Total cost per unit ?
$353.00 ? ?

Total Variable Cost = Variable Cost per Unit × Number of Units

= $103 × 640

= $65,920

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 Number of Canoes Produced and Sold
560 640 800
Total costs
Variable costs $ 57,680 $ 65,920
? ?
Fixed costs 140,000 ?
140,000 140,000
?
Total costs $197,680 ?
$205,920 ?
Cost per unit
Variable cost per unit $103.00
? ?
$103.00 $103.00
?
Fixed cost per unit 250.00
? 218.75
? ?
Total cost per unit ?
$353.00 ?
$321.75 ?

Total fixed cost

Fixed cost per unit =
Number of units
$140,000
=
640
= $218.75

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 Number of Canoes Produced and Sold
560 640 800
Total costs
Variable costs $ 57,680 $ 65,920
? $ 82,400
?
Fixed costs 140,000 ?
140,000 140,000
?
Total costs $197,680 ?
$205,920 ?
$222,400
Cost per unit
Variable cost per unit $103.00
? ?
$103.00 $103.00
?
Fixed cost per unit 250.00
? 218.75
? ?
Total cost per unit ?
$353.00 ?
$321.75 ?

Total Variable Cost = Variable Cost per Unit × Number of Units

= $103 × 800

= $82,400

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 Number of Canoes Produced and Sold
560 640 800
Total costs
Variable costs $ 57,680 $ 65,920
? $ 82,400
?
Fixed costs 140,000 ?
140,000 140,000
?
Total costs $197,680 ?
$205,920 ?
$222,400
Cost per unit
Variable cost per unit $103.00
? ?
$103.00 $103.00
?
Fixed cost per unit 250.00
? 218.75
? 175.00
?
Total cost per unit ?
$353.00 ?
$321.75 ?
$278.00

Total Fixed Cost

Fixed Cost per Unit =
Number of Units
$140,000
=
800
= $175.00

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 Number of Canoes Produced and Sold
560 640 800
Total costs
Variable costs $ 57,680 $ 65,920
? $ 82,400
?
Fixed costs 140,000 ?
140,000 140,000
?
Total costs $197,680 ?
$205,920 ?
$222,400
Cost per unit
Variable cost per unit $103.00
? ?
$103.00 $103.00
?
Fixed cost per unit 250.00
? 218.75
? 175.00
?
Total cost per unit ?
$353.00 ?
$321.75 ?
$278.00

Fixed Costs Variable Costs

• Factory rent • Wood
• Production salaries • Paint
• Machine depreciation • Wages for direct labor

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 Number of Canoes Produced and Sold
560 640 800
Total costs
Variable costs $ 57,680 $ 65,920
? $ 82,400
?
Fixed costs 140,000 ?
140,000 140,000
?
Total costs $197,680 ?
$205,920 ?
$222,400
Cost per unit
Variable cost per unit $103.00
? ?
$103.00 $103.00
?
Fixed cost per unit 250.00
? 218.75
? 175.00
?
Total cost per unit ?
$353.00 ?
$321.75 ?
$278.00

Sales Price: $450

Unit Contribution Margin = Sales Price – Variable Cost per Unit

= $450 – $103

= $347

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 Number of Canoes Produced and Sold
560 640 800
Total costs
Variable costs $ 57,680 $ 65,920
? $ 82,400
?
Fixed costs 140,000 ?
140,000 140,000
?
Total costs $197,680 ?
$205,920 ?
$222,400
Cost per unit
Variable cost per unit $103.00
? ?
$103.00 $103.00
?
Fixed cost per unit 250.00
? 218.75
? 175.00
?
Total cost per unit ?
$353.00 ?
$321.75 ?
$278.00

Sales Price: $450

Contribution Margin Ratio= Unit Contribution Margin

Sales Price
$347
=
$450
= 77%

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 Number of Canoes Produced and Sold
560 640 800
Total costs
Variable costs $ 57,680 $ 65,920
? $ 82,400
?
Fixed costs 140,000 ?
140,000 140,000
?
Total costs $197,680 ?
$205,920 ?
$222,400
Cost per unit
Variable cost per unit $103.00
? ?
$103.00 $103.00
?
Fixed cost per unit 250.00
? 218.75
? 175.00
?
Total cost per unit ?
$353.00 ?
$321.75 ?
$278.00

