Professional Documents
Culture Documents
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
5
5
6
6
6
7
C
K
K
K
K
AP
25.
26.
a
27.
a
28.
a
29.
a
30.
7
7
7
8
8
8
C
K
K
K
K
K
88.
89.
90.
91.
92.
a
93.
a
94.
a
95.
a
96.
a
97.
a
98.
a
99.
a
100.
a
101.
a
102.
a
103.
a
104.
a
105.
a
106.
5
5
5
5
5
6
6
6
6
6
6
6
6
6
6
7
7
7
7
C
K
K
K
K
K
K
K
K
K
K
K
K
K
K
AP
AP
AP
AP
107.
108.
a
109.
a
110.
a
111.
a
112.
a
113.
a
114.
a
115.
a
116.
a
117.
a
118.
a
119.
a
120.
a
121.
a
122.
a
123.
a
124.
a
125.
7
7
7
7
7
7
7
7
7
7
7
7
7
7
8
8
8
8
8
AP
K
K
C
K
K
K
AP
AP
AP
AP
C
C
C
K
K
C
K
K
6
7
AP
AP
AP
7
7
7
AP
AP
AP
8
8
AP
AP
7
7
8
K
K
K
True-False Statements
1.
2.
3.
4.
5.
6.
1
1
2
2
3
3
K
K
K
K
K
K
7.
8.
9.
10.
11.
12.
3
3
3
3
3
4
K
AP
AP
K
K
K
13.
14.
15.
16.
17.
18.
4
4
4
5
5
5
C
C
K
K
K
K
19.
20.
a
21.
a
22.
a
23.
a
24.
a
a
1
1
1
1
1
1
1
1
1
1
1
1
2
2
2
2
2
2
2
K
K
K
AP
AP
AP
AP
K
K
AP
AP
AP
K
AP
AP
AP
AP
AP
AP
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
2
2
2
2
2
2
2
2
2
2
3
3
3
3
3
3
3
3
3
AP
K
AP
AP
AP
K
K
AP
AP
AP
K
C
AP
AP
AP
AP
AP
AP
AP
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
3
3
3
3
3
3
3
4
4
4
4
4
5
5
5
5
5
5
5
AP
AP
C
C
AP
AP
AP
C
C
K
AP
AP
K
C
C
K
AP
AP
C
Brief Exercises
126.
127.
3
3
AP
AP
128.
129.
4
4
AP
AP
130.
131.
5
6
AP
AP
132.
133.
134.
Exercises
135.
136.
137.
3
3
3
AP
AP
AP
138.
139.
140.
4
4
5
AN
AN
AP
141.
142.
a
143.
a
5
6
6
AP
K
AP
144.
145.
a
146.
a
Completion Statements
149.
150.
151.
a
1
2
3
K
K
K
152.
153.
154.
3
4
5
K
K
K
155.
156.
a
157.
a
5
6
6
K
K
K
158.
159.
a
160.
a
147.
148.
6-2
Type
Item
Type
1.
2.
31.
TF
TF
MC
32.
33.
34.
MC
MC
MC
3.
4.
43.
TF
TF
MC
44.
45.
46.
MC
MC
MC
5.
6.
7.
8.
9.
TF
TF
TF
TF
TF
10.
11.
60.
61.
62.
TF
TF
MC
MC
MC
12.
13.
TF
TF
14.
15.
TF
TF
16.
17.
18.
19.
TF
TF
TF
TF
20.
81.
82.
83.
TF
MC
MC
MC
21.
22.
23.
TF
TF
TF
93.
94.
95.
MC
MC
MC
24.
25.
26.
27.
103.
TF
TF
TF
TF
MC
104.
105.
106.
107.
108.
MC
MC
MC
MC
MC
28.
29.
TF
TF
30.
121.
TF
MC
Item
Type
Item
Type
Item
Study Objective 1
35. MC
38. MC
41.
36. MC
39. MC
42.
37. MC
40. MC
149.
Study Objective 2
47. MC
50. MC
53.
48. MC
51. MC
54.
49. MC
52. MC
55.
Study Objective 3
63. MC
68. MC
73.
64. MC
69. MC
74.
65. MC
70. MC
75.
66. MC
71. MC
126.
67. MC
72. MC
127.
Study Objective 4
76. MC
78. MC
80.
77. MC
79. MC
128.
Study Objective 5
84. MC
88. MC
92.
85. MC
89. MC
130.
86. MC
90. MC
140.
87. MC
91. MC
141.
Study Objective 6a
96. MC
99. MC
102.
97. MC
100. MC
131.
98. MC
101. MC
132.
Study Objective 7a
109. MC
114. MC
119.
110. MC
115. MC
120.
111. MC
116. MC
133.
112. MC
117. MC
134.
113. MC
118. MC
144.
Study Objective 8a
122. MC 124. MC
147.
123. MC 125. MC
148.
Note: TF = True-False
MC = Multiple Choice
C = Completion
BE = Brief Exercise
Type
Item
Type
Item
Type
59.
150.
MC
C
139.
153.
Ex
C
157.
MC
MC
C
MC
MC
MC
56.
57.
58.
MC
MC
MC
MC
MC
MC
BE
BE
135.
136.
137.
151.
152.
Ex
Ex
Ex
C
C
MC
BE
129.
138.
BE
Ex
MC
BE
Ex
Ex
154.
155.
C
C
MC
BE
BE
142.
143.
156.
Ex
Ex
C
MC
MC
BE
BE
Ex
145.
146.
158.
159.
Ex
Ex
C
C
Ex
Ex
160.
Ex = Exercise
6-3
6. Explain the difference between absorption costing and variable costing. Under
absorption costing, fixed manufacturing costs are product costs. Under variable costing, fixed
manufacturing costs are period costs.
