Exercise 19-8 (concluded)
Part 2
The company sold 170 ATVs and its contribution margin totals $265,200 for
can also compute the $1,560 as follows.
Selling price per ATV…………………..…………..…..….….….….….. $3,800
Variable expenses
Cost per ATV………………………………………………………………..$1,830
Exercise 19-9 (25 minutes)
Part 1
a.
Cost per unit using absorption costing
Direct materials……………….………………..…………….…..….….….….…...$ 60 per unit
Direct labor………………..……………….……………….….…..….….….….…...22 per unit
Exercise 19-9 (concluded)
b.
COOL SKY
Absorption Costing Income Statement
Sales (36,000 units x $140 per unit)……………….……………………….…$5,040,000
Cost of goods sold (36,000 units x $102 per unit)…..….….….......... 3,672,000
*Variable ($11 x 36,000)……………………………………… $396,000
Fixed………………………………………………………………. 105,000
Total…………………………………………………………….…. $501,000
Part 2
a. Cost per unit using variable costing
Direct materials……….…………………….………………….….….….….….…..$60 per unit
b. COOL SKY
Variable Costing Income Statement
Sales (36,000 units x $140 per unit)……………….….….… $5,040,000
Variable expenses
Variable production costs*……………………..….….….….$3,240,000
Variable selling and administrative expenses**..….… 396,000
* 36,000 units x $90 per unit………….……….. $3,240,000
**36,000 units x $11 per unit……………………. $ 396,000
Exercise 19-10 (15 minutes)
Reconciliation of variable costing income to absorption costing income:
Year 1 Year 2 Year 3
Variable costing income………………………………………..….….…
$110,000 $114,400 $118,950
Fixed overhead in ending inventory*…………….…….…..….…..
3,000 1,750 2,000
_______ (3,000) (1,750 )
*Computed as $2.50 per unit x the number of units in inventory
Exercise 19-11 (15 minutes)
Per unit
Direct materials……………….………………..……………………..……………….…..…$100
Direct labor………………..……………….…………………….…………………..…..….… 30
Variable overhead……..……………………..………………..……………….….….….... 8
Exercise 19-12 (10 minutes)
Fixed overhead per unit at 60,000 unit level =
60,000
$720,000
= $12 per unit
$720,00
Exercise 19-13 (15 minutes)
Expected contribution margin from Bikers’ Club offer:
Revenue (50 suites x 3 nights x $125 per night)…………..……………….…...$18,750
Variable costs (50 suites x 3 nights x $30 per night)………………………….. 4,500
Exercise 19-14 (15 minutes)
Expected contribution margin from JSA convention offer:
Revenue (100 rooms x 4 nights x $150 per night)……………..….….….…....$60,000
Variable costs (100 rooms x 4 nights x $40 per night)…………….….….….. 16,000
Exercise 19-15 (10 minutes)
Memo to: Manager, MidCoast Airlines
Subject: International student group
Assuming that the fixed costs identified by MidCoast Airlines are allocated
over all passengers and not direct costs to the college travelers, the
airline’s contribution margin for the college travelers will be:
Revenue from trip………………..……………….……………………..………….…. $30,000
MidCoast Airlines will be $15,000 better off if they take these passengers.
Of course, if any of the fixed costs are directly related to the extra
Exercise 19-16 (15 minutes)
Part 1
Operating income is growing faster in the Europe segment than in the U.S.
segment. Operating income grew by $175 million in 2013 for the Europe
Part 2
No, the difference in operating income growth between the segments is not
due to the use of different costing methods. McDonald’s follows U.S. GAAP
PROBLEM SET A
Problem 19-1A (45 minutes)
Part 1
DOWELL COMPANY
Variable Costing Income Statements
2014 2015
Sales ($46 per unit sold)………………..………………..……….….….$920,000 $1,840,000
Variable expenses
Total variable costs………………………..………………………….…. 470,000 940,000
Contribution margin…………………………..…………………………... 450,000 900,000
Fixed expenses
*$5 + $9 + $7 = $21
Part 2
DOWELL COMPANY
Reconciliation of Variable Costing Income to Absorption Costing Income
2014 2015
Variable costing income………………………………………..….….…$(90,000) $360,000
Fixed overhead in ending inventory (10,000 x $10)….….......100,000
_______ (100,000)
Problem 19-2A (25 minutes)
Part 1
TREZ COMPANY
Variable Costing Income Statement
Sales (80,000 x $50)……………….……………………….….….. $4,000,000
Variable expenses
Variable production costs (80,000 x $21*)………….…..$1,680,000
Fixed expenses
Fixed manufacturing costs………………..……………….... 900,000
Fixed selling & administrative expenses…..…........... 350,000
Total fixed expenses…………………..….…..….….….….…. 1,250,000
Part 2
Absorption costing income is $180,000 more than variable costing income.
This is because there are 20,000 units in ending inventory which have $9
Problem 19-3A (30 minutes)
Part 1
Yes, it is possible for the company to report a net income by increasing its
production to 100 tons and storing the excess inventory. The following
absorption costing income statement shows this.
BLAZER CHEMICAL
Income Statement
Sales (60 tons x $21,000 per ton)…………………………………..….….….….…...$1,260,000
Cost of goods sold (60 tons x $11,000 per ton*)………………………………… 660,000
*Variable production costs (100 tons x $3,500 per ton)........... $ 350,000
Fixed production costs…………………………………………..….…….. 750,000
Total production costs……………………………………….……..……… $1,100,000
Absorption cost per ton ($1,100,000 / 100 tons)….……………… $11,000 per ton
Blazer Chemical can increase its income by $300,000 by producing 40 tons
Problem 19-3A (concluded)
Part 2
Whether the company should produce the extra 40 tons depends on a
number of factors.
It would be unethical to produce the extra 40 tons just to raise income
(and perhaps have managers earn bonuses) if the company does not
PROBLEM SET B
Problem 19-1B (45 minutes)
Part 1
AZULE COMPANY
Variable Costing Income Statements
2014 2015
Sales ($35 per unit sold)………………..….…..….…..….…...$1,925,000 $2,275,000
Variable expenses
Variable production costs ($18 per unit sold*).......... 990,000 1,170,000
Variable selling & admin. costs ($3 per unit sold)...... 165,000 195,000
*$4+ $6 + $8 = $18
Part 2
AZULE COMPANY
Reconciliation of Variable Costing Income to Absorption Costing Income
2014 2015
Variable costing income………………………………..….….…. $(10,000) $130,000
Fixed overhead in ending inventory (5,000 x $8)..…..... 40,000