Financial & Managerial Accounting, 5th Edition
1070
Exercise 19-7 (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
Variable costs …………………………………………………………………………....
15,000
Contribution margin …………………………………………………………………...
$15,000
Exercise 19-8 (20 minutes)
Part 1
POLARIX
Income Statement—Consumer ATV Department
For Year Ended December 31, 2013
Sales ………………………………………………………………………………
$646,000
Variable expenses
Cost of goods sold (170 ATVs* × $1,830 per ATV) …….……
$311,100
Selling expenses (170 ATVs × $270 per ATV) …………………
45,900
Administrative expenses (40% × $59,500) ………………..……
23,800
380,800
Contribution margin ………………………………………………….……
265,200
Fixed expenses
Selling expenses [$135,000 – (170 ATVs × $270 per ATV)]
89,100
Administrative expenses (60% × $59,500) ………………..……
35,700
124,800
Net income ………………………………………………………………..……
$140,400
*$646,000 sales ÷ $3,800 sales price per unit = 170 ATVs.
Exercise 19-8 (concluded)
Part 2
The company sold 170 ATVs and its contribution margin totals $265,200 for
the year. Consequently, the contribution of each ATV toward covering fixed
costs and toward earning income was $1,560 ($265,200 ÷ 170 ATVs). We
can also compute the $1,560 as follows.
Selling price per ATV …………………………………………………..….
$3,800
Variable expenses
Cost per ATV ……………………………………………………………….
$1,830
Selling expenses ($270 per ATV) …………………………………..
270
Administrative expenses [(40%×$59,500) ÷ 170 ATVs] ….…..
140
2,240
Contribution margin per ATV ………………………………………….
$1,560
Exercise 19-9 (25 minutes)
Part 1
a.
Cost per unit using absorption costing
Direct materials ……………………………………………………………………….
$ 60 per unit
Direct labor ……………………………………………………………………….…….
22 per unit
Variable overhead ……………………………………………………………..…….
8 per unit
Fixed overhead ($528,000/44,000 units) …………………………………….
12 per unit
Total cost per unit ……………………………………………………………..…….
$102 per unit
Exercise 19-9 (concluded)
b.
COOL SKY COMPANY
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
Gross profit ………………………………………………………………………….….
1,368,000
Selling and administrative expenses* ……………………………………….
501,000
Net income …………………………………………………………………………..….
$ 867,000
*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
Direct labor ……………………………………………………………………………..
22 per unit
Variable overhead …………………………………………………………….……..
8 per unit
Total cost per unit …………………………………………………………….……..
$90 per unit
b.
COOL SKY COMPANY
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
Total variable expenses…………………………………..……
3,636,000
Contribution margin ………………………………………….……
1,404,000
Fixed expenses
Fixed manufacturing costs ……………………………..……
528,000
Fixed selling and administrative expenses ……………
105,000
Total fixed expenses ……………………………………….……
633,000
Net income ……………………………………………………….
$ 771,000
* 36,000 units x $90 per unit ……………………
$3,240,000
**36,000 units x $11 per unit ……………………
$ 396,000
Exercise 19-10 (10 minutes)
Fixed overhead per unit at 60,000 unit level =
60,000
$720,000
= $12 per unit
$720,000
Exercise 19-11 (15 minutes)
Part 1
The shirt cost and the utilities cost appear to be variable costs (or at least
have some variable portion), as they increase as production of shirts
increases. The rent cost is fixed, as it does not change with the increase in
production level.
Item
Change in cost
Volume
change
in units
Per
unit
Units
produced
Total
variable
cost
Shirt
$96,000 – $80,000 = $16,000
2,000
$8.00
11,000
$88,000
Utilities
$ 9,900 – $ 8,400 = $ 1,500
2,000
$0.75
11,000
8,250
Total variable costs ……………………………………………………………………...
$96,250
Item
Variable
cost per
unit
(1)
Expected total cost for
12,000 units
(2)
Actual total
cost for
12,000 units
(2) – (1)
Fixed cost
portion of
cost
Shirt
$8.00
$8.00 x 12,000 = $96,000
$96,000
$ 0
Utilities
$0.75
$0.75 x 12,000 = $ 9,000
$ 9,900
$900
Financial & Managerial Accounting, 5th Edition
1074
Exercise 19-11 (concluded)
Part 2
TEE-PRO
Contribution Margin Statement
Monthly Sales Volume of 12,000 Units
Sales ($16.50 × 12,000) …………………………………………………..
$198,000
Variable expenses
Shirt cost (above) ……………………………………………………….
