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

Exercise 48

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:
Margin of Safety
Calculate the hotel's margin of safety (both in units and in sales dollars) for Many Glacier Hotel, assuming the same facts as in Requirement 3, and it sells 700 canoes and 2,500 paddles next year.