Professional Documents
Culture Documents
Brief A B
Learning Objectives Questions Exercises Do It! Exercises Problems Problems
5. Understand how operating 12, 13, 14, 12, 13, 14 14, 15, 16 5A, 6A 5B, 6B
leverage affects profitability. 15, 16
*6. Explain the difference between 17 16, 17, 18 17, 18, 19 7A, 8A 7B, 8B
absorption costing and variable
costing.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-1
ASSIGNMENT CHARACTERISTICS TABLE
6-2 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems
*1. Describe the essential features Q6-1 Q6-2 BE6-2 DI6-1 BE6-1
of a cost-volume-profit income Q6-3 Q6-4 BE6-3 P6-1A P6-1A
statement. BE6-4 P6-2A P6-2A
BE6-5 P6-1B P6-1B
BE6-6 P6-2B P6-2B
*2. Apply basic CVP concepts. Q6-2 BE6-2 E6-2 P6-6A BE6-1 P6-6B
Q6-4 BE6-3 E6-3 P6-1B P6-1A
Q6-5 BE6-4 E6-4 P6-2B P6-2A
*3. Explain the term sales mix and Q6-7 Q6-8 BE6-7 DI6-3 E6-9 E6-6 P6-4B
its effects on break-even sales. Q6-8 Q6-9 BE6-8 E6-6 E6-10 E6-7
BE6-9 E6-7 P6-4A E6-8
BE6-10 E6-8 P6-4B P6-4A
*4. Determine sales mix when a Q6-11 Q6-10 BE6-11 E6-11 P6-3A E6-11 P6-3A
company has limited resources. BE6-15 E6-12 P6-3B E6-12 P6-3B
DI6-4 E6-13 E6-13
*5. Understand how operating Q6-12 Q6-14 Q6-16 E6-14 P6-6A E6-14 P6-6A
leverage affects profitability. Q6-13 BE6-12 E6-15 P6-5B E6-15 P6-5B
Q6-15 BE6-13 E6-16 E6-16 P6-6B
BE6-14 P6-5A P6-5A
**6. Explain the difference between Q6-17 BE6-16 E6-18 P6-7B E6-18 P6-7B
absorption costing and BE6-17 E6-19 P6-8B E6-19 P6-8B
6-3
ANSWERS TO QUESTIONS
1. CVP or cost-volume-profit analysis is the study of the effects of changes in costs and volume on
a company’s profit.
2. Managers use CVP analysis to make decisions involving break-even point, sales required to
reach a target net income, margin of safety, the most profitable sales mix, allocation of limited
resources, and operating leverage.
3. Both types of income statements report the same amount of net income. But the format used to
reach net income differs.
A traditional income statement’s format consists of:
Sales revenue – cost of goods sold = gross profit; Gross profit – selling and administrative expenses =
net income.
A CVP income statement’s format consists of:
Sales revenue – variable expenses = contribution margin; Contribution margin – fixed expenses =
net income.
4. The CVP income statement isolates variable costs from fixed costs while the traditional income
statement does not. The CVP format indicates contribution margin in total and frequently on a per
unit basis as well. This format facilitates calculation of break-even point and target net income.
It also highlights how changes in sales volume or cost structure affect net income.
5. WHEAT COMPANY
CVP Income Statement
6. If the selling price is reduced but variable and fixed costs remain unchanged, the break-even point
will increase.
7. Sales mix is the relative percentage of each product sold when a company sells more than one
product. Sales mix changes the calculation of the break-even point because the fixed costs must
be divided by the weighted-average unit contribution margin.
8. The 150,000-mile tire has a higher unit contribution margin, that is, each tire sold covers a larger
amount of fixed costs. Therefore, if the sales mix shifts away from the 150,000-mile tire to the
50,000-mile tire, the company will have to sell more total tires in order to break-even.
9. If a company has many products, the break-even point is calculated using sales information for
divisions or product lines, rather than individual products. The weighted-average contribution
margin ratio is computed by multiplying the sales mix percentage of each product line by the
contribution margin ratio of each product line, and then summing the results. Total break-even
sales in dollars is then calculated by dividing the company’s total fixed costs by the weighted-
average contribution margin ratio. Finally, to determine the amount of sales generated by each
product line at the break-even point, multiply the total break-even sales by the sales mix percentage
of each product line.
6-4 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
Questions Chapter 6 (Continued)
10. Contribution margin per unit of limited resource is determined by dividing the contribution margin
per unit of the product by the number of units of the limited resource required to produce the
product.
11. The theory of constraints is a specific approach used to identify and manage constraints to achieve
the company’s goals. According to this theory, a company must continually identify its constraints
and find ways to reduce or eliminate them, where appropriate. Examples of constraints would be
production bottlenecks or poorly trained workers.
12. Cost structure refers to the relative proportion of fixed costs versus variable costs that a company
incurs. Companies that rely heavily on fixed costs will have higher break-even points.
13. Operating leverage refers to the extent to which a company’s net income reacts to a given change
in sales. A company can increase its operating leverage by increasing its reliance on fixed costs.
14. Typically manual labor is considered a variable cost. Depreciation on factory equipment is a fixed
cost. Therefore, if a company replaces manual labor with automated factory equipment it will
increase its operating leverage, and increase its break-even point.
15. The degree of operating leverage is a measure of a company’s relative operating leverage. It is
calculated by dividing the contribution margin by net income at a particular level of sales.
16. Pine’s degree of operating leverage of 8 versus Fir’s measure of 4 tells us that Pine will
experience twice (8 ÷ 4) the increase (or decrease) in net income for a given increase
(decrease) in sales as Fir.
*17. Under absorption costing, both variable and fixed manufacturing costs are considered to be
product costs. Under variable costing, only variable manufacturing costs are product costs and
fixed manufacturing costs are expensed when incurred.
*18. (a) The rationale for variable costing centers on the purpose of fixed manufacturing costs, which
is to have productive facilities available for use. Since these costs are incurred whether a
company operates at zero or 100% capacity, it is argued that they should be expensed
when they are incurred. Variable costing is useful in product costing internally by management
and it is useful in controlling manufacturing costs.
(b) Variable costing cannot be used for financial reporting purposes because it does not follow
generally accepted accounting principles.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-5
Questions Chapter 6 (Continued)
*20. If production equals sales in any given period, the net incomes under both methods will be equal.
In this case, there is no increase in the ending inventory. So fixed manufacturing overhead costs
in the current period are not deferred to future periods through the ending inventory.
*21. If production is greater than sales, absorption costing net income will be greater than variable
costing net income. Absorption costing net income is higher because some of the fixed
manufacturing overhead costs will be deferred in the inventory account until the products are
sold.