$96,000
Utilities cost (above) ………………………………………………….…
9,000
105,000
Contribution margin …………………………………………………….…
$93,000
Exercise 19-12 (15 minutes)
Part 1
Operating income is growing faster in the APMEA segment than in the U.S.
segment. Operating income grew by $326 million in 2011 and $210 million
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.
PROBLEM SET A
Problem 19-1A (45 minutes)
Part 1
DOWELL COMPANY
Variable Costing Income Statements
2012
2013
Sales ($46 per unit sold) ………………………………………..……….
$920,000
$1,840,000
Variable expenses
Variable production costs ($21 per unit sold*) ……………….
420,000
840,000
Variable sell. & admin. costs ($2.50 per unit sold) ………….
50,000
100,000
Total variable costs ……………………………………………..……….
470,000
940,000
Contribution margin ……………………………………………………….
450,000
900,000
Fixed expenses
Factory overhead ……………………………………………………….
300,000
300,000
Fixed selling & administrative costs ……………………..……
240,000
240,000
Total fixed expenses …………………………………………………….
540,000
540,000
Net income …………………………………………………………….……….
$(90,000)
$ 360,000
*$5 + $9 + $7 = $21
Part 2
DOWELL COMPANY
Reconciliation of Variable Costing Income to Absorption Costing Income
2012
2013
Variable costing income ……………………………………………..….
$(90,000)
$360,000
Fixed overhead in ending inventory (10,000 x $10) ……….….
100,000
Fixed overhead in beginning inventory (10,000 x $10) ….….
_______
(100,000)
Absorption costing income …………………………………………….
$ 10,000
$260,000
Financial & Managerial Accounting, 5th Edition
1076
Problem 19-2A (20 minutes)
Memo to: Kyra Dowell, President
Subject: Break-even volume and absorption costing
Break-even analysis is computed using a contribution margin approach.
The contribution margin approach assumes that all fixed expenses –
including fixed manufacturing expenses – are expensed in the period in
which they are incurred. The calculation of break-even point, therefore,
assumes that fixed factory overhead of $300,000 will be expensed in the
current period.
However, absorption costing – which we must use for external reporting
purposes – assumes that fixed factory overhead is attached to each unit of
inventory. Therefore, the only amount of the fixed factory overhead that is
expensed in the current period is the amount that is attached to the units
[Instructor’s note: The break-even volume using absorption costing is 19,200 units.]
Problem 19-3A (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
Variable sell. & adm. expenses (80,000 x $2.25) …....
180,000
Total variable expenses ……………………………………....
1,860,000
Contribution margin ……………………………………………...
2,140,000
Fixed expenses
Fixed manufacturing costs …………………………………..
900,000
Fixed selling & administrative expenses ……………....
350,000
Total fixed expenses …………………………………………...
1,250,000
Net income …………………………………………………………....
$ 890,000
*Direct materials ……………………………………………….…….
$ 5 per unit
Direct labor ……………………………………………………....
$14 per unit
Variable overhead ………………………………………………….
$ 2 per unit
Total variable production costs ………………………..…
$21 per unit
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
Financial & Managerial Accounting, 5th Edition
1078
Problem 19-4A (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
Contribution margin …………………………………………………………………………
$14,250
Problem 19-5A (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
Gross margin ………………………………………………………………………….………..
600,000
Selling and administrative expenses ……………………………………….………..
318,600
Net income ……………………………………………………………………………..…….
$ 281,400
*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 19-5A (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
Financial & Managerial Accounting, 5th Edition
1080
PROBLEM SET B
Problem 19-1B (45 minutes)
Part 1
AZULE COMPANY
Variable Costing Income Statements
2012
2013
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
Total variable costs ……………………………………………..
1,155,000
1,365,000
Contribution margin ……………………………………………...
770,000
910,000
Fixed expenses
Factory overhead ………………………………………………...
480,000
480,000
Fixed selling & administrative costs ……………………..
300,000
300,000
Total fixed expenses …………………………………………...
780,000
780,000
Net income (loss) …………………………………………………..
$ (10,000)
$ 130,000
*$4+ $6 + $8 = $18
Part 2
AZULE COMPANY
Reconciliation of Variable Costing Income to Absorption Costing Income
2012
2013
Variable costing income ………………………………………….
$(10,000)
$130,000
Fixed overhead in ending inventory (5,000 x $8) ……….
40,000
Fixed overhead in beginning inventory (5,000 x $8) ….
_______
(40,000)
Absorption costing income ……………………………………..
$ 30,000
$ 90,000