PROBLEMSETC

PROBLEM 22-1C
The following costs result from the production of 24,000 DVD sets manufactured by Astra Company for
the year ended December 31, 2008. The DVD sets will sell for $30 each. The company has a 30%
income tax rate.
Variable manufacturing costs
Plastic for DVD sets.$ 3,000
Wages of assembly workers..60,000
Labeling. 6,000
Variable selling costs
Sales commissions.12,000
Fixed manufacturing costs
Rent on factory...13,500
Factory cleaning service. 9,040
Factory machinery depreciation. 30,000
Fixed selling and administrative costs
Lease of office equipment 2,100
Systems staff salaries.. 30,000
Administrative management salaries.240,000
Required
1. Prepare a contribution income statement for the company.
2. Compute its contribution margin per unit and its contribution margin ratio.
Analysis Component
3. Interpret the contribution margin and contribution margin ratio from part 2.

PROBLEM222C
HandyEquipmentCo.Manufacturesandmarketsanumberofropeproducts.Managementis
consideringthefutureofProductDZ,aspecialtypeofropeforrappelling,thathasnotbeenas
profitableasplanned.SinceProductDZismanufacturedandmarketedindependentlyofother
products,itstotalcostscanbepreciselymeasured.Nextyearsplanscallfora$75sellingprice
per100yardsofDZrope.Itsfixedcostsfortheyearareexpectedtobe$100,000,uptoa
maximumcapacityof550,000yards.Forecastedvariablecostsare$50per100yardsofDZ
rope.
Required
1. EstimateProductDZsbreakevenpointintermsof(a)salesunitsand(b)salesdollars.

2. PrepareaCVPchartforProductDZlikethatinExhibit22.14.Use550,000yardsasthe
maximumnumberofsalesunitsonthehorizontalaxisofthegraph,and$450,000asthe
maximumdollaramountontheverticalaxis.
3. Prepareacontributionmarginincomestatementshowingsales,variablecosts,andfixed
costsforProductDZatthebreakevenpoint.
PROBLEM223C
DotBombCo.smonthlysalesandcostdataforitsoperatingactivitiesofthepastyearfollow.
Managementwantstousethesedatatopredictfuturefixedandvariablecosts.
PeriodSales
TotalCost
1
$320,000 $160,000
2
160,000 100,000
3
280,000 220,000
4
200,000 100,000
5
300,000 230,000
6
200,000 120,000
7
340,000 230,000
8
280,000 160,000
9
80,000 60,000
10
160,000 140,000
11
100,000 100,000
12
110,000 80,000
Required
1.Prepareascatterdiagramforthesedatawithsalesvolume(in$)plottedonthehorizontalaxis
andtotalcostplottedontheverticalaxis.
2.Estimateboththevariablecostspersalesdollarandthetotalmonthlyfixedcostsusingthe
highlowmethod.Drawthetotalcostlineonthescatterdiagraminpart1.
3.Usetheestimatedlineofcostbehaviorandresultsfrompart 2 topredictfuturetotalcosts
whensalesvolumeis(a)$250,000and(b)$400,000.
PROBLEM224C
DeCarloCompanysold1,500unitsofitsonlyproductandbarelybrokeevenforthecurrent
year as shown below. During a planning session for year 2009s activities, the production
manager notes that variable costs can be reduced 30% by installing a new machine that
automates severaloperations.Toobtainthesesavings,thecompanymustincreaseitsannual
fixedcostsby$80,000.Themaximumoutputcapacityofthecompanyis3,000unitsperyear.
DECARLOCOMPANY
ContributionMarginIncomeStatement

ForYearEndedDecember31,2008
Sales
$1,200,000
Variablecosts
975,000
Contributionmargin
$225,000
Fixedcosts
210,000

Netincome
$

15,000
Required
1.Computethebreakevenpointindollarsalesforyear2008.
2.Computethebreakevenpointindollarsalesforyear2009assumingthemachineisinstalled
andthereisnochangeinunitsalesprice.
3.Prepareaforecastedcontributionmarginincomestatementfor2009thatshowstheexpected
resultswiththemachineinstalled.Assumethattheunitsalespriceandthenumberofunitssold
willnotchangeandnoincometaxes.
4.Computethesaleslevelrequiredinbothdollarsandunitstoearn$240,000ofaftertaxincome
in2009withthemachineinstalledandnochangeinunitsalesprice.Theincometaxrateis35%.
(Hint:UseproceduresinExhibits22.18and22.20.)
5.Prepareaforecastedcontributionmarginincomestatementthatshowstheresultsatthesales
levelcomputedinpart(4).Assumeanincometaxrateof35%.
PROBLEM225C
SVCInc.producesandsellstwoproducts,ZZZandXXX.Itmanufacturestheseproductsinseparate
factoriesandmarketsthemthroughdifferentchannels.Theyhavenosharedcosts.Thisyear,SVC
sold10,000unitsofeachproduct.Salesandcostsforeachproductarereflectedinthefollowing
financialresults:
ProductZZZProductXXX
Sales
$65,000$65,000
Variablecosts
45,000