*22. In the long run, neither method will produce a higher net income amount. Over a long period of
time, sales can never exceed production, nor production exceed sales by significant amounts.
For this reason, over the lifetime of a corporation, variable costing and absorption costing will
tend to yield the same net income amounts.
6-6 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
SOLUTIONS TO BRIEF EXERCISES
HAMBY INC.
Income Statement
For the Quarter Ended March 31, 2014
Sales.................................................................................... $2,000,000
Variable expenses
Cost of goods sold ................................................ $760,000
Selling expenses .................................................... 95,000
Administrative expenses ..................................... 79,000
Total variable expenses .............................. 934,000
Contribution margin....................................................... 1,066,000
Fixed expenses
Cost of goods sold ................................................ 600,000
Selling expenses .................................................... 60,000
Administrative expenses ..................................... 66,000
Total fixed expenses .................................... 726,000
Net income ........................................................................ $ 340,000
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-7
BRIEF EXERCISE 6-4
6-8 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
BRIEF EXERCISE 6-8
Total break-even = ($213,000 ÷ $35.50*) = 6,000 units
*Computed in BE 6-7
Sales Units
Units of A12 = .60 X 6,000 = 3,600
Units of B22 = .15 X 6,000 = 900
Units of C124 = .25 X 6,000 = 1,500
6,000
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-9
BRIEF EXERCISE 6-11
Product A Product B
Contribution margin per unit (a) $12.0 $15
Machine hours required (b) 2 3
Contribution margin per unit of limited resource $ 6 $ 5
[(a) ÷ (b)]
Degree of operating
leverage (old) = $200,000 ÷ $40,000 = 5
Degree of operating
leverage (new) = $240,000 ÷ $40,000 = 6
If Sam’s sales change, the resulting change in net income will be 1.2 times
(6 ÷ 5) higher with the new machine than under the old system.
Morgan Company’s cost structure relies much more heavily on fixed costs
than that of Logan Co. As result, Morgan has a higher contribution margin
ratio of .75 ($150,000 ÷ $200,000) versus .60 ($120,000 ÷ $200,000), for Logan
Co. Morgan also has much higher fixed costs to cover. Its break-even point
is therefore higher than that of Logan Co.
6-10 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
BRIEF EXERCISE 6-15
Product 1 Product 2
Contribution margin per unit (a) $ 42 $ 35
Machine hours required (b) .15 .10
Contribution margin per unit of limited resource $280 $350
[(a) ÷ (b)]
Product 2 has a higher contribution margin per limited resource, even though
it has a lower contribution margin per unit. Given that machine hours are
limited to 2,000 per month, Ger Corporation should produce Product 2.
Variable Costing
Direct materials $14,400
Direct labor 25,600
Variable manufacturing overhead 32,400
Total product costs $72,400
Absorption Costing
Direct materials $14,400
Direct labor 25,600
Variable manufacturing overhead 32,400
Fixed manufacturing overhead 12,000
Total product costs $84,400
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-11
*BRIEF EXERCISE 6-18 (Continued)
MEMO
From: Student
Since units produced (50,000) exceeded units sold (48,000) last month, income
under absorption costing will be higher than under variable costing. Some
fixed overhead (2,000 units X $4 = $8,000) will be assigned to ending inventory
and therefore not expensed under absorption costing, whereas all fixed
overhead is expensed under variable costing. Therefore, absorption costing
net income will be higher than variable costing net income by $8,000.
6-12 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
SOLUTIONS TO DO IT! REVIEW EXERCISES
DO IT! 6-1
AMANDA INC.
Income Statement
For the Month Ended January 31, 2014
Contribution margin per unit: $160,000 ÷ 10,000 units = $16 per unit.
Contribution margin ratio: $160,000 ÷ $400,000 = 40% or $16 ÷ $40 = 40%.
DO IT! 6-2
*$20 ÷ $50.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-13
DO IT! 6-2 (Continued)
DO IT! 6-3
(c) The break-even point in units is: $165,480 ÷ $137.90 = 1,200 units.
DO IT! 6-4
(a) The Best binoculars have the highest contribution margin per unit.
Thus, ignoring any manufacturing constraints, it would appear that the
company should shift toward production of more Best units.
6-14 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
DO IT! 6-4 (Continued)
(b) The contribution margin per unit of limited resource is calculated as:
(c) The Better binoculars have the highest contribution margin per unit of
limited resource, even though they do not have the highest contribution
margin per unit. Given the resource constraint, any additional capacity
should be used to make Better binoculars.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-15
SOLUTIONS TO EXERCISES
EXERCISE 6-1
$36,000 = 40%
2. Margin of safety ratio:
$90,000
EXERCISE 6-2
6-16 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
EXERCISE 6-2 (Continued)
$16,800
(b) Break-even sales in dollars: = $67,200.
25%
$16,800
Break-even sales in units: = 2,240.
$7.50
EXERCISE 6-3
*($68.20 X 5,000)
Alternative 1, increasing unit sales price, will produce the highest net income.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-17
EXERCISE 6-4
$30,000
(a) 1. Contribution margin ratio is: = 62.5%
$48,000
$20,250
Break-even point in dollars = = $32,400
62.5%
$48,000
2. Round-trip fare = = $120
400 fares
$32,400
Break-even point in fares = = 270 fares
$120
(b) At the break-even point fixed costs and contribution margin are equal.
Therefore, the contribution margin at the break-even point would be
$20,250.