7. Discuss net income effects under absorption costing versus variable costing. If
production volume exceeds sales volume, net income under absorption costing will exceed
net income under variable costing by the amount of fixed manufacturing costs included in
ending inventory that results from units produced but not sold during the period. If production
volume is less than sales volume, net income under absorption costing will be less than
under variable costing by the amount of fixed manufacturing costs included in the units sold
during the period that were not produced during the period.
8. Discuss the merits of absorption versus variable costing for management decision
making. The use of variable costing is consistent with cost-volume-profit analysis. Net
income under variable costing is unaffected by changes in production levels. Instead, it is
closely tied to changes in sales. The presentation of fixed costs in the variable costing
approach makes it easier to identify fixed costs and to evaluate their impact on the
companys profitability.
6-4
TRUE-FALSE STATEMENTS
1.
The CVP income statement classifies costs as variable or fixed and computes a
contribution margin.
2.
In CVP analysis, cost includes manufacturing costs but not selling and administrative
expenses.
3.
When a company is in its early stages of operation, its primary goal is to generate a target
net income.
4.
The margin of safety tells a company how far sales can drop before it will be operating at
a loss.
5.
Sales mix is a measure of the percentage increase in sales from period to period.
6.
Sales mix is not important to managers when different products have substantially
different contribution margins.
7.
8.
If Conan Corporation sells two products with a sales mix of 75% : 25%, and the respective
contribution margins are $100 and $300, then weighted-average unit contribution margin
is $150.
9.
If fixed costs are $100,000 and weighted-average unit contribution margin is $50, then the
break-even point in units is 2,000 units.
10.
11.
12.
When a company has limited resources, management must decide which products to
make and sell in order to maximize net income.
13.
14.
If a company has limited machine hours available for production, it is generally more
profitable to produce and sell the product with the highest contribution margin per machine
hour.
15.
According to the theory of constraints, a company must identify its constraints and find
ways to reduce or eliminate them.
16.
Cost structure refers to the relative proportion of fixed versus variable costs that a
company incurs.
17.
Operating leverage refers to the extent to which a companys net income reacts to a given
change in fixed costs.
6-5
18.
19.
If OBrien Company has a margin of safety ratio of .60, it could sustain a 60 percent
decline in sales before it would be operating at a loss.
20.
A company with low operating leverage will experience a sharp increase in net income
with a given increase in sales.
21.
Variable costing is the approach used for external reporting under generally accepted
accounting principles.
22.
The difference between absorption costing and variable costing is the treatment of fixed
manufacturing overhead.
23.
Selling and administrative costs are period costs under both absorption and variable
costing.
24.
Manufacturing cost per unit will be higher under variable costing than under absorption
costing.
25.
Some fixed manufacturing costs of the current period are deferred to future periods
through ending inventory under variable costing.
26.
When units produced exceed units sold, income under absorption costing is higher than
income under variable costing.
27.
When units sold exceed units produced, income under absorption costing is higher than
income under variable costing.
28.
When absorption costing is used for external reporting, variable costing can still be used
for internal reporting purposes.
29.
30.
1.
2.
3.
4.
5.
Ans.
T
F
F
T
F
Item
6.
7.
8.
9.
10.
Ans.
F
T
T
T
T
Item
11.
12.
13.
14.
15.
Ans.
F
T
F
T
T
Item
16.
17.
18.
19.
20.
Ans.
T
F
T
T
F
Item
a
21.
a
22.
a
23.
a
24.
a
25.
Ans.
F
T
T
F
F
Item
a
26.
a
27.
a
28.
a
29.
a
30.
Ans.
T
F
T
T
F
6-6
32.
33.
34.
Buerhrles CVP income statement included sales of 2,000 units, a selling price of $100,
variable expenses of $60 per unit, and fixed expenses of $44,000. Contribution margin is
a. $200,000.
b. $120,000.
c. $80,000.
d. $36,000.
35.
Buerhrles CVP income statement included sales of 2,000 units, a selling price of $100,
variable expenses of $60 per unit, and fixed expenses of $44,000. Net income is
a. $200,000.
b. $80,000.
c. $76,000.
d. $36,000.
36.
For Dye Company, at a sales level of 5,000 units, sales is $75,000, variable expenses
total $40,000, and fixed expenses are $21,000. What is the contribution margin per unit?
a. $2.80
b. $7.00
c. $8.00
d. $15.00
37.
If contribution margin is $200,000, sales is $300,000, and net income is $30,000, then
variable and fixed expenses are
a.
b.
c.
d.
Variable
$100,000
$100,000
$170,000
$500,000
Fixed
$270,000
$170,000
$100,000
$270,000
6-7
Vazquez Companys cost of goods sold is $350,000 variable and $200,000 fixed. The
companys selling and administrative expenses are $250,000 variable and $300,000 fixed.
If the companys sales is $1,400,000, what is its contribution margin?
a. $300,000
b. $800,000
c. $850,000
d. $900,000
41. Vazquez Companys cost of goods sold is $350,000 variable and $200,000 fixed. The
companys selling and administrative expenses are $250,000 variable and $300,000 fixed.
If the companys sales is $1,400,000, what is its net income?
a. $300,000
b. $800,000
c. $850,000
d. $900,000
42.
Garlands CVP income statement included sales of 3,000 units, a selling price of $100,
variable expenses of $60 per unit, and net income of $50,000. Fixed expenses are
a. $70,000.
b. $120,000.
c. $180,000.
d. $300,000.
43.
44.
For Danks Company, sales is $500,000, variable expenses are $310,000, and fixed
expenses are $140,000. Danks contribution margin ratio is
a. 10%.
b. 28%.
c. 38%.
d. 62%.
