Analytical Thinking (continued)
2. a. No, the cookbook line should not be eliminated. The cookbook is
covering all of its own costs and is generating an $18,000 segment
margin toward covering the company’s common costs and toward
profits. (Note: Problems relating to the elimination of a product line
are covered in more depth in the next chapter.)
b.
Cook–
book
Travel
Guide
Handy
Speller
Contribution margin (a) ………………
$54,000
$72,000
$42,000
Sales (b) ………………………………….
$90,000
$150,000
$60,000
Contribution margin ratio (a) ÷ (b) ..
60%
48%
70%
It is probably unwise to focus all available resources on promoting the
travel guide. The company is already spending more on the
promotion of this product than on the other two products combined.
Furthermore, the travel guide has the lowest contribution margin ratio
of the three products. Therefore, a dollar of sales of the travel guide
generates less profit than a dollar of sales of either of the two other
products. Nevertheless, we cannot say for sure which product should
be emphasized in this situation without more information. The
problem states that there is ample demand for all three products,
which suggests that there is no idle capacity. If the equipment is
being fully utilized, increasing the production of any one product
would require cutting back production of the other products. In the
next chapter we will discuss how to choose the most profitable
product when a production constraint forces such a trade-off among
products.
Case (75 minutes)
1. See the segmented statement on the second following page.
Supporting computations for the statement are given below:
Sales:
Membership dues (20,000 × $100) ………………………
$2,000,000
Assigned to Magazine Subscriptions Division
(20,000 × $20) ……………………………………………..
400,000
Assigned to Membership Division …………………………
$1,600,000
Non-member magazine subscriptions (2,500 × $30) ..
$ 75,000
Reports and texts (28,000 × $25) ………………………..
$ 700,000
Continuing education courses:
One-day (2,400 × $75) …………………………………..
$ 180,000
Two-day (1,760 × $125) ………………………………….
220,000
Total revenue ………………………………………………….
$ 400,000
Salaries
Membership Division ………………….
$210,000
Magazine Subscriptions Division ……
150,000
Books and Reports Division ………….
300,000
Continuing Education Division ………
180,000
Total assigned to divisions …………..
840,000
Corporate staff ………………………….
80,000
Total……………………………………….
$920,000
© The McGraw-Hill Companies, Inc., 2016. All rights reserved.
Solutions Manual, Chapter 6 59
Case (continued)
Some may argue that, except for the $50,000 in rental cost directly
attributed to the Books and Reports Division, occupancy costs are
common costs that should not be allocated. The correct treatment of
the occupancy costs depends on whether they could be avoided in part
by eliminating a division. In the solution below, we have assumed they
could be avoided.
Occupancy costs ($230,000 allocated + $50,000 direct to the Books
and Reports Division = $280,000):
Allocated to:
Membership Division
($230,000 × 0.2) …………………………………….
$ 46,000
Magazine Subscriptions Division
($230,000 × 0.2) …………………………………….
46,000
Books and Reports Division
[($230,000 × 0.3) + $50,000] ……………………
119,000
Continuing Education Division
($230,000 × 0.2) …………………………………….
46,000
Corporate staff
($230,000 × 0.1) …………………………………….
23,000
Total occupancy costs …………………………………
$280,000
Printing and paper costs ………………………………..
$320,000
Assigned to:
Magazine Subscriptions Division
(22,500 × $7) ………………………………………
$157,500
Books and Reports Division
(28,000 × $4) ………………………………………
112,000
269,500
Remainder—Continuing Education Division ……
$ 50,500
Postage and shipping costs …………………………….
$176,000
Assigned to:
Magazine Subscriptions Division
(22,500 × $4) ………………………………………
$ 90,000
Books and Reports Division
(28,000 × $2) ………………………………………
56,000
146,000
Remainder—corporate staff ……………………….
$ 30,000
© The McGraw-Hill Companies, Inc., 2016. All rights reserved.
60 Introduction to Managerial Accounting, 7th Edition
Case (continued)
Division
Association
Total
Membership
Magazine
Subscriptions
Books &
Reports
Continuing
Education
Sales:
Membership dues ………………………
$2,000,000
$1,600,000
$400,000
Non-member magazine
subscriptions ………………………….
75,000
75,000
Advertising ………………………………
100,000
100,000
Reports and texts ………………………
700,000
$700,000
Continuing education courses ………
400,000
$400,000
Total revenues ………………………….
3,275,000
1,600,000
575,000
700,000
400,000
Expenses traceable to segments:
Salaries …………………………………..
840,000
210,000
150,000
300,000
180,000
Personnel costs …………………………
210,000
52,500
37,500
75,000
45,000
Occupancy costs ……………………….