EXERCISE 6-5
6-18 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
EXERCISE 6-5 (Continued)
EXERCISE 6-6
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-19
EXERCISE 6-7
(a)
Weighted-Average
Sales Mix Contribution Contribution
Percentage Margin Ratio Margin Ratio
Oil changes 70% 20% .14
Brake repair 30% 60% .18
.32
(b)
Sales Dollars
Sales Mix Total Needed Per Product
Percentage Sales Needed Per Store
Oil changes 70% X $437,500 = $306,250
Brake repair 30% X $437,500 = 131,250
Total sales $437,500
EXERCISE 6-8
(a)
Weighted-Average
Sales Mix Contribution Contribution
Percentage Margin Ratio Margin Ratio
Mail pouches
and small boxes 80% 20% .16
Non-standard
boxes 20% 70% .14
.30
6-20 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
EXERCISE 6-8 (Continued)
EXERCISE 6-9
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-21
EXERCISE 6-9 (Continued)
EXERCISE 6-10
Weighted-average contribution
margin ratio = (.60 X .30) + (.40 X .35) = .32
EXERCISE 6-11
(a) Product
A B C
Contribution margin per unit (a) $ 5 $ 2 $ 3
Machine hours required (b) 2 1 2
Contribution margin per unit of limited resource (a) ÷ (b) $2.50 $ 2 $1.50
6-22 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
EXERCISE 6-11 (Continued)
(c) 1. Product
A B C
Machine hours (a) (1,500 ÷ 3) 500 500 500
Contribution margin per unit of limited
resource (b) $ 2.50 $ 2 $1.50
Total contribution margin [(a) X (b)] $1,250 $1,000 $ 750
2. Product A
Machine hours (a) 1,500
Contribution margin per unit of limited resource (b) $ 2.50
Total contribution margin [(a) X (b)] $3,750
EXERCISE 6-12
(b) Product
D E F
Selling price $200 $ 300 $250
Variable costs 125 160 180
Contribution margin 75 140 70
Direct labor hours per unit ÷ 3.0 ÷ 8.0 ÷ 3.5
Contribution margin per
direct labor hour $ 25 $17.50 $ 20
Product D
Total direct labor hours available 2,000
Contribution margin per direct labor hour X $25
Total contribution margin $50,000
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-23
EXERCISE 6-13
(a) Product
Basic Deluxe
Selling price per unit $40 $ 52
Variable costs per unit 20 22
Contribution margin per unit (a) $20 $ 30
Machine hours required (b) .5 .8
Contribution margin per
machine hour (a) ÷ (b) $40 $37.50
EXERCISE 6-14
(a)
Contribution Net Degree of Operating
Margin ÷ Income = Leverage
Armstrong $260,000 ÷ $100,000 = 2.60
Contador $450,000 ÷ $100,000 = 4.50
6-24 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
EXERCISE 6-14 (Continued)
(b)
Armstrong Company Contador Company
Sales $550,000** $550,000***
Variable costs 264,000** 55,000***
Contribution margin 286,000** 495,000***
Fixed costs 160,000** 350,000***
Net income $126,000** $145,000***
*$500,000 X 1.1
**$240,000 X 1.1
***$ 50,000 X 1.1
EXERCISE 6-15
(a)
Contribution Degree of
Margin ÷ Net Income = Operating Leverage
Manual system $300,000 ÷ $250,000 = 1.20
Computerized
system $900,000 ÷ $250,000 = 3.60
(b) The computerized system would produce profits that are 3.0 times
(3.60 ÷ 1.20) as much as the manual system. With a $150,000 increase in
sales, net income would increase $30,000 ($280,000 – $250,000)
under the manual system and $90,000 ($340,000 – $250,000) under the
computerized system.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-25
EXERCISE 6-15 (Continued)
Manual Computerized
System System
Sales $1,650,000 $1,650,000
Variable costs 1,320,000* 660,000**
Contribution margin 330,000 990,000
Fixed costs 50,000 650,000
Net income $ 280,000 $ 340,000
(c)
(Actual Sales – Break-even Sales) ÷ Actual Sales = Margin of Safety Ratio
Manual system ($1,500,000 – $250,000*) ÷ $1,500,000 = .83
Computerized
system ($1,500,000 – $1,083,333**) ÷ $1,500,000 = .28
The manual system could weather the greater decline in sales before
reaching the break-even point. Under the manual system sales could
drop 83% before suffering a loss, while sales under the computerized
system could only decline by 28% before suffering a loss.
EXERCISE 6-16
(a)
Contribution Net Degree of Operating
Margin ÷ Income = Leverage
Traditional Yams $ 80,000 ÷ $50,000 = 1.60
Auto-Yams $240,000 ÷ $50,000 = 4.80
Auto-Yams, which relies more heavily on fixed costs, has the higher
degree of operating leverage, 4.8 versus 1.60. That means for every
dollar of increase (decrease) in sales, Auto-Yams will generate 3
(4.80 ÷ 1.60) times more (less) in contribution margin and net income.
6-26 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
EXERCISE 6-16 (Continued)
(b)
Degree of
% Change Operating % Change in
in Sales X Leverage = Net Income
15% decrease:
Traditional Yams (15%) X 1.60 = (24.0%)
Auto-Yams (15%) X 4.80 = (72.0%)
10% increase:
Traditional Yams 10% X 1.60 = 16.0%
Auto-Yams 10% X 4.80 = 48.0%
(c) There are several possible answers that could be given. For example, if
the candied Yams business is fairly stable, Auto-Yams might be the
choice, because they will generate the higher contribution margin and
net income. If, however, sales swing widely from year to year, Traditional
Yams might be chosen because they will provide the more stable
contribution margin and net income. Finally, if the investment banker
is a risk taker, she might choose Auto-Yams in spite of year to year sales
swings.
EXERCISE 6-17
(a)
Unit Cost
Direct materials $ 7.50
Direct labor 2.45
Variable manufacturing overhead 5.80
Manufacturing cost per unit $15.75
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-27
EXERCISE 6-17 (Continued)
(b)
FELDE COMPANY
Income Statement
For the Year Ended December 31, 2014
Variable Costing
Sales (80,000 lures X $25) $2,000,000
Variable cost of goods sold
(80,000 lures X $15.75) $1,260,000
Variable selling and administrative
expenses (80,000 lures X $3.90) 312,000 1,572,000
Contribution margin 428,000
Fixed manufacturing overhead 225,000
Fixed selling and administrative
expenses 240,100 465,100
Net Income (loss) $ (37,100)
(c)
Unit Cost
Direct materials $ 7.50
Direct labor 2.45
Variable manufacturing overhead 5.80
Fixed manufacturing overhead ($225,000 ÷ 90,000) 2.50
Manufacturing cost per unit $18.25
(d)
FELDE COMPANY
Income Statement
For the Year Ended December 31, 2014
Absorption Costing
6-28 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
*EXERCISE 6-18
(a)
Direct materials used $ 79,000
Direct labor incurred 30,000
Variable manufacturing overhead 21,500
Variable manufacturing costs $130,500
Variable manufacturing cost per unit = $130,500 ÷ 9,000 = $14.50 per unit
Finished goods inventory cost = (9,000 – 8,200 units) X $14.50
= $11,600
(b) Absorption costing would show a higher net income because a portion
of the fixed costs are deferred to future periods. The following computa-
tion indicates that finished goods inventory will be $4,000 higher under
absorption costing which will cause its net income to be $4,000 higher.
