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During the sixth month of the fiscal year, the program director
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During the sixth month of the fiscal year, the program director of the Westchester
Home-Delivered Meals (WHDM) program decides to again recompute fixed costs,
variable costs, and the BEP using the high–low method. Here are the number of
meals served and the total costs of the program for each of the first six months:
Month Meals Served Total Costs
July 3,500 $20,500
August 4,000 22,600
September 4,200 23,350
October 4,600 24,500
November 4,700 25,000
December 4,900 26,000
Recompute fixed costs, variable costs, and the BEP. What are the variable
costs? What are the fixed costs? How many meals will the WHDM program need
to provide during the fiscal year to reach the BEP? How much profit will the program
earn if it completes its 45,000-meal contract with the City of Westchester?
I must turn this homework in in 40 minutes. Here is some more information from the text. This may help answer the question.
TABLE 10.5 Westchester Home-Delivered Meals Program
Service and Cost Data (July 1, 20X1–October 31, 20X1)
Step 2. The difference in costs between the high and low time periods is computed.
The resulting figure is $4,000 ($24,500 – $20,500).
Step 3. The variable cost per meal is computed. The cost difference ($4,000) computed
in Step 2 is divided by the difference (1,100) in service volume computed in
Step 1. The resulting figure is $3.64. This figure is the variable cost per unit of service
(one meal). The logic here is quite simple: Since fixed costs do not vary, the
only costs that can vary between the high and low time periods are the variable
Step 4. Total variable costs are computed for the low time period. However, the
computations work the same for either the high or the low time period. In the low
time period, the service volume (the number of meals provided) is 3,500. Service
volume is multiplied by the variable costs per meal ($3.64). The resulting figure is
$12,740. This figure is the amount of variable costs for the low month.
Step 5. Total fixed costs are computed for the low time period. The total program
costs in the low month are $20,500. If the variable costs ($12,740) are subtracted
from the total costs ($20,500), the remainder ($7,760) is the amount of the fixed
costs. Again, the logic is straightforward. Since there are only two types of costs
(fixed and variable), if one knows the total costs and the variable costs, one knows
the fixed costs.
Step 6. The break-even point is computed using the BEP formula and the data
generated in Steps 1 through 5 plus one additional piece of information. The additional
piece of information needed to compute the BEP is the service price. The service
price is $5.77, which is the contract price between the WHDM program and
the City of Westchester. As Table 10.6 shows, when the computations are performed,
the resulting BEP is 3,643 meals. This figure, however, is a monthly figure
based on monthly data so the program director must annualize the data to get the
BEP for the fiscal year:
3,643 meals per month × 12 months = 43,716 meals
TABLE 10.6 Westchester Home-Delivered Meals Program
Computing the Break-Even Point
Using the High–Low Method
PX = A + BX
5.77X = 7,760 + 3.64X
(Subtract 3.64X from each side.)
2.13X = 7,760
(Divide each side by 2.13.)
X = 3,643 (monthly BEP)
3,643 × 12 = 43,716 (fiscal-year BEP)
The high–low method computes the actual BEP for the home-delivered meals
program at 43,716 meals. At 43,716 meals, the home-delivered meals program will
recover its fixed costs for the fiscal year. Assuming that the WHDM program completes
its 45,000 meals contract with the City of Westchester, a small profit will be
earned. For each meal provided above the break-even point (43,716), the homedelivered
meals program will incur variable costs of $3.64 per meal, but will earn
revenues of $5.77 per meal. The difference between the variable cost per meal and
the revenue per meal is $2.13 per meal. The difference between contracted meals
(45,000) and the BEP (43,716) is 1,284. The potential profit is $2,735 (1,284 meals ×
$2.13). Of course, variable costs will continue to vary during the remaining eight
months of the fiscal year, so the program director will want to continue monitoring
them and will also want to conduct additional break-even analyses during the fiscal
The preceding case examples demonstrate two principal uses of break-even
analysis: (1) to estimate a human service program’s fixed costs, variable costs, and
BEP as part of the planning and budgeting processes and (2) to monitor a human
service program’s fixed costs, variable costs, and the BEP during the fiscal year.
The discussion of differential cost analysis now shifts to decrease/discontinue
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