Problem 19-2B (20 minutes)
Memo to: Roberta Azule, President
Subject: Break-even volume and absorption costing
Break-even analysis is computed using a contribution margin approach.
even units of 55,715. Our loss of $10,000 can be calculated as:
715 units below break-even x $14 contribution margin per unit = $10,010
(with a $10 rounding error)
[Instructor’s note: The break-even volume using absorption costing is 50,000 units.]
Financial & Managerial Accounting, 5th Edition
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Problem 19-3B (25 minutes)
Part 1
E’LONTE COMPANY
Variable Costing Income Statement
Sales (250,000 x $18) ……………………………………………..……….
$4,500,000
Variable expenses
Variable production costs (250,000 x $6*) ……………..……….
$1,500,000
Variable selling & admin. expenses (250,000 x $4) ..……….
1,000,000
Total variable expenses ……………………………………….……….
2,500,000
Contribution margin ……………………………………………………….
2,000,000
Fixed expenses
Fixed manufacturing costs …………………………………..……….
450,000
Fixed selling & administrative expenses ……………….……….
1,200,000
Total fixed expenses …………………………………………………….
1,650,000
Net income …………………………………………………………….……….
$ 350,000
*Direct materials ……………………………………..
Direct labor ……………………………………………
Variable overhead ………………………………….
Total variable production costs ………………
Part 2
Absorption costing income is $75,000 more than variable costing income.
This is because there are 50,000 units in ending inventory which have $1.50
Problem 19-4B (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
Contribution margin …………………………………………………………………………
$44,000
As long as there are no additional fixed costs (additional staff that must be
Problem 19-5B (30 minutes)
Part 1
Yes, it is possible for the company to report a net income by increasing its
production to 300,000 lbs. and storing the excess inventory. The following
absorption costing income statement shows this.
CHEM-MELT
Income Statement (Absorption Costing)
Sales (250,000 lbs. x $8 per lb.) ……………………………………………..………..
$2,000,000
Cost of goods sold (250,000 lbs. x $6 per lb*) ………………………..…
1,500,000
Gross margin ………………………………………………………………………..………….
500,000
Selling and administrative expenses ……………………………………..………….
450,000
Net income ……………………………………………………………………………………
$ 50,000
*Variable production costs (300,000 lbs. x $2 per lb.) …………..
$ 600,000
Fixed production costs ………………………………………………………
1,200,000
Total production costs ………………………………………………………
$1,800,000
Absorption cost per ton ($1,800,000 / 300,000 lbs.) …………….
$6.00 per lb.
Chem-Melt can increase its income by $200,000 by producing 50,000
pounds more than it sells. Each of the 50,000 pounds in inventory will
Part 2
Whether the company should produce the extra 50,000 pounds depends on
a number of factors.
• It would be unethical to produce the extra 50,000 pounds just to raise
income (and perhaps have managers earn bonuses) if the company does
not feel it can sell the chemical in the near future.
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Serial Problem — SP 19
Part 1 (a and b)
SUCCESS SYSTEMS
Absorption Costing Income Statements
Forecasted for Year Ended 2014
Workstations produced
(a) 300
(b) 320
Sales (300 x $3,000) ………………………………………………
$900,000
$900,000
Cost of goods sold (300 x $1,380*);(300 x $1,375**) ……..
414,000
412,500
Gross profit ………………………………………………………….
486,000
487,500
Selling expenses*** ………………………………………………
19,000
19,000
Net income ……………………………………………………………
$467,000
$468,500
* Absorption costing cost per unit for 300 units produced:
Direct materials …………………………………..…..
$ 800.00 per unit
Direct labor ……………………………………………..
400.00 per unit
Variable overhead ……………………………….…..
100.00 per unit
Fixed overhead ($24,000/300 units)…………..
80.00 per unit
Total cost per unit ……………………………….…..
$1,380.00 per unit
** Absorption costing cost per unit for 320 units produced:
Direct materials …………………………………..…..