Direct materials used $ 79,000
Direct labor incurred 30,000
Variable manufacturing overhead 21,500
Fixed manufacturing overhead 45,000
Total manufacturing costs $175,500
Total manufacturing costs per unit = $175,500 ÷ 9,000 = $19.50 per unit
Finished goods inventory cost = (9,000 – 8,200 units) X $19.50 = $15,600
Inventory (absorption costing) $15,600
Inventory (variable costing) 11,600
$ 4,000
*EXERCISE 6-19
(a)
Utility Expense
Months in Kilowatt Hourly Variable
X X =
a year hours Charge Utilities
12 X $1,500 = $18,000
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-29
*EXERCISE 6-19 (Continued)
Variable Costing
Labor:
Crate builders $38,000
Material:
Wood 54,000
Variable Overhead:
Utilities 2,400
Nails 350
Total manufacturing costs $94,750
(b)
Absorption Costing
Labor:
Crate builders $ 38,000
Material:
Wood 54,000
Variable overhead:
Utilities 2,400
Nails 350
Fixed overhead:
Utilities 18,000
Rent 21,400
Total manufacturing costs $134,150
(c) The entire difference in costs between the two methods is due to the
fact that fixed overhead is included as part of manufacturing costs
only under the absorption costing method. This difference amounts to
$39,400 ($18,000 + $21,400).
6-30 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
SOLUTIONS TO PROBLEMS
PROBLEM 6-1A
(a) Sales were $2,000,000 and variable expenses were $1,100,000, which
means contribution margin was $900,000 and CM ratio was .45. Fixed ex-
penses were $1,035,000. Therefore, the break-even point in dollars is:
$1,035,000 = $2,300,000
.45
(b) 1. The effect of this alternative is to increase the selling price per unit to
$31.25 ($25 X 125%). Total sales become $2,500,000 (80,000 X $31.25).
Thus, contribution margin ratio changes to 56% [($2,500,000 –
$1,100,000) ÷ $2,500,000]. The new break-even point is:
3. The effects of this alternative are: (1) variable and fixed cost of
goods sold become $734,000 each, (2) total variable costs become
$884,000 ($734,000 + $92,000 + $58,000), (3) total fixed costs are
$1,251,000 ($734,000 + $425,000 + $92,000) and the contribution
margin ratio becomes .558 [($2,000,000 – $884,000) ÷ $2,000,000].
The new break-even point is:
$1,251,000
= $2,241,935 (rounded)
.558
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-31
PROBLEM 6-2A
(a) (1)
Current Year
Sales $1,500,000
Variable costs
Direct materials 511,000
Direct labor 290,000
Manufacturing overhead ($350,000 X .70) 245,000
Selling expenses ($250,000 X .40) 100,000
Administrative expenses ($270,000 X .20) 54,000
Total variable costs 1,200,000
Contribution margin $ 300,000
Variable costs
Direct materials 511,000 X 1.1 562,100
Direct labor 290,000 X 1.1 319,000
Manufacturing overhead 245,000 X 1.1 269,500
Selling expenses 100,000 X 1.1 110,000
Administrative expenses 54,000 X 1.1 59,400
Total variable costs 1,200,000 X 1.1 1,320,000
Contribution margin $ 300,000 X 1.1 $ 330,000
(2)
Fixed Costs Current Year Projected year
Manufacturing overhead ($350,000 X .30) $105,000 $105,000
Selling expenses ($250,000 X .60) 150,000 150,000
Administrative expenses ($270,000 X .80) 216,000 216,000
Total fixed costs $471,000 $471,000
6-32 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
PROBLEM 6-2A (Continued)
(e) (1)
Current Year
Sales $1,500,000
Variable costs
Direct materials 511,000
Direct labor ($290,000 – $104,000) 186,000
Manufacturing overhead ($350,000 X .30) 105,000
Selling expenses ($250,000 X .90) 225,000
Administrative expenses ($270,000 X .20) 54,000
Total variable costs 1,081,000
Contribution margin $ 419,000
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-33
PROBLEM 6-2A (Continued)
Fixed cost
Manufacturing overhead ($350,000 X .70) $245,000
Selling expenses ($250,000 X .10) 25,000
Administrative expenses ($270,000 X .80) 216,000
Total fixed costs $486,000
6-34 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
PROBLEM 6-3A
(a) Product
Economy Standard Deluxe
Selling price $30 $50 $100
Less: Variable costs 14 15 46
Contribution margin per unit $16 $35 $ 54
Ignoring the machine time constraint, the Deluxe product should be produced
because it has the highest contribution margin per unit.
(b) Product
Economy Standard Deluxe
Contribution margin per unit (a) $16 $ 35 $ 54
Machine hours required (b) .5 .8 1.6
Contribution margin
per limited resource (a)/(b) $32 $43.75 $33.75
(c) If additional machine hours become available, the additional time should
be used to produce the Standard product since it has the highest contri-
bution margin per machine hour.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-35
PROBLEM 6-4A
(a)
Weighted-Average
Sales Mix Contribution Contribution
Percentage X Margin Ratio = Margin Ratio
Appetizers 15% X 50% = .075
Main entrees 50% X 25% = .125
Desserts 10% X 50% = .050
Beverages 25% X 80% = .200
.450
(b)
Weighted-Average
Sales Mix Contribution Contribution
Percentage X Margin Ratio = Margin Ratio
Appetizers 25% X 50% = .125
Main entrees 25% X 10% = .025
Desserts 10% X 50% = .050
Beverages 40% X 80% = .320
.520
Total sales required
to achieve target net
income = ( $1,638,000* + $117,000) ÷ .52 = $ 3,375,000
*$1,053,000 + $585,000
6-36 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
PROBLEM 6-4A (Continued)
Thus, sales would have to increase by $775,000 ($3,375,000 – $2,600,000) to
achieve the target net income. This increase in sales is driven by the
increase in fixed costs. The sales of each product line would be:
Sales Mix Total Sales Sales from
Percentage X Needed = Each Product
Appetizers 25% X $3,375,000 = $ 843,750
Main entrees 25% X $3,375,000 = 843,750
Desserts 10% X $3,375,000 = 337,500
Beverages 40% X $3,375,000 = 1,350,000
$3,375,000
(c)
Weighted-Average
Sales Mix Contribution Contribution
Percentage X Margin Ratio = Margin Ratio
Appetizers 15% X 50% = .075
Main entrees 50% X 10% = .050
Desserts 10% X 50% = .050
Beverages 25% X 80% = .200
.375
The weighted-average contribution margin ratio computed in part (a) was
45%. With the contribution margin ratio on entrees falling to 10%, that
average will now be 37.5% as shown previously. Applying this to the new
fixed costs of $1,638,000 and target net income of $117,000 we get:
Total sales required
to achieve target net
income = ($1,638,000 + $117,000) ÷ .375 = $ 4,680,000
Sales Mix Total Sales Sales from
Percentage X Needed = Each Product
Appetizers 15% X $4,680,000 = $ 702,000
Main entrees 50% X $4,680,000 = 2,340,000
Desserts 10% X $4,680,000 = 468,000
Beverages 25% X $4,680,000 = 1,170,000
$4,680,000
Relative to parts (a) and (b), the total required sales for (c) would increase.