6-8
45.
For Contreras Company, sales is $1,000,000, fixed expenses are $300,000, and the
contribution margin per unit is $72. What is the break-even point?
a. $1,388,889 sales dollars
b. $416,667 sales dollars
c. 13,889 units
d. 4,167 units
46.
For Garland Company, sales is $1,000,000, fixed expenses are $300,000, and the
contribution margin ratio is 36%. What is net income?
a. $60,000
b. $108,000
c. $252,000
d. $360,000
47.
For Garland Company, sales is $1,000,000, fixed expenses are $300,000, and the
contribution margin ratio is 36%. What are the total variable expenses?
a. $192,000
b. $360,000
c. $640,000
d. $1,000,000
48.
In 2008, Masset sold 3,000 units at $500 each. Variable expenses were $350 per unit,
and fixed expenses were $200,000. What was Massets 2008 net income?
a. $250,000
b. $450,000
c. $1,050,000
d. $1,500,000
49.
In 2008, Masset sold 3,000 units at $500 each. Variable expenses were $350 per unit,
and fixed expenses were $200,000. The same selling price, variable expenses, and fixed
expenses are expected for 2009. What is Massets break-even point in sales dollars for
2009?
a. $666,667
b. $1,333,333
c. $1,500,000
d. $2,142,857
50.
In 2008, Masset sold 3,000 units at $500 each. Variable expenses were $350 per unit,
and fixed expenses were $200,000. The same selling price, variable expenses, and fixed
expenses are expected for 2009. What is Massets break-even point in units for 2009?
a. 1,333
b. 3,000
c. 4,285
d. 6,667
51.
6-9
52.
For Jon Company, sales is $1,000,000, fixed expenses are $300,000, and the contribution
margin ratio is 36%. What is required sales in dollars to earn a target net income of
$200,000?
a. $555,556
b. $833,333
c. $1,388,889
d. $2,777,778
53.
Jenks Corporation reported sales of $2,000,000 last year (100,000 units at $20 each),
when the break-even point was 80,000 units. Jenks margin of safety ratio is
a. 20%.
b. 25%.
c. 80%.
d. 120%.
54.
For Bobby Company, sales is $1,000,000 (5,000 units), fixed expenses are $300,000, and
the contribution margin per unit is $80. What is the margin of safety in dollars?
a. $50,000
b. $250,000
c. $450,000
d. $700,000
55.
56.
57.
In 2008, McDougal sold 3,000 units at $500 each. Variable expenses were $350 per unit,
and fixed expenses were $195,000. The same variable expenses per unit and fixed
expenses are expected for 2009. If McDougal cuts selling price by 4%, what is
McDougals break-even point in units for 2009?
a. 1,300
b. 1,354
c. 1,440
d. 1,500
58.
In 2008, Thornton sold 3,000 units at $500 each. Variable expenses were $250 per unit,
and fixed expenses were $150,000. The same selling price is expected for 2009. Thornton
is tentatively planning to invest in equipment that would increase fixed costs by 20%, while
decreasing variable costs per unit by 20%. What is Thorntons break-even point in units
for 2009?
a. 600
b. 720
c. 750
d. 900
6 - 10
59.
In 2008, Logan sold 1,000 units at $500 each, and earned net income of $40,000.
Variable expenses were $300 per unit, and fixed expenses were $160,000. The same
selling price is expected for 2009. Logans variable cost per unit will rise by 10% in 2009
due to increasing material costs, so they are tentatively planning to cut fixed costs by
$10,000. How many units must Logan sell in 2009 to maintain the same income level as
2008?
a. 882
b. 1,000
c. 1,056
d. 1,118
60.
Sales mix is
a. the relative percentage in which a company sells its multiple products.
b. the trend of sales over recent periods.
c. the mix of variable and fixed expenses in relation to sales.
d. a measure of leverage used by the company.
61.
In a sales mix situation, at any level of units sold, net income will be higher if
a. more higher contribution margin units are sold than lower contribution margin units.
b. more lower contribution margin units are sold than higher contribution margin units.
c. more fixed expenses are incurred.
d. weighted-average unit contribution margin decreases.
62.
Konerko Company sells two types of computer chips. The sales mix is 30% (Q-Chip) and
70% (Q-Chip Plus). Q-Chip has variable costs per unit of $30 and a selling price of $50.
Q-Chip Plus has variable costs per unit of $35 and a selling price of $65. The weightedaverage unit contribution margin for Konerko is
a. $23.
b. $25.
c. $27.
d. $50.
63.
Iguchi Company sells 2,000 units of Product A annually, and 3,000 units of Product B
annually. The sales mix for Product A is
a. 40%.
b. 60%.
c. 67%.
d. cannot determine from information given.
64.
Konerko Company sells two types of computer chips. The sales mix is 30% (Q-Chip) and
70% (Q-Chip Plus). Q-Chip has variable costs per unit of $30 and a selling price of $50.
Q-Chip Plus has variable costs per unit of $35 and a selling price of $65. Konerkos fixed
costs are $540,000. How many units of Q-Chip would be sold at the break-even point?
a. 6,000
b. 7,043
c. 10,000
d. 14,000
6 - 11
66.
68.
69.
What will sales be for the Sporting Goods Division at the break-even point?
a. $1,800,000
b. $2,100,000
c. $3,355,814
d. $3,900,000
70.
71.
6 - 12
72.
Standard Division
$400,000
280,000
$120,000
Premium Division
$600,000
360,000
$240,000
Total
$1,000,000
$300,000
73.
74.
75.