Sales Price: $450

Number of Units: 750

Waterbay Inc.
Contribution Margin Income Statement
For the Current Year

Sales Revenue (750 × $450) $337,500

Less: Variable Costs (750 ×$103) 77,250
Contribution Margin (750 ×$347) $260,250
Less: Fixed Costs 140,000
Net Operating Income $120,250
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 Exercise 5-15

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 Café Kofe Company is launching a new sustainability initiative that would reward customers for
purchasing a reusable cup. During the cup promotion, customers would pay an extra $1.50 for the
reusable cup and would receive a 25% discount each time they return with the cup to buy a cup of
coffee.
Each week Café Kofe serves 60,000 customers who purchase an average of 2 cups of coffee
per week (120,000 cups total). Café Kofe’s contribution margin income statement for a typical week is
shown as follows:

Units Per Unit Total

Sales Revenue 120,000 $6.00 $720,000
Variable Costs 120,000 2.50 300,000
Contribution Margin 120,000 $3.50 $420,000
Fixed Costs 140,000
Net Operating Income $280,000

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 Assume the new cup promotion is expected to impact sales volume, revenue, fixed, and variable costs
as follows:
• Café Kofe estimates that 25% of its current customers (15,000) will participate in the promotion. The
remainder of its existing customer base (45,000) will buy an average of 3 cups of coffee per week.
• Café Kofe expected to attract 5,000 new customers to participate in the promotion.
• Customers who participate in the promotion will pay an additional $1.50 for the reusable cup. They
will then receive a 25% discount on repeat visits when they bring back their reusable cup.
• The additional variable cost of purchasing the reusable cup is $2.00. The variable cost savings of the
paper cup is $0.50.
• Café Kofe expects that customers who participate in the reusable cup promotion will visit an average
of 5 times per week, including the first purchase of the reusable cup.
• Café Kofe will spend a total of $20,000 per week advertising the reusable cup promotion.

Required:
1. Prepare a contribution margin income statement to predict how the reusable cup promotion will
impact weekly net operating income. Include a separate contribution margin calculation for current
customers who will not participate in the promotion, the first purchase for customers who buy the
reusable cup, and the repeat visits for customers who buy the reusable cup.
2. Compute the difference in total revenue, total variable costs, total contribution margin, total fixed
costs, and total operating income before and after the promotion.
3. How will this sustainability initiative impact the company’s triple bottom line?

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• Café Kofe estimates that 25% of its current customers (15,000) will participate in the promotion.
The remainder of its existing customer base (45,000) will continue to buy an average of 3 cups of
coffee per week.
• Café Kofe expected to attract 5,000 new customers to participate in the promotion.
• Customers who participate in the promotion will pay an additional $1.50 for the reusable cup.
They will then receive a 25% discount on repeat visits when they bring back their reusable cup.
• The additional variable cost of purchasing the reusable cup is $2.00. The variable cost savings of
the paper cup is $0.50.
• Café Kofe expects that customers who participate in the reusable cup promotion will visit an
average of 5 times per week, including the first purchase of the reusable cup.
• Café Kofe will spend a total of $20,000 per week advertising the reusable cup promotion.

Units Per Unit Total

Sales Revenue (45,000 × 3) 135,000 $6.00 $810,000
Variable Costs 135,000 2.50 337,500
Contribution Margin 135,000 $3.50 $472,500

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• Café Kofe estimates that 25% of its current customers (15,000) will participate in the promotion.
The remainder of its existing customer base (45,000) will continue to buy an average of 3 cups of
coffee per week.
• Café Kofe expected to attract 5,000 new customers to participate in the promotion.
• Customers who participate in the promotion will pay an additional $1.50 for the reusable cup.
They will then receive a 25% discount on repeat visits when they bring back their reusable cup.
• The additional variable cost of purchasing the reusable cup is $2.00. The variable cost savings of
the paper cup is $0.50.
• Café Kofe expects that customers who participate in the reusable cup promotion will visit an
average of 5 times per week, including the first purchase of the reusable cup.
• Café Kofe will spend a total of $20,000 per week advertising the reusable cup promotion.