It appears that the least risky approach would be for Phil to switch to the
new sales mix, but not to incur the additional fixed costs of expanding
operations. If the switch in sales mix appears to be successful, then it may
be appropriate for him to incur the additional fixed costs necessary for
expansion of operations.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-37
PROBLEM 6-5A
(a) To determine the break-even point in dollars we must first calculate the
contribution margin ratio for each company.
Contribution Contribution Margin
Margin ÷ Sales = Ratio
Viejo Company $220,000 ÷ $500,000 = .44
Nuevo Company $320,000 ÷ $500,000 = .64
(b)
Contribution Net Degree of Operating
Margin ÷ Income = Leverage
Viejo Company $220,000 ÷ $40,000 = 5.5
Nuevo Company $320,000 ÷ $40,000 = 8.0
Because Nuevo Company relies more heavily on fixed costs, it has a higher
degree of operating leverage. This means that its net income will be more
sensitive to changes in sales. For a given change in sales, the change in
net income will be 1.45 (8.0 ÷ 5.5) times higher for Nuevo Company than for
Viejo Company.
(c)
Viejo Company Nuevo Company
Sales $600,000* $600,000
Variable costs 336,000** 216,000***
Contribution margin 264,000 384,000
Fixed costs 180,000 280,000
Net income $ 84,000 $104,000
*$500,000 X 1.2
**$280,000 X 1.2
***$180,000 X 1.2
6-38 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
PROBLEM 6-5A (Continued)
(d)
Viejo Company Nuevo Company
Sales $400,000* $400,000
Variable costs 224,000** 144,000***
Contribution margin 176,000 256,000
Fixed costs 180,000 280,000
Net income (Loss) ($ 4,000) ($ 24,000)
*$500,000 X .80
**$280,000 X .80
***$180,000 X .80
(e) In part (b) the degree of operating leverage of Nuevo Company was
higher than that of Viejo Company, telling us that the net income of
Nuevo Company was more sensitive to changes in sales than that of
Viejo Company. In part (c) we see that a 20% increase in sales increased
the net income of Nuevo Company by $64,000 ($104,000 – $40,000),
while the net income of Viejo Company increased by only $44,000
($84,000 – $40,000). However, in part (d) we see that a 20% decrease in
sales resulted in a $64,000 ($40,000 + $24,000) decline in net income for
Nuevo Company, while Viejo Company’s net income only declined by
$44,000 ($40,000 + $4,000). The increased risk caused by higher
operating leverage is also seen in part (a). Nuevo Company has a higher
break-even point, and a lower margin of safety ratio than Viejo
Company. Thus, while operating leverage can be very beneficial for a
company that expects its sales to increase, it can also significantly
increase a company’s risk.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-39
PROBLEM 6-6A
6-40 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
PROBLEM 6-6A (Continued)
(d) The sales level at which operating incomes will be identical is called
the point of indifference. This would be when the cost of the network of
agents (18% of sales) is exactly equal to the cost of paying employees
8% commission along with additional fixed costs of $7.5 million. None
of the other costs is relevant, because they will not change between
alternatives.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-41
*PROBLEM 6-7A
6-42 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
*PROBLEM 6-7A (Continued)
GARDNER COMPANY
Income Statement
For the Year Ended December 31, 2014
Variable Costing
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-43
*PROBLEM 6-7A (Continued)
GARDNER COMPANY
Income Statement
For the Year Ended December 31, 2014
Absorption Costing
(2)
In 2014, with absorption costing $2,750,000 of fixed manufacturing overhead is expensed
as part of cost of goods sold. This includes the fixed manufacturing overhead for 2014 of
$2,000,000 plus $750,000 of fixed manufacturing overhead from 2013 that was included in
the beginning inventory for 2014.
6-44 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
*PROBLEM 6-7A (Continued)
(d) Income parallels sales under variable costing as seen in the increase
in net income in 2014 when 1,500 additional units were sold. In contrast,
under absorption costing, income parallels production as seen in
the higher net income in 2013 when production exceeded sales by
1,500 tons.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-45
*PROBLEM 6-8A
(a)
(b)
6-46 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
*PROBLEM 6-8A (Continued)
(c) If the company produces 90,000 units, but only sells 60,000 units,
then 30,000 units will remain in ending inventory. Under absorption
costing these 30,000 units will each include $6 of fixed manufacturing
overhead—a total of $180,000. However, under variable costing, fixed
manufacturing overhead is expensed when incurred. This accounts for
the $180,000 difference ($550,000 – $370,000) in net income. This is
summarized as:
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-47
PROBLEM 6-1B
(a) Sales were $2,400,000 and variable expenses were $1,536,000, which
means contribution margin was $864,000 and CM ratio was .36. Fixed
expenses were $936,000. Therefore, the break-even point in dollars is:
$936,000
= $2,600,000
.36
(b) 1. The effect of this alternative is to increase the selling price per unit
to $15 ($12 X 125%). Total sales become $3,000,000 (200,000 X
$15). Thus, contribution margin changes to 48.8% [($3,000,000 –
$1,536,000) ÷ $3,000,000]. The new break-even point is:
$936,000
= $1,918,033 (rounded)
.488
$816,000
= $2,720,000
.30
3. The effects of this alternative are: (1) variable and fixed cost of
goods sold become $594,400 and $891,600, (2) total variable costs
become $1,060,400 ($594,400 + $356,000 + $110,000), (3) total fixed
costs are $1,411,600 ($891,600 + $325,000 + $195,000) and the
contribution margin becomes .5582 [($2,400,000 – $1,060,400) ÷
$2,400,000]. The new break-even point is:
$1,411,600
= $2,529,749 (rounded)
.558
6-48 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
PROBLEM 6-2B
(a) (1)
Current Year
Sales $1,000,000
Variable costs
Direct materials 327,000
Direct labor 190,000
Manufacturing overhead ($240,000 X .20) 48,000
Selling expenses ($200,000 X .30) 60,000
Administrative expenses ($250,000 X .30) 75,000
Total variable costs 700,000
Contribution margin $ 300,000
Variable costs
Direct materials 327,000 X 1.2 392,400
Direct labor 190,000 X 1.2 228,000
Manufacturing overhead 48,000 X 1.2 57,600
Selling expenses 60,000 X 1.2 72,000
Administrative expenses 75,000 X 1.2 90,000
Total variable costs 700,000 X 1.2 840,000
Contribution margin $ 300,000 X 1.2 $ 360,000
(2)
Fixed Costs Current Year Projected year
Manufacturing overhead ($240,000 X .80) $192,000 $192,000
Selling expenses ($200,000 X .70) 140,000 140,000
Administrative expenses ($250,000 X .70) 175,000 175,000
Total fixed costs $507,000 $507,000
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-49
PROBLEM 6-2B (Continued)
(e) (1)
Current Year
Sales $1,000,000
Variable costs
Direct materials 327,000
Direct labor ($190,000 – $90,000) 100,000
Manufacturing overhead ($240,000 X .10) 24,000
Selling expenses ($200,000 X .80) 160,000
Administrative expenses ($250,000 X .30) 75,000
Total variable costs 686,000
Contribution margin $ 314,000
Fixed cost
Manufacturing overhead ($240,000 X .90) $ 216,000
Selling expenses ($200,000 X .20) 40,000
Administrative expenses ($250,000 X .70) 175,000
Total fixed costs $ 431,000
6-50 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
PROBLEM 6-2B (Continued)
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-51
PROBLEM 6-3B
(a) Product
Economy Standard Deluxe
Selling price $270 $450 $650
Less: Variable costs 144 260 430
Contribution margin per unit $126 $190 $220
Ignoring the machine time constraint, the Deluxe product should be produced
because it has the highest contribution margin per unit.