The sales mix percentages for Guillens Chicago and Charlotte Divisions are 70% and
30%. The contribution margin ratios are: Chicago (40%) and Charlotte (30%). Fixed costs
are $555,000. What is Guillens break-even point in dollars?
a. $194,250
b. $1,500,000
c. $1,585,714
d. $1681,818
76. A company can sell all the units it can produce of either Product A or Product B but not both.
Product A has a unit contribution margin of $16 and takes two machine hours to make and
Product B has a unit contribution margin of $30 and takes three machine hours to make. If
there are 1,000 machine hours available to manufacture a product, income will be
a. $2,000 more if Product A is made.
b. $2,000 less if Product B is made.
c. $2,000 less if Product A is made.
d. the same if either product is made.
77.
Dye Company can sell all the units it can produce of either Plain or Fancy but not both.
Plain has a unit contribution margin of $96 and takes two machine hours to make and
Fancy has a unit contribution margin of $120 and takes three machine hours to make.
There are 2,400 machine hours available to manufacture a product. What should Dye do?
a. Make Fancy which creates $24 more profit per unit than Plain does.
b. Make Plain which creates $8 more profit per machine hour than Fancy does.
c. Make Plain because more units can be made and sold than Fancy.
d. The same total profits exist regardless of which product is made.
What is the key factor in determining sales mix if a company has limited resources?
a. Contribution margin per unit of limited resource
b. The amount of fixed costs per unit
c. Total contribution margin
d. The cost of limited resources
79.
Jermaines Vittles can produce and sell only one of the following two products:
Oven
Hours Required
Crackers
0.2
Bread sticks
0.3
6 - 13
Contribution
Margin Per Unit
$3
$4
The company has oven capacity of 600 hours. How much will contribution margin be if it
produces only the most profitable product?
a. $6,000
b. $8,000
c. $9,000
d. $12,000
80.
S-Pods contribution margin is $10 per unit for Product A and $12 for Product B. Product
A requires 2 machine hours and Product B requires 4 machine hours. How much is the
contribution margin per unit of limited resource for each product?
A
B
a. $5.00
$3.00
b. $5.00
$3.33
c. $4.00
$3.00
d. $4.00
$3.33
81.
Cost structure
a. refers to the relative proportion of fixed versus variable costs that a company incurs.
b. generally has little impact on profitability.
c. cannot be significantly changed by companies.
d. refers to the relative proportion of operating versus nonoperating costs that a company
incurs.
82.
83.
Reducing reliance on human workers and instead investing heavily in computers and
online technology will
a. reduce fixed costs and increase variable costs.
b. reduce variable costs and increase fixed costs.
c. have no effect on the relative proportion of fixed and variable costs.
d. make the company less susceptible to economic swings.
6 - 14
84.
86.
87.
88.
89.
6 - 15
90.
A cost structure which relies more heavily on fixed costs makes the company
a. more sensitive to changes in sales revenue.
b. less sensitive to changes in sales revenue.
c. either more or less sensitive to changes in sales revenue, depending on other factors.
d. have a lower break-even point.
91.
92.
93.
Only direct materials, direct labor, and variable manufacturing overhead costs are
considered product costs when using
a. full costing.
b. absorption costing.
c. variable costing.
d. product costing.
94.
When a company assigns the costs of direct materials, direct labor, and both variable and
fixed manufacturing overhead to products, that company is using
a. operations costing.
b. absorption costing.
c. variable costing.
d. product costing.
95.
96.
Under absorption costing and variable costing, how are fixed manufacturing costs
treated?
a.
b.
c.
d.
Absorption
Product Cost
Product Cost
Period Cost
Period Cost
Variable
Product Cost
Period Cost
Product Cost
Period Cost
6 - 16
a
97.
98.
99.
Variable
Product Cost
Period Cost
Product Cost
Period Cost
Under absorption costing and variable costing, how are direct labor costs treated?
a.
b.
c.
d.
Absorption
Product Cost
Product Cost
Period Cost
Period Cost
Absorption
Product Cost
Product Cost
Period Cost
Period Cost
Variable
Product Cost
Period Cost
Product Cost
Period Cost
100. Which cost is not charged to the product under variable costing?
a. Direct materials
b. Direct labor
c. Variable manufacturing overhead
d. Fixed manufacturing overhead
104.
6 - 17
107.
Under absorption costing, what amount of fixed overhead is deferred to a future period?
a. $20,000
b. $80,000
c. $100,000
d. $480,000
108.
109.
110.
111. The one primary difference between variable and absorption costing is that under
a. variable costing, companies charge the fixed manufacturing overhead as an expense
in the current period.
b. absorption costing, companies charge the fixed manufacturing overhead as an
expense in the current period.
c. variable costing, companies charge the variable manufacturing overhead as an
expense in the current period.
d. absorption costing, companies charge the variable manufacturing overhead as an
expense in the current period.
6 - 18
112. Net income under absorption costing is higher than net income under variable costing
a. when units produced exceed units sold.
b. when units produced equal units sold.
c. when units produced are less than units sold.
d. regardless of the relationship between units produced and units sold.
113. Some fixed manufacturing overhead costs of the current period are deferred to future
periods under
a. absorption costing.
b. variable costing.
c. both absorption and variable costing.
d. neither absorption nor variable costing.
117.
120.
6 - 19
period under
period under
future period
future period
122. If a division managers compensation is based upon the divisions net income, the
manager may decide to meet the net income targets by increasing production when using
a. variable costing, in order to increase net income.
b. variable costing, in order to decrease net income.
c. absorption costing, in order to increase net income.
d. absorption costing, in order to decrease net income.
a
123. Expected sales for next year for the Huxtable Division is 150,000 units. Bill Cosby,
manager of the Huxtable Division, is under pressure to improve the performance of the
Division. As he plans for next year, he has to decide whether to produce 150,000 units or
180,000 units. The Huxtable Division will have higher net income if Bill Cosby decides to
produce
a. 180,000 units if income is measured under absorption costing.
b. 180,000 units if income is measured under variable costing.
c. 150,000 units if income is measured under absorption costing.
d. 150,000 units if income is measured under variable costing.