15,000
Contributionmargin
$20,000$50,000
Fixedcosts
10,000

40,000
Incomebeforetaxes
$10,000$10,000
Incometaxes(25%rate)
2,500

2,500
Netincome
$

7,500$

7,500
Required
1.Computethebreakevenpointindollarsalesforeachproduct.
2.Assumethatthecompanyexpectssalesofeachproducttodeclineto6,000unitsnextyear
withnochangeinunitsalesprice.Prepareforecastedfinancialresultsfornextyearfollowingthe
formatofthecontributionmarginincomestatementasshownabovewithcolumnsforeachof

thetwoproducts(assumea25%taxrate).Also,assumethatanylossbeforetaxesyieldsa25%
taxsavings.
3.Assumethatthecompanyexpectssalesofeachproducttoincreaseto14,000unitsnextyear
withnochangeinunitsalesprice.Prepareforecastedfinancialresultsfornextyearfollowingthe
formatofthecontributionmarginincomestatementasshownabovewithcolumnsforeachof
thetwoproducts(assumea25%taxrate).
AnalysisComponent
4.Ifsalesgreatlydecrease,whichproductwouldexperienceagreaterloss?Explain.
5.Describe some factors that might have created the different cost structures for these two
products.
PROBLEM226C
ThisyearNaplesCompanysold30,000unitsofitsonlyproductfor$40perunit.Manufacturing
andsellingtheproductrequired$300,000offixedmanufacturingcostsand$450,000offixed
sellingandadministrativecosts.Itsperunitvariablecostswereasfollows:
Material
$12.00
Directlabor(paidonthebasisofcompletedunits)
6.00
Variableoverheadcosts
3.00
Variablesellingandadministrativecosts 0.80
Nextyearthecompanywillusenewmaterialwhichwillreducematerialcostsby60%anddirect
laborcostsby50%,andwillnotaffectproductqualityormarketability.Managementisconsidering
anincreaseintheunitsalespricetoreducethenumberofunitssoldbecausethefactorysoutputis
nearingitsannualoutputcapacityof33,000units.Twoplansarebeingconsidered.Underplan1,the
companywillkeepthepriceatthecurrentlevelandsellthesamevolumeaslastyear.Thisplanwill
increaseincomebecauseofthereducedcostsfromusingthenewmaterial.Underplan2,thecompany
willincreasepriceby30%.Thisplanwilldecreaseunitsalesvolumeby5%.Underbothplans1and
2,thetotalfixedcostsandthevariablecostsperunitforoverheadandforsellingandadministrative
costswillremainthesame.
Required
1.Computethebreakevenpointindollarsalesforboth(a)plan1and(b)plan2.
2.Prepareaforecastedcontributionmarginincomestatementwithtwocolumnsshowingthe
expectedresultsofplan1andplan2.Thestatementsshouldreportsales,totalvariablecosts,
contributionmargin,totalfixedcosts,incomebeforetaxes,incometaxes(30%rate),andnet
income.

PROBLEM227C

Garcia Co. manufactures and sells three types of glass flowers: Sugar Magnolias, Scarlet
Begonias, and Ramblin Roses. Their unit sales prices are Sugar Magnolias, $40 per unit;
ScarletBegonias,$30perunit;andRamblinRoses,$50perunit.Theperunitvariablecoststo
manufacture and sell these products are Sugar Magnolias, $27; Scarlet Begonias, $21; and
RamblinRoses,$34.Theirsalesmixisreflectedinaratioof4:3:1(SugarMagnolias:Scarlet
Begonias:RamblinRoses).Annualfixedcostsofglassblowingequipmentsharedbyallthree
productsare$34,000.Onetypeofglassisusedtomanufactureallthreeproducts.Thecompany
hasdevelopedanewglassthatisofequalqualityforlesscost.However,thenewmaterialwould
reducevariablecostsperunitasfollows:SugarMagnolias,by$5;ScarletBegonias,by$6;and
RamblinRoses,by$4.However,thenewglassrequiresnewequipment,whichwillincrease
annualfixedcostsby$9,000.(Roundanswerstowholecompositeunit.)
Required
1.Ifitcontinuestousetheoldglass,determinethecompanysbreakevenpointinbothsales
unitsandsalesdollarsofeachindividualproduct.
2.Ifitusesthenewglass,determinethecompanysnewbreakevenpointinbothsalesunitsand
salesdollarsofeachindividualproduct.
AnalysisComponent
3.Whatinsightdoesthisanalysisoffermanagementforlongtermplanning?