(b) Product
Economy Standard Deluxe
Contribution margin per unit (a) $126 $ 190 $ 220
Machine hours required (b) .6 .8 1.1
Contribution margin
per limited resource (a)/(b) $210 $237.50 $ 200
(c) If additional machine hours become available, the additional time should
be used to produce the Standard product since it has the highest contri-
bution margin per machine hour.
6-52 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
PROBLEM 6-4B
(a)
Weighted-Average
Sales Mix Contribution Contribution
Percentage X Margin Ratio = Margin Ratio
Appetizers 15% X 60% = .09
Main entrees 60% X 25% = .15
Desserts 10% X 40% = .04
Beverages 15% X 80% = .12
.40
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-53
PROBLEM 6-4B (Continued)
Thus, sales would have to increase by $280,000 ($1,600,000 – $1,320,000) to
achieve the target net income. This increase in sales is driven by the
increase in fixed costs. The sales of each product line would be:
6-54 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
PROBLEM 6-4B (Continued)
Relative to parts (a) and (b), the total required sales for (c) would increase.
It appears that the least risky approach would be for Michael to switch to
the new sales mix, but not to incur the additional fixed costs of expanding
operations. If the switch in sales mix appears to be successful, then it may
be appropriate for him to incur the additional fixed costs necessary for
expansion of operations.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-55
PROBLEM 6-5B
(a) To determine the break-even point in dollars we must first calculate the
contribution margin ratio for each company.
Contribution Contribution
Margin ÷ Sales = Margin Ratio
Lyte Company $400,000 ÷ $1,000,000 = .40
Darke Company $800,000 ÷ $1,000,000 = .80
Margin of Safety
(Actual Sales – Break-even Sales) ÷ Actual Sales = Ratio
Lyte Company ($1,000,000 – $500,000) ÷ $1,000,000 = .50
Darke Company ($1,000,000 – $750,000) ÷ $1,000,000 = .25
(b)
Contribution Net Degree of Operating
Margin ÷ Income = Leverage
Lyte Company $400,000 ÷ $200,000 = 2.00
Darke Company $800,000 ÷ $200,000 = 4.00
Because Darke Company relies more heavily on fixed costs, it has a higher
degree of operating leverage. This means that its net income will be more
sensitive to changes in sales. For a given change in sales, the change in
net income will be 2.0 (4.00 ÷ 2.00) times higher for Darke Company than for
Lyte Company.
6-56 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
PROBLEM 6-5B (Continued)
(c)
Lyte Company Darke Company
Sales $1,300,000* $1,300,000
Variable costs 780,000** 260,000***
Contribution margin 520,000 1,040,000
Fixed costs 200,000 600,000
Net income $ 320,000 $ 440,000
*$1,000,000 X 1.3
**$600,000 X 1.3
***$200,000 X 1.3
(d)
Lyte Company Darke Company
Sales $700,000* $700,000
Variable costs 420,000** 140,000***
Contribution margin 280,000 560,000
Fixed costs 200,000 600,000
Net income $ 80,000 ($ 40,000)
*$1,000,000 X .70
**$600,000 X .70
***$200,000 X .70
(e) In part (b) the degree of operating leverage of Darke Company was
higher than that of Lyte Company, telling us that the net income of
Darke Company was more sensitive to changes in sales than that of
Lyte Company. In part (c) we see that a 30% increase in sales increased
the net income of Darke Company by $240,000 ($440,000 – $200,000),
while the net income of Lyte Company increased by only $120,000
($320,000 – $200,000). However, in part (d) we see that a 30% decrease
in sales resulted in a $240,000 ($40,000 + $200,000) decline in net income
for Darke Company, while Lyte Company’s net income only declined by
$120,000 ($200,000 – $80,000). The increased risk caused by higher
operating leverage is also seen in part (a). Darke Company has a higher
break-even point, and a lower margin of safety ratio than Lyte Company.
Thus, while operating leverage can be very beneficial for a company
that expects its sales to increase, it can also significantly increase a
company’s risk.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-57
PROBLEM 6-6B
6-58 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
PROBLEM 6-6B (Continued)
The higher contribution margin per dollar of sales and higher fixed
costs from Peaches employing their own agents gives them more
operating leverage. This will result in greater benefits (increases in
operating income) if revenues increase, but greater risks (decreases
in operating income) if revenues decline.
(d) The sales level at which operating incomes will be identical is called
the point of indifference. This would be when the cost of the network of
agents (16.25% of sales) is exactly equal to the cost of paying employees
10% commission along with additional fixed costs of $12.0 million.
None of the other costs is relevant, because they will not change
between alternatives.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-59
*PROBLEM 6-7B
6-60 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
*PROBLEM 6-7B (Continued)
FAB COMPANY
Income Statement
For the Year Ended December 31, 2014
Variable Costing
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-61
*PROBLEM 6-7B (Continued)
FAB COMPANY
Income Statement
For the Year Ended December 31, 2014
Absorption Costing
(c) The variable costing and the absorption costing income from opera-
tions can be reconciled as follows:
2013 2014
Variable costing net income $100,000 $250,000
Fixed manufacturing overhead
expensed with variable costing $400,000 $400,000
Less: Fixed manufacturing overhead
expensed with absorption costing (320,000)(1) (480,000)(2)
Difference 80,000 (80,000 )
Absorption costing income $180,000 $170,000
(2)
In 2014, with absorption costing $480,000 of fixed manufacturing overhead is expensed as
part of cost of goods sold. This includes the fixed manufacturing overhead for 2014 of
$400,000 plus $80,000 of fixed manufacturing overhead from 2013 that was included in the
beginning inventory for 2014.