124. Which of the following is a potential advantage of variable costing relative to absorption
costing?
a. Net income is affected by changes in production levels.
b. The use of variable costing is consistent with cost-volume-profit analysis.
c. Net income computed under variable costing is not closely tied to changes in sales
levels.
d. More than one of the above.
6 - 20
a
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
Ans.
a
a
c
c
d
b
b
d
d
b
a
a
d
c
Item
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
Ans.
d
a
c
a
a
a
c
c
a
b
b
c
d
a
Item
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
Ans.
d
a
a
c
a
a
a
c
a
d
d
b
a
a
Item
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
Ans.
Item
Ans.
c
b
b
c
b
a
c
a
a
a
b
d
d
b
87.
88.
89.
90.
91.
92.
a
93.
a
94.
a
95.
a
96.
a
97.
a
98.
a
99.
a
100.
d
c
b
a
a
c
c
b
d
b
a
a
a
d
Item
a
101.
a
102.
a
103.
a
104.
a
105.
a
106.
a
107.
a
108.
a
109.
a
110.
a
111.
a
112.
a
113.
a
114.
Ans.
a
c
c
b
c
a
b
d
b
c
a
a
a
b
Item
a
115.
a
116.
a
117.
a
118.
a
119.
a
120.
a
121.
a
122.
a
123.
a
124.
a
125.
Ans.
c
a
d
b
a
b
c
c
a
b
b
BRIEF EXERCISES
BE 126
Haldi Corporation sells three different sets of sportswear. Sleek sells for $30 and has variable
costs of $18; Smooth sells for $50 and has variable costs of $30; Potent sells for $90 and has
variable costs of $45. The sales mix of the three sets is: Sleek, 50%; Smooth, 30%; and Potent,
20%.
Instructions
What is the weighted-average unit contribution margin?
Solution 126
(68 min.)
Sleek:
50% ($30 $18)
=
Smooth:
30% ($50 $30)
=
Potent:
20% ($90 $45)
=
Weighted-average unit contribution margin
$ 6
6
9
$21
6 - 21
BE 127
Garrett Corporation sells two product lines. The sales mix of the product lines is: Standard, 60%;
and Deluxe, 40%. The contribution margin ratio of each line is: Standard, 35%; and Deluxe, 45%.
Garretts fixed costs are $1,950,000.
Instructions
What is the dollar amount of Deluxe sales at the break-even point?
Solution 127
(68 min.)
Standard:
60% 35%
=
Deluxe:
40% 45%
=
Weighted-average contribution margin ratio
21%
18%
39%
Product 12
$20
2.5 hours
Product 43
$15
1.5 hours
Instructions
Compute the contribution margin per unit of limited resource for each product. Which product
should Carpenter tell its sales personnel to push to customers?
Solution 128
(35 min.)
Footballs
2,000
$60,000
24,000
10,000
$26,000
1.25
$13.00
$18.00
Baseballs
3,000
$25,000
13,750
5,250
$ 6,000
0.25
$2.00
$3.75
6 - 22
BE 129 (cont.)
Assume that Ace is able to order an additional 2,000 yards of leather and wishes to maximize its
income. Of the additional units it produces, at least 400 of each product are necessary for sales.
Instructions
How many units of each must be produced?
Solution 129
(57 min.)
Footballs
$18 1.25 = $14.40
Baseballs
$3.75 .25 = $15
(46 min.)
Contribution margin
$250,000
$300,000
Net Income
$100,000
$100,000
=
=
=
After the new equipment is purchased, Nortons earnings would go up (or down) by 1.2 times (3
2.5) as much as it would have before the purchase, with an equal increase (or decrease) in sales.
a
BE 131
Huskie Company produces footballs. It incurred the following costs this year:
Direct materials
Direct labor
Fixed manufacturing overhead
Variable manufacturing overhead
Fixed selling and administrative expenses
Variable selling and administrative expenses
$25,000
31,000
22,000
38,000
23,000
14,000
Instructions
What are the total product costs for the company under variable costing?
Solution 131
(35 min.)
Direct materials
Direct labor
Variable manufacturing overhead
Total product costs under variable costing
a
6 - 23
$25,000
31,000
38,000
$94,000
BE 132
Huskie Company produces footballs. It incurred the following costs this year:
Direct materials
Direct labor
Fixed manufacturing overhead
Variable manufacturing overhead
Fixed selling and administrative expenses
Variable selling and administrative expenses
$25,000
31,000
22,000
38,000
23,000
14,000
Instructions
What are the total product costs for the company under absorption costing?
a
Solution 132
(35 min.)
Direct materials
Direct labor
Fixed manufacturing overhead
Variable manufacturing overhead
Total product costs under absorption costing
a
$ 25,000
31,000
22,000
38,000
$116,000
BE 133
During 2008, Nowak Corporation produced 60,000 units and sold 55,000 for $10 per unit.
Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was
$120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed
selling and administrative costs were $30,000.
Instructions
Prepare a variable costing income statement.
a
Solution 133
(57 min.)
$550,000
$220,000
55,000
120,000
30,000
275,000
275,000
150,000
$125,000
6 - 24
a
BE 134
During 2008, Nowak Corporation produced 60,000 units and sold 55,000 for $10 per unit.
Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was
$120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed
selling and administrative costs were $30,000.