$ 800.00 per unit
Direct labor ……………………………………………..
400.00 per unit
Variable overhead ……………………………….…..
100.00 per unit
Fixed overhead ($24,000/320 units)…………..
75.00 per unit
Total cost per unit ……………………………….…..
$1,375.00 per unit
***Selling expenses
Variable ($50 x 300) ……………………………..…..
$ 15,000
Fixed …………………………………………………..…..
4,000
Total selling expenses …………………………..
$ 19,000
Serial Problem SP-19 (Concluded)
Part 2 (a and b)
SUCCESS SYSTEMS
Variable Costing Income Statements
Forecasted for Year Ended 2014
Workstations produced
(a) 300
(b) 320
Sales (300 x $3,000) ……………………………………………….
$900,000
$900,000
Variable expenses
Variable cost of goods sold (300 x $1,300*) ………….
390,000
390,000
Variable selling expenses (300 x $50) …………………..
15,000
15,000
Total variable expenses ……………………………………...
405,000
405,000
Contribution margin ……………………………………………...
495,000
495,000
Fixed expenses
Factory overhead ………………………………………………..
24,000
24,000
Selling expenses ………………………………………………...
4,000
4,000
Total fixed expenses …………………………………………..
28,000
28,000
Net income …………………………………………………………….
$467,000
$467,000
*Variable costing cost per unit:
Direct materials ………………………………………..
$ 800 per unit
Direct labor ………………………………………….…..
400 per unit
Variable overhead ………………………………..…..
100 per unit
Total cost per unit …………………………..………..
$1,300 per unit
Part 3
For absorption costing, her income is increased by $1,500 if she produces
the extra 20 units. This is equal to 20 units x $75 per unit in fixed overhead
that will be attached to the ending inventory. Variable costing income will
be $467,000 no matter how many units are produced, as all fixed overhead
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Reporting in Action — BTN 19-1
1. Polaris’ ending inventory increased in each of the years 2011 and 2010.
All else equal, this means more fixed overhead costs remain in ending
Comparative Analysis — BTN 19-2
1. The costs that Arctic Cat must consider include variable overhead, such
as miscellaneous supplies, and any new fixed costs that must be
Ethics Challenge — BTN 19-3
1. FDP Company must use absorption costing to determine its income for
external reporting purposes. Absorption costing “absorbs” both
variable and fixed manufacturing costs into each unit of inventory. FDP
2. Yes, there is an ethical concern. If the company produces excess
inventory it cannot sell, it will spend resources unnecessarily. The
company’s financial position will appear better than it really is, and
Financial & Managerial Accounting, 5th Edition
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Communicating in Practice — BTN 19-4
MEMORANDUM
TO: ____________________
FROM: ____________________
DATE: ____________________
SUBJECT: ____________________
Break-even volume is determined by dividing total fixed expenses by the
contribution margin per unit. The contribution margin is selling price less
Taking It to the Net — BTN 19-5
1. This requires that students print out the required page.
3. According to the website:
• If beginning and ending inventory levels are equal: absorption
costing profit = variable costing profit;
Teamwork in Action — BTN 19-6
Teams’ answers will vary, but students’ answers should center on several
issues:
• Absorption costing is required for external reporting.
Entrepreneurial Decision — BTN 19-7
1. Four examples of costs that might explain the wide range of selling
prices of Samanta’s shoes include:
• Type and grade of material (e.g. leather) to make shoes
2. Samanta Shoes’ income measured under absorption costing probably
would be about the same as its income measured under variable
Financial & Managerial Accounting, 5th Edition
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Hitting the Road — BTN 19-8
1. Many answers are possible, but variable costs with respect to
2. Fixed costs would include: Salary of hotel manager; wages of front desk
3. It is likely that the fixed costs will far outweigh the variable costs. Most
4. During low occupancy seasons, the hotel would like to have paying
Global Decision— BTN 19-9
If KTM buys an entire business, they will be interested in the absorption
costing financial statements. The business will have its own fixed