Cornerstones of Managerial Accounting 4th Edition by Maryanne Mowen, Don Hansen, Dan Heitger

Exercise 35

Cost Behavior and Cost-Volume-Profit Analysis for Many Glacier Hotel
The purpose of this integrated exercise is to demonstrate the interrelationship between cost estimation techniques and subsequent uses of cost information. In particular, this exercise illustrates how the variable and fixed cost information estimated from a high-low analysis can be used in a single- and multiple-product CVP analysis.
Using the High-Low Method to Estimate Variable and Fixed Costs
Located on Swiftcurrent Lake in Glacier National Park, Many Glacier Hotel was built in 1915 by the Great Northern Railway. In an effort to supplement its lodging revenue, the hotel decided in 1998 to begin manufacturing and selling small wooden canoes decorated with symbols hand painted by Native Americans living near the park. Due to the great success of the canoes, the hotel began manufacturing and selling paddles as well in 2001. Many hotel guests purchase a canoe and paddles for use in self-guided tours of Swiftcurrent Lake. Because production of the two products began in different years, the canoes and paddles are produced in separate production facilities and employ different laborers. Each canoe sells for $500, and each paddle sells for $50. A 2001 fire destroyed the hotel's accounting records. However, a new system put into place before the 2002 season provides the following aggregated data for the hotel's canoe and paddle manufacturing and marketing activities:
Required:
Sensitivity Cost-Volume-Profit Analysis and Production Versus Period Expenses, Multiple-Product Setting
If both the variable and fixed production expenses (refer to your answer to Requirement 1) associated with the canoe product line increased by 5 percent (beyond the estimate from the high-low analysis), how many canoes and paddles would need to be sold in order to earn a target income of $96,000 Assume the same sales mix and additional fixed costs as in Requirement 3.