Instructions
Prepare an absorption costing income statement.
a
Solution 134
(57 min.)
$550,000
330,000
220,000
$55,000
30,000
85,000
$135,000
EXERCISES
Ex. 135
Trail King manufactures mountain bikes. It has fixed costs of $5,360,000. Trail Kings sales mix
and contribution margin per unit is shown as follows:
Sales Mix
20%
55%
25%
Destroyer
Voyager
Rebel
Contribution Margin
$120
$ 60
$ 40
Instructions
Compute the number of each type of bike that the company would need to sell in order to break
even under this product mix.
Solution 135
Destroyer
Voyager
Rebel
(812 min.)
Sales Mix
20%
55%
25%
Contribution Margin
$120
$ 60
$ 40
Weighted-Average
Contribution Margin
$24
$33
$10
$67
Sales Mix
20%
55%
25%
80,000
80,000
80,000
=
=
=
16,000 bikes
44,000 bikes
20,000 bikes
6 - 25
Ex. 136
Account-Able Company provides primarily two lines of service: accounting and tax. Accountingrelated services represent 60% of its revenue and provide a contribution margin ratio of 30%. Tax
services represent 40% of its revenue and provide a 45% contribution margin ratio. The
companys fixed costs are $9,000,000.
Instructions
(a) Calculate the revenue from each type of service that the company must achieve to break
even.
(b) The company has a desired net income of $1,800,000. What amount of revenue would
Account-Able earn from tax services if it achieves this goal with the current sales mix?
Solution 136
(1015 min.)
(a)
Accounting
Tax
Contribution
Margin Ratio
30%
45%
Sales Mix
60%
40%
Weighted-Average
Contribution Margin Ratio
18%
18%
36%
Sales Mix
60%
40%
$25,000,000 = $15,000,000
$25,000,000 = $10,000,000
(b) Sales to achieve target net income = ($9,000,000 + $1,800,000) .36 = $30,000,000
Tax
Sales Mix
40%
$30,000,000 = $12,000,000
Ex. 137
Mad City Flash Company sells computers and video game systems. The business is divided into
two divisions along product lines. Variable costing income statements for the current year are
presented below:
Computers
VG Systems
Total
Sales
$700,000
$300,000
$1,000,000
Variable costs
420,000
210,000
630,000
Contribution margin
$280,000
$ 90,000
370,000
Fixed costs
259,000
Net income
$ 111,000
Instructions
(a) Determine the sales mix and contribution margin ratio for each division.
(b) Calculate the companys weighted-average contribution margin ratio.
(c) Calculate the companys break-even point in dollars.
(d) Determine the sales level, in dollars, for each division at the break-even point.
6 - 26
Solution 137
(1520 min.)
(b) Weighted-average contribution margin ratio = (70% 40%) + (30% 30%) = 37%
(c) Break-even point in dollars = $259,000 .37 = $700,000
(d) Sales dollars at break-even point:
Computers:
$700,000 .70 = $490,000
VG Systems:
$700,000 .30 = $210,000
Ex. 138
Movie House Company has 4,000 machine hours available to produce either Product 22 or
Product 44. The cost accounting department developed the following unit information for each
product:
Product 22
Product 44
Sales price
$20
$40
Direct materials
5
8
Direct labor
3
2
Variable manufacturing overhead
4
5
Fixed manufacturing overhead
3
5
Machine time required
15 minutes
60 minutes
Instructions
Management wants to know which product to produce in order to maximize the companys
income. Taking into consideration the constraints under which the company operates, prepare a
report to show which product should be produced and sold.
Solution 138
(1012 min.)
Product 22
$20
$5
3
4
12
$ 8
1/4 hr
Product 44
$40
$8
2
5
15
$25
1 hr
$
25
4,000
$100,000
6 - 27
Ex. 139
PHR Company manufactures and sells two products. Relevant per unit data concerning each
product are given below:
Product
Standard
Deluxe
Selling price
$50
$75
Variable costs
$24
$30
Machine hours
2
3
Instructions
(a) Compute the contribution margin per unit of limited resource for each product.
(b) If 1,000 additional machine hours are available, which product should be manufactured?
Solution 139
(68 min.)
(a)
Product
Contribution margin per unit
Machine hours required
Contribution margin per unit of limited resource
Standard
$26
2
$13
Deluxe
$45
3
$15
(b) The Deluxe product should be manufactured because it results in the highest contribution
margin per machine hour: $15 1,000 = $15,000.
Ex. 140
The following CVP income statements are available for Antique Company and Contemporary
Company.
Antique Company
Contemporary Company
Sales revenue
$700,000
$700,000
Variable costs
350,000
140,000
Contribution margin
350,000
560,000
Fixed costs
150,000
360,000
Net income
$200,000
$200,000
Instructions
(a) Compute the degree of operating leverage for each company.
(b) Assume that sales revenue decreases by 20%. Prepare a CVP income statement for each
company.
Solution 140
(a)
(1520 min.)
Contribution Margin
Antique
$350,000
Contemporary
$560,000
Net Income
$200,000
$200,000
=
=
=
6 - 28
Solution 140
(cont.)
(b)
Sales revenue
Variable costs
Contribution margin
Fixed costs
Net income
Antique Company
$560,000*
280,000**
280,000
150,000
$130,000
Contemporary Company
$560,000*
112,000***
448,000
360,000
$ 88,000
*$700,000 .8
**($350,000 $700,000) $560,000
***($140,000 $700,000) $560,000
Ex. 141
An investment banker is analyzing two companies that specialize in the production and sale of
gourmet cappuccino and chai mixes. Fireside Company uses a labor-intensive approach and
Stirring Moments Company uses a mechanized system. Variable costing income statements for
the two companies are shown below:
Fireside
$1,000,000
650,000
350,000
150,000
$ 200,000
Sales
Variable costs
Contribution margin
Fixed costs
Net Income
Stirring Moments
$1,000,000
300,000
700,000
500,000
$ 200,000
The investment banker is interested in acquiring one of these companies. However, she is
concerned about the impact that each companys cost structure might have on its profitability.
