Question 1:

In 2016, the 4 x 4 Shop is a large retailer of pickup trucks. An income statement for the company's
Seat Liner Department for the most recent quarter is presented below:
 

The 4x4 Shop

Income Statement – Seat Liner Department

For the First Quarter of 2016

Sales   $700,000

Less: Cost of goods sold   250,000

Gross margin   450,000

Less: Operating expenses:    

Selling expenses $195,000  

Administrative expenses 145,000 340,000

Net income   $110,000

 
The liners sell, on average, for $350 each. The department's variable selling expenses are $35 per
liner sold. The remaining selling expenses are fixed. The administrative expenses are 25% variable
and 75% fixed. The company purchases its liners from a supplier at a cost of $125 per liner.

Required:

1. Prepare an income statement for the quarter, using the contribution approach. 

The 4x4 Shop

Income statement
For the First Quarter of 2016
Sales $700,000
Less: cost of goods sold 250,000
Selling and administrative expense 106,250
Contribution margin 343,750
Less: Fixed selling and administrative expense 233,750
Net Income 110,000

Sales  liners sell $350 each 700,000 / 350 = 2,000 units sold

selling expense  195,000  35 x per unit (variable) 35 x 2000 = 70,000, remaining is fixed

fixed selling expense =195,000 – 70,000 = 125,000

administrative expense  145,000  25% variable = 36,250, 75% fixed = 108750

 production expense (cost of goods sold)  $125 per linear = 125 x 2000 =

 
Question 2:
 
ABC Company's total overhead costs at various levels of activity are presented below:

  Machine Hours Total Overhead Costs

March 60,000 $216,800

April 50,000 194,000

May 70,000 239,600

June 80,000 262,400

 
Assume that the overhead costs above consist of utilities, supervisory salaries, and maintenance. At
the 50,000-machine-hour level of activity, these costs are presented below:
 

Utilities (V) $54,000

Supervisory salaries 62,000

(F)

Maintenance (M) 78,000

Total overhead costs $194,000

Legend: V=Variable, F=Fixed, M=Mixed 

The company wants to break down the maintenance cost into its basic variable and fixed cost
elements.

Required:

1. Estimate the maintenance cost for June.

Total cost in June 262,400

Less: utilities cost 86,400

Supervisory salary 62,000

Maintenance Cost 113,000

Calculations  Utility cost 54000/50000)*80000 = 86400

 Therefore, the maintenance cost for June is $113,000.

2. Use the high-low method to estimate the cost formula for maintenance cost.

Y = a + bX let a = total fixed cost, let b = variable cost per unit and, let y = maintenance cost

B = y2 – y1 / x2 – x1 = (113600 – 78000) / (80000 – 50000) = 1.1867

At level of 50,000

78,000 = a + bx  78000 = a + 1.1867 * 50000

A =18,666.67

Therefore, using the high low method the cost formula for maintenance cost is
y = 18,666.67 + 1,1867X

3. Estimate the total overhead cost at an activity level of 55,000 machine hours, using the
separate estimates you obtained for its components.

Y = a + bx  a = y2 – bx2 = y1 – bx1  b = y2 – y1 / x2 – x1
B = (262400 – 216800) / (80000 – 50000) = 1.52
A = 262400 – 1,52*8000 = 140800 – 1.52*50000 = 64800
Y = 64800 + 1.52 *55000 = 148400
at 55000 machine hours
Y = 18666.67 + 1.1867*55000  y = 83,935.17
Therefore, the total overhead cost at an activity level of 55,000 is $148,8000.
 
Question 3:
The following is Arkadia Corporation's contribution format income statement for last month:

Sales $1,200,000

Less: Variable expenses 800,000

Contribution margin 400,000

Less: Fixed expenses 300,000

Operating income $100,000

 
The company has no beginning or ending inventories and produced and sold 20,000 units during the
month.
 
Required:

1. What is the company's contribution margin ratio?

Sales – variable expense / sales

1200000 – 800000 / 1200000 = 0.33

Therefore, the contribution margin ratio is 1/3 or 0.333.

2. What is the company's break-even in units?

Break even  sales = expenses

BEP (units) = fixed cost / price – variable

P = 1200000 / 20000 units = 60 v = 800000/20000 units = 40

BEP units = 300,000 / (60 – 40)  15000 units

Therefore, the break even p[point in units is 15,000 units.

3. If sales increase by 100 units, by how much should operating income increase?

20 * 100= 2000

Therefore, operating income will increase by $2,000.

4. How many units would the company have to sell to attain target operating income of
$125,000?

Units to sell = (target profit + fixed cost) / (price – variable)

= 125000 / 300000/ 60 – 40

= 21,500

Therefore, the company would have to sell 21, 500 units to earn an operating income f
$125,000.

5. What is the company's margin of safety in dollars?

Margin of safety = sales - BEP in sales $

 = 1200000 - (15000*60)

= 300,000

Therefore, the margin of safety is $300,000.

6. What is the company's degree of operating leverage?

Degree of operating leverage = contribution margin / operating income

= 400000/ 100000

=4

Therefore, the company’s degree of operating leverage is 4.

7. If the tax rate is 30%, how many units must be sold to attain an after - tax profit of $84,000? 

Units to sell = target profit + fixed cost / price – variable

= 84000/(1 – 0.3) / 60 – 40

= 21000

Therefore, the company must sell 21000 units in order to attain an after - tax profit of $84,000.

 
Question 4:
Fill in the missing amounts in each of the eight case situations below. Each case is independent of
the others. (Hint: One way to find the missing amounts would be to prepare a contribution-format
income statement for each case, enter the known data, and then compute the missing items.)

1. Assume that only one product is being sold in each of the following four case situations:

Units Sold Variable Contribution Fixed Operating Income

Case Sales
Expenses Margin Per Unit Expenses (Loss)

1 9,000 $270,000 $162,000 $12 $90,000 $18,000

2 $14,000 $350,000 $140,000 $15 $170,000 $40,000

3 20,000 $600,000 $280,000 $16 $285,000 $35,000

4 5,000 $160,000 $ 90,000 $14 $82,000 ($12,000)

 
I answered this by creating a formula for each. Then I inputted the known figures and solved for each
unknown.
Sales – variable = contribution margin($)
Contribution margin per unit = contribution margin($) / units
Operating loss = contribution margin($) – fixed cost
I filled in all the known figures and solved for each unknown

2. Assume that more than one product is being sold in each of the following four case
situations:

Case Sales Variable Ave Fixed Operating Income

Expenses Contribution Expenses (Loss)
Margin %

1 $450,000 $270 000 40% $115,000 $65,000

2 $200,000 $130,000 35% $60,000 $10,000

3 $700,000 $140,000 80% $470,000 $90,000

4 $300,000 $90,000 70% $225,000 ($15,000)

 
I filled in the missing values by creating formulas for each. Then I inputted the known figures and solved
for each unknown.

Average contribution margin = sales – variable expense / sales

Contribution margin = sales – variable expense

Operating income/loss = contribution margin ($) – fixed expense