Chapter 6 1

Exercise 6-4 , page 256

Caltec, Inc., Produces and sells recordable CD and DVD packs.
Revenue and cost information relating to the products follows:
Product
CD DVD
Selling price per pack $8 $25
Variable expenses per pack $3,20 $17,50
Traceable fixed expenses per year $138,000 $45,000
Common fixed in the company total $105,000 annually.
Last year the company produced and sold 37,000 CD packs and 18,000
DVD packs.

Required:
prepare a contribution format income statement for the year
segmented by product lines.

Nora Aldawood | By : Alanoud Albarak

 Chapter 6 2

Solution:

Table 1

Company CD DVD

Sales 750,000 37,500 * 8 = 300,000 18,000 * 8 = 450,000

(units sold * selling price)

Less: 435,000 37,500 * 3.20 = 120,000 37,500 * 17.50= 315,000

Variable cost
(Units sold* VC per unit)

Equal : 315,000 180,000 135,000

Contribution margin
(Sales - Variable cost)

Less : 183,000 138,000 45,000

Traceable fixed cost

Equal : 132,000 42,000 90,000

Division margin

Less : 105,000
Common fixed cost

Equal : 27,000
Net operating income

Note :

1.The "company box" =CD + DVD , for example = 300,000+ 450,000

2. The traceable fixed cost and common fixed cost "Given in the question"

Nora Aldawood | By : Alanoud Albarak

 Chapter 6 3

Exercise 6-1 , page 256

Shastri Bicycle of Bombay, India, produces an inexpensive, yet rugged,
bicycle for use the city's crowded streets that sells for 500
rupees.(Indian currency is denominated in rupees, denoted by R.)
Selected data for the company's operations last year follow:

Unit in beginning inventory 0

Unit produced 10,000
Unit sold 8,000
Unit in ending inventory 2,000
Variable costs per unit:
Direct materials R120
Direct labor R140
Variable manufacturing overhead R50
Variable selling and administrative R20
Fixed costs:
Fixed manufacturing overhead R600,000
Fixed selling and administrative R400,000

Required:
1. Assume that the company uses absorption costing.
Compute the unit product cost for one bicycle.
2. Assume that the company uses variable costing.
Compute the unit product cost for one bicycle.

Nora Aldawood | By : Alanoud Albarak

 Chapter 6 4

Solution :

1.Absorption costing:

Unit product cost = Direct materials + Direct labor + Variable

manufacturing overhead + Fixed manufacturing overhead "per unit"

= 120 + 140 + 50 + 60*

= 370 units.

*fixed manufacturing overhead per unit = total fixed manufacturing

overhead \ units product

= 600,000 \ 10,000

= 60

2.Variable costing:

Unit product cost = Direct materials + Direct labor + Variable

manufacturing overhead

= 120+140+50

= 310 units.

Nora Aldawood | By : Alanoud Albarak

 Chapter 6 5

Exercise 6-2 , page 256

Refer to the data in Exercise 6-1 for Shastri Bicycle.
The absorption costing income statements prepared by the company's
accountant for last year appears below:
Sales R4,000,000
Cost of goods sold R2,960,000
Gross margin R1,040,000
Selling and administrative expense R560,000
Net operating income R480,000

Required:
1. Determine how much of the ending inventory consists of fixed
manufacturing overhead cost deferred in inventory to the next period.
2. Prepare an income statement for the year using variable costing.
Explain the difference in net operating income between the two
costing methods.
Solution:

1.

Ending inventory = Units produced - Units sold

= 10,000 - 8000

= 2000

Fixed manufacturing overhead cost "per unit" = Total fixed

manufacturing overhead \ Units produced

= 600,000 \10.000 = 60

= 2000*60= 120,000

Nora Aldawood | By : Alanoud Albarak

 Chapter 6 6

2. The variable costing income statement :

Sales 4,000,000

Variable expenses :

Variable cost of goods sold )8,000* 310)

(Units sold * Variable manufacturing cost only "per unit"( 2,480,000

Variable selling and administrative (8,000* 20)

(Units sold* cost of Variable selling & Adm. "per unit") 160,000

Total variable expenses 2,640,000

Contribution margin 1,360,000

Fixed expenses :

Fixed manufacturing overhead 600,000

Fixed selling and administrative 400,000

Total fixed expenses 1,000,000

Net operating income 360,000

Nora Aldawood | By : Alanoud Albarak