Instructions
(a) Calculate each companys degree of operating leverage.
(b) Determine the effect on each companys net income if sales decrease by 10% and if sales
increase by 20%. Do not prepare income statements.
Solution 141
(810 min.)
(a)
Fireside
St. Moments
Contribution Margin
$350,000
$700,000
(b)
Fireside
St. Moments
Fireside
St. Moments
% Change in Sales
(10%)
(10%)
20%
20%
Net Income
$200,000
$200,000
=
=
=
Degree of
Operating Leverage
1.75
3.50
1.75
3.50
% Change in
Net Income
(17.5%)
(35.0%)
=
=
35.0%
70.0%
6 - 29
Ex. 142
Indicate with a check mark whether each of the following would be a product cost or a period cost
under an absorption or a variable system for Carson Company.
Absorption
Product
Period
Variable
Product
Period
a. Direct materials
_________
_________
_________
_________
b. Direct labor
_________
_________
_________
_________
c. Factory utilities
_________
_________
_________
_________
d. Factory rent
_________
_________
_________
_________
e. Indirect labor
_________
_________
_________
_________
f.
_________
_________
_________
_________
_________
_________
_________
_________
h. Factory depreciation
_________
_________
_________
_________
i.
Sales salaries
_________
_________
_________
_________
j.
Sales commissions
_________
_________
_________
_________
Solution 142
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
a
(1015 min.)
Direct materials
Direct labor
Factory utilities
Factory rent
Indirect labor
Factory supervisor salaries
Factory maintenance (variable)
Factory depreciation
Sales salaries
Sales commissions
Absorption
Product
Period
________
__________
________
__________
________
__________
________
__________
________
__________
________
__________
________
__________
________
__________
__________
________
__________
________
Variable
Product
Period
________
_________
________
_________
________
_________
__________
_______
________
_________
__________
_______
________
_________
__________
_______
__________
_______
__________
_______
Ex. 143
Fresh Air Products Company manufactures and sells a variety of camping products. Recently the
company opened a new plant to manufacture a deluxe portable cooking unit. Cost and sales data
for the first month of operations are shown below:
Manufacturing Costs
Fixed Overhead
Variable overhead
Direct labor
Direct material
$120,000
$3 per unit
$12 per unit
$30 per unit
Beginning inventory
Units produced
Units sold
0 units
12,000
11,000
6 - 30
a
$200,000
$4 per unit sold
The portable cooking unit sells for $110. Management is interested in the opening months results
and has asked for an income statement.
Instructions
Assume the company uses absorption costing. Calculate the production cost per unit and prepare
an income statement for the month of June, 2008.
a
Solution 143
(812 min.)
Direct materials
Direct labor
Variable overhead
Fixed overhead ($120,000 12,000)
Total cost
Per Unit
$30
12
3
10
$55
$1,210,000
605,000
605,000
$ 44,000
200,000
244,000
$ 361,000
Ex. 144
Momentum Bikes Company manufactures a basic road bicycle. Production and sales data for the
most recent year are as follows (no beginning inventory):
Variable production costs
Fixed production costs
Variable selling and administrative costs
Fixed selling and administrative costs
Selling price
Production
Sales
Instructions
(a) Prepare a brief income statement using absorption costing.
(b) Compute the amount to be reported for inventory in the year-end absorption costing balance
sheet.
Solution 144
(a)
(812 min.)
(b)
a
6 - 31
$3,600,000
2,070,000
1,530,000
916,000
$ 614,000
$ 90 per bike
25 per bike
$115 per bike
Ex. 145
Momentum Bikes Company manufactures a basic road bicycle. Production and sales data for the
most recent year are as follows (no beginning inventory):
Variable production costs
Fixed production costs
Variable selling and administrative costs
Fixed selling and administrative costs
Selling price
Production
Sales
Instructions
(a) Prepare a brief income statement using variable costing.
(b) Compute the amount to be reported for inventory in the year-end variable costing balance
sheet.
a
Solution 145
(a)
(b)
(812 min.)
$3,600,000
$1,620,000
396,000
500,000
520,000
2,016,000
1,584,000
1,020,000
$ 564,000
6 - 32
a
Ex. 146
Dolan Company produces sporting equipment. In 2008, the first year of operations, Dolan
produced 25,000 units and sold 22,000 units. In 2009, the production and sales results were
exactly reversed. In each year, selling price was $100, variable manufacturing costs were $40 per
unit, variable selling expenses were $8 per unit, fixed manufacturing costs were $540,000, and
fixed administrative expenses were $200,000.
Instructions
(a) Compute the net income under variable costing for each year.
(b) Compute the net income under absorption costing for each year.
(c) Reconcile the differences each year in income from operations under the two costing
approaches.
a
Solution 146
(2025 min.)
