1. Macon Company has a variable selling cost.

If sales volume increases, how will

the total variable cost and the variable cost per unit behave?
 
If sales volume increases, total variable cost will increase and variable cost per unit will
remain constant.

2. Straight-line depreciation is a typical example of a fixed cost.

3. Each of Boggart’s production managers (annual salary cost, $45,000) can

oversee 60,000 machine hours of manufacturing activity. Thus, if the company
has 50,000 hours of manufacturing activity, one manager is needed; for 75,000
hours, two managers are needed; for 125,000 hours, three managers are
needed; and so forth. Boggart’s salary cost can best be described as a:

Boggart’s salary cost can best be described as a step-fixed cost.

4. The company's relevant range of activity varies from a low of 600 machine hours
to a high of 1,100 machine hours, with the following data being available for the
first six months of the year:
  Machine
Month Utilities Hours
January $8,700       800  
February  8,360       720  
March  8,950       810  
April  9,360       920  
May  9,625       950  
June  9,150       900  

 
The variable utilities cost per machine hour for Barkoff is:

(High − Low costs) ÷ (High − Low Units)

= ($9,625 − $8,360) ÷ (950 − 720)
= $1,265 ÷ 230
= $5.50 variable cost per unit

5. The fixed utilities cost per month for Barkoff is:

(High − Low costs) ÷ (High − Low Units) = ($9,625 − $8,360) ÷ (950 − 720) = $1,265 ÷ 230
= $5.50 variable cost per unit

Variable costs (using the high level) = 950 × $5.50 = $5,225;

Total costs(utilities) – variable costs = fixed costs (or $9,625 − $5,225 = $4,400).

6. An employee’s compensation, consisting of a flat salary plus a commission, is a mixed

cost.
 7. Outlays for advertising programs is not an example of a committed fixed cost.

8. Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the
company has fixed costs that amount to $400,000. Current sales total 16,000 units.

Break-even in units = Total Fixed costs ÷ Fixed cost per unit

$400,000 ÷ [$50 − ($50 × 60%)] = 20,000 units

9. The break-even point is that level of activity where contribution margin equals fixed
cost.

10. If a company increases its variable cost per unit, then contribution margin decreases and
break-even point increases.

11. If a company wants to lower its break-even point, it should strive to reduce variable
costs.

12. The contribution-margin ratio is unit contribution margin divided by the selling price.

13. The difference between budgeted sales revenue and break-even sales revenue is the
safety margin.

14. A manager who wants to determine the percentage impact on income of a given
percentage change in sales would multiple the percentage increase or decrease in sale
revenue by the operating leverage factor.

15. Vega Enterprises has computed the following unit costs for the year just ended:

 
      
Direct material used $12 
Direct labor  18 
Variable manufacturing overhead  25 
Fixed manufacturing overhead  29 
Variable selling and administrative cost  10 
Fixed selling and administrative cost  17 

Under absorption costing, each unit of the company's inventory would be carried at:

Direct materials + Direct labor + Variable Manufacturing Overhead + Fixed Manufacturing

Overhead = $12 + $18 + $25 + $29 = $84.

16. Under variable costing, each unit of the company's inventory would be carried at:
 Direct materials + Direct labor + Variable Manufacturing Overhead = $12 + $18 + $25 =
$55

17.
Variable costing is consistent with contribution reporting and cost-volume-profit
analysis.
Absorption costing must be used for external financial reporting.
A number of companies use both absorption costing and variable costing.

18. Change in inventory units × predetermined fixed-overhead rate per unit can reconcile
the difference between absorption and variable costing income.

19. Units sold that are less than units produced cause absorption-costing income to be
higher than variable-costing income.

20. Since Chu's inventory increased during the year, income reported under absorption
costing will be higher than that reported under variable costing.

21. Cost of goods sold on an absorption-costing income statement includes fixed costs.
The amount of variable selling and administrative cost is the same on absorption- and
variable-costing income statements.

22. Sales commissions would not be inventoried under absorption costing.

Homework 7:
#1. The company’s annual fixed expenses are $40,000. The sales price of a pizza is $10, and it
costs the company $5 to make and deliver each pizza.

Fixed expenses
Break-even point (in units) =
Unit contribution margin
 

$40,000
=  = 8,000 pizzas
$10 – $5

Unit contribution margin

Contribution-margin ratio =
Unit sales price
 

$10 – $5
=  = 0.5
$10
 Fixed expenses
Break-even point (in sales dollars) =
Contribution-margin ratio
 

$40,000
=  = $80,000
0.5

How many pizzas must the company sell to earn a target profit of $65,000?

Let X denote the sales volume of pizzas required to earn a target net profit of $65,000.

