Chapter 6: Variable Costing and Performance Reporting

Short exercises

1. Shore Company reports the following information regarding its production cost.

   
A) Compute production cost per unit under absorption costing. 
$60.39

B) Compute production cost per unit under variable costing. 

$57.00

2.  Sea Company reports the following information regarding its production cost.

   
A) Compute production cost per unit under variable costing. 
$80

B) Compute production cost per unit under absorption costing. 

$82.50

3. Advanced Company reports the following information for the current year. All beginning inventory
amounts equaled $0 this year.
 

 
Given Advanced Company's data, and the knowledge that the product is sold for $50 per unit and
operating expenses are $200,000:

A) Compute the net income under absorption costing. 

$122,500

B) Compute the net income under variable costing. 

$67,500
4. Wind Fall, a manufacturer of leaf blowers, began operations this year. During this year, the
company produced 10,000 leaf blowers and sold 8,500. At year-end the company reported the
following income statement using absorption costing.

   
Production costs per leaf blower total $20, which consists of $16 in variable production costs and $4
in fixed production costs (based on the 10,000 units produced). Fifteen percent of total selling and
administrative expenses are variable.

Compute net income under variable costing. 

$146,500

5. Aces, Inc., a manufacturer of tennis rackets, began operations this year. The company produced
6,000 rackets and sold 4,900. At year-end, the company reported the following income statement
using absorption costing.

   

Production costs per tennis racket total $38, which consists of $25 in variable production costs and
$13 in fixed production costs (based on the 6,000 units produced). Ten percent of total selling and
administrative expenses are variable.

Compute net income under variable costing. 

$165,500

6.  A company reports the following information regarding its production cost.

   

Compute total variable overhead cost if the production cost per unit under variable costing is $73.
$798,000
7. A company reports the following information regarding its production cost.

   
Compute total variable overhead cost if the production cost per unit under absorption costing is
$240. 

$1,254,000

8. A company is currently operating at 60% capacity producing 10,000 units. Cost information
relating to this current production is shown in the table below.

   
The company has been approached by a customer with a request for a special order for 5,000 units.
What is the minimum per unit sales price that management would accept for this order if the
company wishes to increase current profits? 

HINT: you need to find what is the remaining capacity and if it is enough to produce 5,000 units.
What are the incremental cost related to accepting this order.

6,666 unit remaining capacity

$12.35 incremental costs
Any sales price that exceeds the $12.35 incremental costs will increase current profits.

9.  A company is currently operating at 70% capacity producing 8,000 units. Cost information relating
to this current production is shown in the table below.

   
The company has been approached by a customer with a request for a special order for 1,500 units.
The sales price per unit for this special order is $10. Should the company accept the special order? 
3,428 unit remaining capacity
$10.35 incremental costs

10. Dataport Company reports the following annual cost data for its single product.

   
This product is normally sold for $230 per unit. If Dataport increases its production to 100,000 units,
while sales remain at the current 89,000 unit level, by how much would the company's gross margin
increase or decrease under absorption costing? Assume the company has idle capacity to double
current production. 

$42 FOH per unit at 89,000 unit level

$37.38 FOH per unit at 100,000 unit level