$404,000
$560,000
64,800
$468,800
(64,800)
$495,200
Ex. 147
McCartney Pumps is a division of UK Controls Corporation. The division manufactures and sells
a pump that is used in a wide variety of applications. During the coming year, it expects to sell
30,000 units for $20 per unit. George Harrison, division manager, is considering producing either
30,000 or 50,000 units during the period. Other information is presented in the schedule below:
Division Information 2008
Beginning inventory
Expected sales in units
Selling price per unit
Variable manufacturing cost per unit
Fixed manufacturing overhead costs (total)
Fixed manufacturing overhead costs per unit
Based on 30,000 units ($300,000 30,000)
Based on 50,000 units ($300,000 50,000)
Manufacturing cost per unit
Based on 30,000 units ($7 variable + $10 fixed)
Based on 50,000 units ($7 variable + $6 fixed)
Selling and administrative expenses (all fixed)
0
30,000
$20
$7
$300,000
$10
$6
$17
$13
$25,000
6 - 33
Instructions
(a) Prepare and absorption costing income statement with one column showing the results if
30,000 units are produced and one column showing the results if 50,000 units are produced.
(b) Why is income different for the two production levels when sales is 30,000 units either way?
Solution 147
(a)
(1520 min.)
McCartney Pumps Division
Income Statement (Absorption Costing)
For the Year Ended 2008
30,000 Produced
50,000 Produced
Sales (30,000 units $20)
$600,000
$600,000
Cost of goods sold
510,000 (30,000 $17)
390,000 (30,000 $13)
Gross profit
90,000
210,000
Fixed selling and admin. expenses
25,000
25,000
Net income
$ 65,000
$185,000
(b)
Net income is $120,000 higher when 50,000 units are produced because under absorption
costing, $120,000 of fixed manufacturing costs (20,000 $6) are deferred to the next year.
Ex. 148
McCartney Pumps is a division of UK Controls Corporation. The division manufactures and sells
a pump that is used in a wide variety of applications. During the coming year, it expects to sell
30,000 units for $20 per unit. George Harrison, division manager, is considering producing either
30,000 or 50,000 units during the period. Other information is presented in the schedule below:
Division Information 2008
Beginning inventory
0
Expected sales in units
30,000
Selling price per unit
$20
Variable manufacturing cost per unit
$7
Fixed manufacturing overhead costs (total)
$300,000
Fixed manufacturing overhead costs per unit
Based on 30,000 units ($300,000 30,000)
$10
Based on 50,000 units ($300,000 50,000)
$6
Manufacturing cost per unit
Based on 30,000 units ($7 variable + $10 fixed)
$17
Based on 50,000 units ($7 variable + $6 fixed)
$13
Selling and administrative expenses (all fixed)
$25,000
Instructions
Prepare a variable costing income statement with one column showing the results if 30,000 units
are produced and one column showing the results if 50,000 units are produced.
6 - 34
a
Solution 148
(1520 min.)
McCartney Pumps Division
Income Statement (Variable Costing)
For the Year Ended 2008
30,000 Produced
$600,000
210,000
390,000
300,000
25,000
$ 65,000
50,000 Produced
$600,000
210,000
390,000
300,000
25,000
$ 65,000
6 - 35
COMPLETION STATEMENTS
149. The ______________ income statement classifies cost as variable or fixed and computes
a contribution margin.
150. _________________ tells a company how far sales can drop before it will be operating at
a loss.
151. ___________________ is the relative percentage in which a company sells its multiple
products.
152. When more than one product is sold, the break-even point can be determined by dividing
fixed expenses by _______________________.
153. When a company has ________________, management must decide which products to
make and sell in order to maximize net income.
154. ___________________ refers to the relative proportion of fixed versus variable costs that
a company incurs.
155. The _________________________ provides a measure of a companys earnings volatility
and can be used to compare companies.
a
156. Under _____________________ all manufacturing costs are charged to, or absorbed by,
the product.
157. Fixed manufacturing costs are treated as period costs under ______________________.
159. When units produced exceed units sold, income under absorption costing is ___________
than income under variable costing.
160. Management may be tempted to overproduce in a given period in order to increase net
income if _______________ is used for internal decision making.
CVP
Margin of safety
Sales mix
weighted-average unit contribution
limited resources
Cost structure
155.
156.
a
157.
a
158.
a
159.
a
160.
a
6 - 36
S-A E 163
Define variable costing and absorption costing. What are some of the benefits to a manager from
using variable costing instead of absorption costing for internal decision making?
a
Solution 163
Variable costing is a system for determining product costs that is used primarily for making
managerial decisions. This system determines product costs by considering only direct materials,
direct labor, and variable manufacturing overhead. In contrast, absorption costing is used by
some managers and also for external reporting. Under absorption costing, product costs include
direct materials, direct labor, and both fixed and variable manufacturing overhead costs.
Some of the benefits to a manager from using variable costing instead of absorption costing for
internal decision-making include: variable costing already has to be used when constructing a
contribution margin income statement, variable costing puts greater focus on cost behaviors,
fixed expenses do not get tied up in inventory under variable costing, variable costing is better
6 - 37
suited for cost-volume-profit analysis, variable costing produces income statements that are
closer to net cash flows than absorption costing, and the method ties in with standard costing and
flexible budgeting more effectively.
a
S-A E 164
How do differences in production and sales levels affect income under absorption and variable
costing?.
a
Solution 164
If production equals sales in any given period, the net incomes under both absorption and
variable costing will be equal. Under this scenario, fixed manufacturing overhead will not differ,
because the direct cost expense under variable costing will be equal to the product cost
component of fixed overhead under absorption costing.
If production exceeds sales, absorption costing net income will be greater than variable costing
net income. Absorption costing net income is higher because some fixed manufacturing overhead
costs will be deferred in the inventory account until the products are sold, whereas under variable
costing, all fixed manufacturing overhead costs will be expensed.
If sales exceed production, absorption costing net income will be less than variable costing net
income. Absorption costing net income is less because some fixed manufacturing overhead costs
from the previous period will now be expensed when the older product is sold, whereas under
variable costing, only fixed manufacturing overhead costs of the current period will be expensed.