10X – $5X – $40,000 = $65,000

$5X = $105,000
X = 21,000 pizzas

The firm’s fixed costs are 4,000,000 p per year. The variable cost of each component is 2,000 p,
and the components are sold for 3,000 p each. The company sold 5,000 components during the
prior year.

1.
Fixed costs
Break-even point (in units)   =   
Unit contribution margin
 

4,000,000 p
 =   = 4,000 components
3,000 p – 2,000 p
 

p denotes Argentina’s peso.

2. What will the new break-even point be if fixed costs increase by 10 percent?
(4,000,000 p)(1.10)
New break-even point (in units)   =   
3,000 p – 2,000 p
 

4,400,000 p
 =   = 4,400 components
1,000 p
 Or

4,000,000x10%= 400,000

4,000,000+400,000= 4,400,000
3. What was the company’s net income for the prior year?
     
Sales revenue (5,000 × 3,000 p) 15,000,000 p
Variable costs (5,000 × 2,000 p) 10,000,000 p
Contribution margin 5,000,000 p
Fixed costs 4,000,000 p
Net income 1,000,000 p

4. The sales manager believes that a reduction in the sales price to 2,500 p will result in orders for 1,200
more components each year. What will the break-even point be if the price is changed?
4,000,000 p
New break-even point (in units)= 2,500 p –
2,000 p   
     
  =8,000 components
 

5. Should the price change discussed in requirement (4) be made?

Analysis of price change decision:

  Price    
  3,000 p   2,500 p  
Sales revenue: (5,000 × 3,000 p) 15,000,000 p       
(6,200 × 2,500 p)     15,500,000 p  
Variable costs: (5,000 × 2,000 p) 10,000,000 p       
(6,200 × 2,000 p)      12,400,000 p  
Contribution margin 5,000,000 p   3,100,000 p  
Fixed expenses 4,000,000 p   4,000,000 p  
Net income (loss) 1,000,000 p   (900,000 p)  
  
 

The price cut should not be made, since projected net income will decline.

#2 All units produced during the year were sold. (Ignore income taxes.)
 
      
Sales revenue $2,000,000 
Manufacturing costs:     
Fixed   500,000 
Variable  1,000,000 
Selling costs:     
 Fixed   50,000 
Variable   100,000 
Administrative costs:    
Fixed   120,000 
Variable   30,000 

2.
Operating leverage factor (at $2,000,000 Contribution margin
  =   
sales level) Net income
 

$870,000
 =   = 4.35
$200,000
Contribution Margin = Sales – Variable expenses

Net Income = CM – Fixed expenses

3. Suppose sales revenue increases by 10 percent. What will be the percentage increase in net income?

Percentage increase in = (Percentage increase in sales revenue)

net income × (Operating leverage factor)
  = 10% × 4.35
  = 43.5%

4.
Most operating managers prefer the contribution income statement for answering this type of
question. The contribution format highlights the contribution margin and separates fixed and variable
expenses.

#3 A contribution income statement for the Nantucket Inn is shown below.

(Ignore income taxes.)
 
 
Revenue $500,000 
Less: Variable
 300,000 
expenses
Contribution margin $200,000 
Less: Fixed expenses  150,000 
Net income $ 50,000 

2. Suppose the hotel’s revenue declines by 15 percent. Use the contribution-margin percentage to
calculate the resulting decrease in net income.
Decrease in Revenue Contribution Margin Percentage Decrease in Net Income
$75,000* × 40%† = $30,000

*
$75,000 = $500,000 × 15%
†
40% = $200,000/$500,000

3. What is the hotel’s operating leverage factor when revenue is $500,000?

Contribution margin
Operating leverage factor (at revenue of $500,000)=
Net income
 

$200,000
=  = 4
$50,000

4. Calculate the increase in net income resulting from a 20 percent increase in sales revenue.
Percentage increase in = (Percentage increase in sales revenue)
net income × (Operating leverage factor)
  = 20% × 4
  = 80%

HOMEWORK 8:
#1
Manta Ray Company manufactures diving masks with a variable cost of $25. The masks sell for
$34. Budgeted fixed manufacturing overhead for the most recent year was $792,000. Actual
production was equal to planned production.

       
1. Production 110,000 units
  Sales 108,000 units
2. Production 90,000 units
  Sales 95,000 units
3. Production 79,200 units
  Sales 79,200 units

1.
a. Inventory increases by 2,000 units, so operating income is greater under absorption costing.
b.

$792,000
Fixed overhead rate per unit = = $7.20
110,000

Difference in reported operating income = $7.20 × 2,000 = $14,400

2.
a. Inventory decreases by 5,000 units, so operating income is greater under variable costing.
b.

$792,000
Fixed overhead rate per unit = = $8.80
90,000

Difference in reported operating income = $8.80 × 5,000 = $44,000

3.
a. Inventory remains unchanged, so there is no difference in reported operating income under the
two methods of product costing.

b. No difference.