6-62 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
*PROBLEM 6-7B (Continued)
(d) Income parallels sales under variable costing as seen in the increase
in net income in 2014 when 100,000 additional units were sold. In
contrast, under absorption costing, income parallels production as
seen in the higher net income in 2013 when production exceeded sales
by 100,000.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-63
*PROBLEM 6-8B
(a)
ELECTRICOIL DIVISION
Income Statement
For the Year Ended December 31, 2014
Absorption Costing
200,000 250,000
Produced Produced
Sales (200,000 units X $9) $1,800,000 $1,800,000
Cost of goods sold
(200,000 units X $5.50) 1,100,000 (200,000 X $5.00) 1,000,000
Gross profit 700,000 800,000
Variable selling and
administrative expenses
(200,000 units X $0.40) 80,000 80,000
Fixed selling and
administrative expenses 15,000 15,000
Net income $ 605,000 $ 705,000
(b)
ELECTRICOIL DIVISION
Income Statement
For the Year Ended December 31, 2014
Variable Costing
_______________________________________________________________
200,000 250,000
Produced Produced
Sales (200,000 units X $9) $1,800,000 $1,800,000
Variable cost of goods sold
(200,000 units X $3) 600,000 600,000
Variable selling and
administrative expenses
(200,000 units X $0.40) 80,000 80,000
Contribution margin 1,120,000 1,120,000
Fixed manufacturing overhead 500,000 500,000
Fixed selling and
administrative expenses 15,000 15,000
Net income $ 605,000 $ 605,000
6-64 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
*PROBLEM 6-8B (Continued)
(c) If the company produces 250,000 units, but only sells 200,000 units,
then 50,000 units will remain in ending inventory. Under absorption
costing these 50,000 units will each include $2.00 of fixed manufacturing
cost—a total of $100,000. However, under variable costing, fixed manu-
facturing cost is expensed when incurred. This accounts for the $100,000
difference ($705,000 – $605,000) in net income. This is summarized as:
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-65
BYP 6-1 DECISION-MAKING AT CURRENT DESIGNS
(a) Weighted
Average Unit
Contribution
Rotomolded Kayaks Composite Kayaks Margin
+ =
(($950 – $570) X .80) (($2,000 – $1,340) X .20) $436
Weighted-Average
Rotomolded Kayaks + Composite Kayaks = CM/Unit
($380 X .70) ($660 X .30) $464
Rotomolded Composite
Sales $2,000,000 $1,000,000
Variable Costs 1,200,000* 670,000**
Contribution Margin 800,000 330,000
Fixed Costs 660,000 160,000
Net Income $ 140,000 $ 170,000
6-66 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
BYP 6-1 (Continued)
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-67
BYP 6-2 DECISION-MAKING ACROSS THE ORGANIZATION
(a)
Sales (10,000 seats X $500) $5,000,000
Variable costs (10,000 seats X $200) 2,000,000
Contribution margin 3,000,000
Fixed costs 2,000,000
Net income $1,000,000
(b) Contribution margin ratio = $3,000,000 ÷ $5,000,000 = .60
Break-even point in dollars = $2,000,000 ÷ .60 = $3,333,333
Margin of safety ratio = ($5,000,000 – $3,333,333) ÷ $5,000,000 = .333
Degree of operating leverage = $3,000,000 ÷ $1,000,000 = 3.0
(c)
Sales (10,000 seats X $500) $5,000,000
Variable costs (10,000 seats X $ 100) 1,000,000
Contribution margin 4,000,000
Fixed costs 3,000,000
Net income $1,000,000
(d) Contribution margin ratio = $4,000,000 ÷ $5,000,000 = .80
Break-even point in dollars = $3,000,000 ÷ .80 = $3,750,000
Margin of safety ratio = ($5,000,000 – $3,750,000) ÷ $5,000,000 = .25
Degree of operating leverage = $4,000,000 ÷ $1,000,000 = 4.00
(e) By automating its manufacturing process the company will replace some
of its variable costs with fixed costs. This shift toward more fixed costs
will increase its break-even point from $3,333,333 to $3,750,000 and
reduce its margin of safety from 33.3% to 25%. This means that under
the old system sales could fall by 33.3% percent before the company
would operate at a loss, whereas under the automated system they could
only fall by 25%. Both of these findings suggest that the company would
be riskier with the automated system. However, the company’s degree
of operating leverage would increase from 3.0 to 4.00. This means that
with a change in sales, the change in net income would be 1.33 (4 ÷ 3)
times higher under the automated system. This would be good if the
company expects sales to increase, but would be bad if the company’s
sales fall.
6-68 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
BYP 6-3 MANAGERIAL ANALYSIS
This means that for every dollar of sales, net income goes up by
25 cents under the current approach, but by $.50 under the automated
approach.
(b) The break-even points in sales dollars under each approach are:
This shows that, under the automated approach, the company’s sales
would have to be 5.26% higher just to break-even.
(c) At the current level of sales, the margin of safety ratio under each
approach is:
(d) The degree of operating leverage under each approach at the current
level of sales is:
This means that for a 10% drop in sales net income would drop by
41.7 percent for the current approach, but 50% for the automated
approach. Recall, however, that at the current level of sales the company
makes considerably more money using the automated approach.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-69
BYP 6-3 (Continued)
(e) In order to solve for the sales level where net income would be equal
under either approach, set the two CVP equations equal to each other
and solve for sales:
Sales – ((1 – .75) X Sales) – $380,000 = Sales – ((1 – .5) X Sales) – $800,000
(.25 X Sales) – $380,000 = (.5 X Sales) – $800,000
(.25 X Sales) = $420,000
Sales = $1,680,000
When sales are equal to $1,680,000 the company would make the same
amount of income under either approach.
(f) Based upon this numeric analysis it would appear that the decision to
purchase the automated system would be a good decision. The
current level of sales far exceeds the break-even point, and, unless
sales were to fall all the way to $1,680,000, the company would be
better off under the automated system. However, there are many
difficult issues that should also be considered. Not-the-least of these
is the decision to lay-off 15 employees, many of whom have likely been
with the company for a long time. Also, the company should carefully
evaluate whether the automated system will be able to attain the same
level of quality as the skilled employees. Perhaps the automated
system would be more appropriate for some of the painting work,
while skilled labor would be more appropriate for other painting work.