Units Per Unit Total

Sales Revenue 20,000 $7.50 (1) $150,000
Variable Costs 20,000 4.00 (2) 80,000
Contribution Margin 20,000 $3.50 $ 70,000

(1) $6.00 + $1.50

(2) $2.50 + $2.00 – $0.50
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• Café Kofe estimates that 25% of its current customers (15,000) will participate in the promotion.
The remainder of its existing customer base (45,000) will continue to buy an average of 3 cups of
coffee per week.
• Café Kofe expected to attract 5,000 new customers to participate in the promotion.
• Customers who participate in the promotion will pay an additional $1.50 for the reusable cup.
They will then receive a 25% discount on repeat visits when they bring back their reusable cup.
• The additional variable cost of purchasing the reusable cup is $2.00. The variable cost savings of
the paper cup is $0.50.
• Café Kofe expects that customers who participate in the reusable cup promotion will visit an
average of 5 times per week, including the first purchase of the reusable cup.
• Café Kofe will spend a total of $20,000 per week advertising the reusable cup promotion.

Units Per Unit Total

Sales Revenue (20,000 × 4) 80,000 $4.50 (1) $360,000
Variable Costs 80,000 2.00 (2) 160,000
Contribution Margin 80,000 $2.50 $200,000

(1) $6.00 × 75%

(2) $2.50 – 0.50
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 Units Per Unit Total
Sales Revenue 135,000 $6.00 $810,000
Variable Costs 135,000 2.50 337,500
Contribution Margin 135,000 $3.50 $472,500

Units Per Unit Total

Sales Revenue 20,000 $7.50 $150,000
Variable Costs 20,000 4.00 80,000
Contribution Margin 20,000 $3.50 $ 70,000

Units Per Unit Total

Sales Revenue 80,000 $4.50 $360,000
Variable Costs 80,000 2.00 160,000
Contribution Margin 80,000 $2.50 $200,000

Before Promotion After Promotion

Sales Revenue $720,000 $1,320,000
Variable Costs 300,000 577,500
Contribution Margin $420,000 $ 742,500
Fixed Costs 140,000 160,000
NetMcGraw-Hill
Copyright © 2020 Operating Income
Education. All rights reserved. No reproduction$280,000 $ 582,500
or distribution without the prior written consent of McGraw-Hill Education.
• Café Kofe estimates that 25% of its current customers (15,000) will participate in the promotion.
The remainder of its existing customer base (45,000) will continue to buy an average of 3 cups of
coffee per week.
• Café Kofe expected to attract 5,000 new customers to participate in the promotion.
• Customers who participate in the promotion will pay an additional $1.50 for the reusable cup.
They will then receive a 25% discount on repeat visits when they bring back their reusable cup.
• The additional variable cost of purchasing the reusable cup is $2.00. The variable cost savings of
the paper cup is $0.50.
• Café Kofe expects that customers who participate in the reusable cup promotion will visit an
average of 5 times per week, including the first purchase of the reusable cup.
• Café Kofe will spend a total of $20,000 per week advertising the reusable cup promotion.

Before Promotion After Promotion Difference

Sales Revenue $720,000 $1,320,000 $600,000
Variable Costs 300,000 577,500 277,500
Contribution Margin $420,000 $ 742,500 $322,500
Fixed Costs 140,000 160,000 20,000
Net Operating Income $280,000 $ 582,500 $302,500

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 Exercise 5-16

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Seven Seas Liners Inc. makes one model of wooden canoe. Partial information for it follows:

Total
Total Cost
Variable Costs $ 77,250
Fixed Cost 140,000
Total Costs $217,250
Costs per unit
Variable cost per unit $103.00
Fixed cost per unit 250.00
Total cost per unit $353.00

Seven Seas expects to sell 750 canoes at a per unit cost of $450.
Required:
1. Calculate the contribution margin per canoe and the contribution margin ratio and prepare Seven Seas
Liners' contribution margin income statement for each independent scenario.
a. Seven Seas raises the sales price to $700 per canoe.
b. Both sales price and variable cost per unit increase by 20 percent.
c. Seven Seas cuts its fixed cost by 25 percent.