#2
Information taken from Allied Pipe Company’s records for the most recent
year is as follows:
 
      
Direct material used $340,000 
Direct labor  160,000 
Variable manufacturing overhead   75,000 
Fixed manufacturing overhead  125,000 
Variable selling and administrative costs  70,000 
Fixed selling and administrative costs   37,000 

1.
Inventoriable costs under absorption costing:
 
      
Direct material used $340,000 
Direct labor  160,000 
Variable manufacturing overhead  75,000 
Fixed manufacturing overhead  125,000 
Total $700,000 

2.
Inventoriable costs under variable costing:
 
      
Direct material used $340,000 
Direct labor  160,000 
Variable manufacturing overhead  75,000 
Total $575,000 

#3
      
Sales price $15 
Direct material   5 
Direct labor   2 
Variable
  3 
overhead

 
Budgeted fixed overhead in 20x1, the company’s first year of operations, was
$300,000. Actual production was 150,000 five-gallon containers, of which
125,000 were sold. Skinny Dippers, Inc. incurred the following selling and
administrative expenses.
 
        
Fixed $50,000 for the year
per container
Variable $ 1 
sold

1.
Calculation of predetermined fixed overhead rate:

 Predetermined fixed overhead Budgeted fixed overhead

=
rate Budgeted production
 

$300,000
  = = $2 per unit
150,000
 

Cost per Unit

Direct material $ 5 
Direct labor   2 
Variable overhead   3 
a. Cost per unit under variable costing $ 10 
Fixed overhead per unit under absorption costing   2 
b. Cost per unit under absorption costing $ 12 

2-a. ABSORPTION COSTING

Sales revenue (125,000 units sold at $15 per unit) = $1,875,000

Cost of goods sold (at absorption cost of $12 per unit) = 125,000 x $12 = $1,500,000
 COGS= Sold x Cost Per Unit (Absorption costing)

Selling and administrative expenses: Variable (at $1 per unit) = $125,000

2-b. VARIABLE ACOSTING

Sales revenue (125,000 units sold at $15 per unit) = $1,875,000

Variable manufacturing costs (at variable cost of $10 per unit) = $1,250,000

Variable selling and administrative costs (at $1 per unit) = $125,000

4.
=
Difference in fixed overhead expensed under absorption and variable costing
Difference in reported income (change in inventory, in units) × (predetermined fixed overhead rate per unit)
=

 
  = (25,000 units) × ($2 per unit)
  = $50,000
 

As shown in requirement (2), reported operating income is $50,000 lower under variable costing.

#4
A case of cans sells for $50. The variable costs of production for one case of
cans are as follows:
 
      
Direct material $15 
Direct labor   5 
Variable manufacturing overhead  12 
Total variable manufacturing cost per
$32 
case

 
Variable selling and administrative costs amount to $1 per case. Budgeted
fixed manufacturing overhead is $800,000 per year, and fixed selling and
administrative cost is $75,000 per year. 
    Year 1   Year 2   Year 3
Planned production (in units)  80,000  80,000  80,000 
Finished-goods inventory (in units),
  0   0  20,000 
January 1
Actual production (in units)  80,000  80,000  80,000 
 Sales (in units)  80,000  60,000  90,000 
Finished-goods inventory (in units),
  0  20,000  10,000 
December 31

1.
a.

Absorption-costing operating income statements:

Sales revenue (at $50 per case)

Less: Cost of goods sold (at absorption cost of $42 per case*)

Variable (at $1 per case)

*The absorption cost per case is $42, calculated as follows:

Budgeted fixed manufacturing

Variable manufacturing cost per
overhead +
case
Planned production
 

  $800,000
+ $32
  80,000
       
  $10 + $32 = $42
 

b.

Variable-costing operating income statements:

Sales revenue (at $50 per case)

Less: Variable expenses:

Variable manufacturing costs (at variable cost of $32 per case)

Variable selling and administrative costs (at $1 per case)

2.
Reconciliation:
  Reported Income                          
Difference in Fixed
Overhead Expensed
Difference Change in × Predetermined Under Absorption
Absorption Variable in Reported Inventory Fixed Overhead and Variable
Year Costing Costing Income   (in units) Rate*   Costing
1 $ 485,000  $ 485,000    0      0    $ 10      0  
2   345,000    145,000  $ 200,000      20,000      10    $ 200,000  
3   555,000    655,000    (100,000)     (10,000)    10      (100,000)

Predetermined fixed manufacturing overhead $800,000

=
rate 80,000
 

3.
a.

In year 4, the difference in reported operating income will be $100,000, calculated as follows:

Change in Predetermined
inventory (in × fixed overhead    
units) rate
  (10,000) × $10 = $(100,000)