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BYP 6-4 REAL-WORLD FOCUS
(a)
($ in millions) Soup and
Consumer Pet Infant-Feeding
Products Products Products
Sales $1,031.8 $ 837.3 $ 302.0
Variable costs 610.0 350.0 100.0
Contribution margin $ 421.8 $ 487.3 $ 202.0
(b)
Weighted-Average
Sales Mix Contribution Contribution
Percentage X Margin Ratio = Margin Ratio
Consumer products 47.5% 40.9% .194
Pet products 38.6% 58.2% .225
Soup and infant-feeding
products 13.9% 66.9% .093
.512
Break-even point
in dollars = $860,300,000 ÷ .512 = $1,680,273,438
Sales Mix Sales from
Percentage X Total Sales = Each Product*
Consumer products 47.5% X $1,680,273,438 = $ 798,129,883
Pet products 38.6% X $1,680,273,438 = 648,585,547
Soup and infant-
feeding products 13.9% X $1,680,273,438 = 233,558,008
Total sales $1,680,273,438
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BYP 6-5 REAL-WORLD FOCUS
(a) The four primary product lines are FedEx Express (provides express
transportation); FedEx Ground (small package ground delivery); FedEx
Freight (regional, less-than-truckload freight service); and FedEx
Services (Kinkos). The key factors affecting operating results are the
volumes of shipments transported through networks; the mix of services
purchased by customers; the prices obtained for services; ability to
manage cost structure for capital expenditures and operating expenses;
and ability to match operating costs to shifting volumes.
(b)
FEDEX GROUND
Income Statement
For the Year Ended May 31, 2008
Variable Costing
(In Millions)
____________________________________________________________
Revenues ................................................................ $ 6,751
Variable costs:
Salaries and employee benefits ................ $1,073
Purchased transportation............................ 2,691
Fuel...................................................................... 201
Maintenance and repairs ............................. 145
Intercompany charges.................................. 658 4,768
Contribution margin ...................................... 1,983
Fixed costs:
Rentals ............................................................... 189
Depreciation and amortization................... 305
Other ................................................................... 753 1,247
Net income.............................................................. $ 736
Contribution Contribution
Margin ÷ Revenues = Margin Ratio
$1,983 ÷ $6,751 = 29.4%
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BYP 6-5 (Continued)
(c)
(i)
2008 2006
FedEx Express $24,421 ÷ $38,244 = 63.9% $21,446 ÷ $32,485 = 66.0%
FedEx Ground 6,751 ÷ $38,244 = 17.6% 5,306 ÷ $32,485 = 16.3%
FedEx Freight 4,934 ÷ $38,244 = 12.9% 3,645 ÷ $32,485 = 11.2%
FedEx Services 2,138 ÷ $38,244 = 5.6% 2,088 ÷ $32,485 = 6.4%
Total $38,244 $32,485
*$(891) ÷ $2,138
(iii) In part (ii) we see that in all divisions the company’s operating margins
declined. We also see in part (ii) that in 2006 FedEx Express had the
lowest operating margin (8.2%), and FedEx Services had the lowest in
2008 (–41.7%) while FedEx Ground had the highest (13.3% and 10.9%).
In part (i) we see that the company shifted its sales mix percentage
down in FedEx Express (66.0% to 63.9%) and FedEx Services (6.4%
and 5.6%) but increased its sales mix percentage for FedEx Ground
(16.3% to 17.6%) and FedEx Freight (11.2% to 12.9%). Thus, during this
period two of the company’s divisions became more profitable, and the
company successfully shifted its sales mix so that more of its revenue
came from its more profitable divisions.
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BYP 6-6 REAL-WORLD FOCUS
(c) The potential advantage of having very low fixed costs is that the
company has a lower break-even point. It can be profitable at relatively
low volumes of sales and therefore it has less potential for financial
failure.
(d) The potential disadvantage of this approach is that its low fixed costs
means that the company has low operating leverage. If the company’s
sales increase significantly, it would not enjoy the same increase in
profitability as a company that was producing its own goods.
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BYP 6-7 COMMUNICATION ACTIVITY
MEMO
From: Student
I share your concern, that, since we are operating at full capacity, we need
to ensure that our product mix maximizes our profitability. The decision of
how to best utilize our limited productive resources is one of the most
important decisions we face. We currently make two different anchors, a
traditional fishing anchor, and a high-end yacht anchor. The contribution
margin per unit produced of the yacht anchor is three times that of the
fishing anchor, thus one might logically assume that we should shift our
production toward producing the yacht anchor. However, this assumption
ignores an element that is critical to the decision. In order to make a proper
decision, we would need to know the contribution margin per unit of limited
resource that each product produces. While the yacht anchor has a very
high contribution margin, it also consumes considerably more productive
resources. I propose that a study be done to determine exactly how much
of the limited productive resource is consumed by one unit of each of the
two anchor types.
In addition, at the same time that this study is being undertaken, I propose
that the marketing department undertake a study of the demand for each
anchor type. This is important so that we don’t produce anchors that we
can’t sell.
Finally, a shift in our product mix would maximize our profitability at our
current level of productive capacity. However, we should also consider a
more long-term solution to our production constraints. Since we have been
operating at, or near full capacity for two years, it would seem appropriate
to undertake a study of whether an acquisition of additional plant equipment
would be appropriate.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 6-75
*BYP 6-8 ETHICS CASE
(b) In 2013 the number of units produced and sold were equal. When this
occurs variable costing and absorption costing provide the same
results. Thus, in 2013, net income under variable costing would have
been $300,000. In 2014, units produced exceeded units sold by 5,000
units. However, net income under variable costing is not impacted by
the number of units produced. Since the number of units sold did not
change from 2013 to 2014, and the selling price, variable cost per unit,
and total fixed costs didn’t change, the division’s net income in 2014
would equal its 2013 income of $300,000.
(c) In part (b) it was determined that the division’s net income would have
been $300,000 in 2014 under variable costing. Since this is the same as
2013 net income, Brett would not receive a bonus.
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BYP 6-9 ALL ABOUT YOU
(b) To find the sales required to reach a target net income, contribution
margin must be calculated.
Contribution Margin = Sales – Variable Costs
Contribution Margin = $7,800 – $2,340
Contribution Margin = $5,460
Contribution Margin per Unit = $5,460/300 memberships = $18.20
Contribution Margin Ratio = $5,460/$7,800 = 70%
(c) Answers will vary. Suggested examples include franchise fees, employee
wages, utilities, supplies, and maintenance.
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BYP 6-10 CONSIDERING CORPORATE SOCIAL RESPONSIBILITY
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