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 a. Seven Seas raises the sales price to $700 per canoe.

Total Other info:

Total Cost Sales price $450
Variable Costs $ 77,250 Number of Units 750
Fixed Cost 140,000
Total Costs $217,250
Costs per unit
Variable cost per unit $103.00
Fixed cost per unit 250.00
Total cost per unit $353.00

Unit Contribution Margin = Sales Price per Unit − Variable Cost per Unit
= $700 − $103
= $597

Unit Contribution Margin

Contribution Margin Ratio =
Sales Price per Unit

$597
=
$700
= No reproduction
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 a. Seven Seas raises the sales price to $700 per canoe.

Total Other info:

Total Cost Sales price $450
Variable Costs $ 77,250 Number of Units 750
Fixed Cost 140,000
Total Costs $217,250
Costs per unit
Variable cost per unit $103.00
Fixed cost per unit 250.00
Total cost per unit $353.00

Seven Seas Inc.

Contribution Margin Income Statement
For Scenario #1

Sales Revenue (750 × $700) $525,000

Less: Variable Costs (750 × $103) 77,250
Contribution Margin $447,750
Less: Fixed Costs 140,000
Net Operating Income $307,750

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 b. Both sales price and variable cost per unit increase by 20 percent.

Total Other info:

Total Cost Sales price $450
Variable Costs $ 77,250 Number of Units 750
Fixed Cost 140,000
Total Costs $217,250
Costs per unit
New Sales Price: $450
$540
× 120%
Variable cost per unit $103.00
$123.60
New Variable Cost: $103 × 120%
Fixed cost per unit 250.00
Total cost per unit $353.00

Unit Contribution Margin = Sale Price per unit − Variable Cost per Unit
= $540 − $123.60
= $416.40

Unit Contribution Margin

Contribution Margin Ratio =
Sale Price per Unit
$416.40
=
$540
= No reproduction
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 b. Both sales price and variable cost per unit increase by 20 percent.

Total Other info:

Total Cost Sales price $450
Variable Costs $ 77,250 Number of Units 750
Fixed Cost 140,000
Total Costs $217,250
Costs per unit
New Sales Price: $540
Variable cost per unit $103.00
New Variable Cost: $123.60
Fixed cost per unit 250.00
Total cost per unit $353.00

Seven Seas Inc.

Contribution Margin Income Statement
For Scenario #1

Sales Revenue (750 × $540) $405,000

Less: Variable Costs (750 × $123.60) 92,700
Contribution Margin $312,300
Less: Fixed Costs 140,000
Net Operating Income $172,300

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 c. Seven Seas cuts its fixed cost by 25 percent.

Total Other info:

Total Cost Sales price $450
Variable Costs $ 77,250 Number of Units 750
Fixed Cost 140,000
Total Costs $217,250
Costs per unit
New fixed costs: $140,000
$105,000 × 75%
Variable cost per unit $103.00
Fixed cost per unit 250.00
Total cost per unit $353.00

Unit Contribution Margin = Sale Price per unit − Variable Cost per Unit
= $450 − $103
= $347

Unit Contribution Margin

Contribution Margin Ratio =
Sale Price per Unit
$347
=
$450
= No reproduction
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 c. Seven Seas cuts its fixed cost by 25 percent.

Total Other info:

Total Cost Sales price $450
Variable Costs $ 77,250 Number of Units 750
Fixed Cost 140,000
Total Costs $217,250
Costs per unit
New Fixed Costs: $105,000
Variable cost per unit $103.00
Fixed cost per unit 250.00
Total cost per unit $353.00

Seven Seas Inc.

Contribution Margin Income Statement
For Scenario #1

Sales Revenue (750 × $450) $337,500

Less: Variable Costs (750 × $103) 77,250
Contribution Margin $260,250
Less: Fixed Costs 105,000
Net Operating Income $155,250

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