257,000
46,000
46,000
119,000
46,000
Reimbursement of member costs to
local chapters …………………………..
600,000
600,000
Other membership services …………
500,000
500,000
Printing and paper …………………….
320,000
157,500
112,000
50,500
Postage and shipping …………………
146,000
90,000
56,000
Instructors’ fees ………………………..
80,000
80,000
Total traceable expenses …………….
2,953,000
1,408,500
481,000
662,000
401,500
Division segment margin ……………….
322,000
$ 191,500
$ 94,000
$ 38,000
$ (1,500)
[The statement is continued on the next page.]
Case (continued)
[Continuation of the segmented income statement.]
Division
Association
Total
Membership
Magazine
Subscriptions
Books &
Reports
Continuing
Education
Division segment margin ……………….
322,000
$ 191,500
$ 94,000
$ 38,000
$ (1,500)
Common expenses not traceable to divisions:
Salaries—corporate staff ……………..
80,000
Personnel costs …………………………
20,000
Occupancy costs ……………………….
23,000
Postage and shipping …………………
30,000
General and administrative ………….
38,000
Total common expenses ………………..
191,000
Excess of revenues over expenses …..
$ 131,000
Case (continued)
2. While we do not favor the allocation of common costs to segments, the
most common reason given for this practice is that segment managers
need to be aware of the fact that common costs do exist and that they
must be covered.
Chapter 6
Take Two Solutions
Exercise 6-1 (15 minutes)
1. Under absorption costing, all manufacturing costs (variable and fixed)
are included in product costs.
Direct materials ……………………………………………………
$100
Direct labor …………………………………………………………
320
Variable manufacturing overhead …………………………….
40
Fixed manufacturing overhead ($60,000 ÷ 250 units) …..
240
Absorption costing unit product cost …………………………
$700
2. Under variable costing, only the variable manufacturing costs are
included in product costs.
Direct materials ……………………………………………………
$100
Direct labor …………………………………………………………
320
Variable manufacturing overhead …………………………….
40
Variable costing unit product cost …………………………….
$460
Exercise 6-3 (20 minutes)
1.
Year 1
Year 2
Year 3
Beginning inventories ……….
200
140
180
Ending inventories ……………
140
180
220
Change in inventories ……….
(60)
40
40
Fixed manufacturing
overhead in beginning
inventories (@$560 per
unit) …………………………...
$112,000
$ 78,400
$100,800
Fixed manufacturing
overhead in ending
inventories (@$560 per
unit) …………………………...
78,400
100,800
123,200
Fixed manufacturing
overhead deferred in
(released from)
inventories (@$560 per
unit) …………………………...
$ (33,600)
$ 22,400
$ 22,400
Variable costing net
operating income …………..
$1,080,400
$1,032,400
$ 996,400
Add (deduct) fixed
manufacturing overhead
cost deferred in (released
from) inventory under
absorption costing …………
(33,600)
22,400
22,400
Absorption costing net
operating income …………..
$1,046,800
$1,054,800
$1,018,800
2. Because absorption costing net operating income was greater than
variable costing net operating income in Year 4, inventories must have
Exercise 6-4 (10 minutes)
Total
Company
Weedban
Greengrow
Sales* ……………………………..
$321,000
$96,000
$225,000
Variable expenses** …………..
195,900
38,400
157,500
Contribution margin ……………
125,100
57,600
67,500
Traceable fixed expenses ……..
66,000
45,000
21,000
Product line segment margin ..
59,100
$12,600
$ 46,500
Common fixed expenses not
traceable to products ………..
33,000
Net operating income ………….
$ 26,100
*
Weedban: 16,000 units × $6.00 per unit = $96,000;
Greengrow: 30,000 units × $7.50 per unit = $225,000.
**
Weedban: 16,000 units × $2.40 per unit = $38,400;
Greengrow: 30,000 units × $5.25 per unit = $157,500.
Exercise 6-8 (10 minutes)
Sales were below the company’s break–even sales and yet the company
earned a profit. The apparent contradiction is explained by the fact that the
CVP analysis is based on variable costing, whereas the income reported to
Exercise 6-9 (30 minutes)
1 a. Under variable costing, only the variable manufacturing costs are
included in product costs.
Year 1
Year 2
Direct materials ………………………………
$25
$25
Direct labor ……………………………………
15
15
Variable manufacturing overhead ……….
5
5
Variable costing unit product cost ……….
$45
$45
Note that selling and administrative expenses are not treated as
product costs; that is, they are not included in the costs that are
inventoried. These expenses are always treated as period costs.
1 b.
Year 1
Year 2
Sales …………………………………………………
$2,400,000
$3,000,000
Variable expenses:
Variable cost of goods sold @ $45 per unit
1,800,000
2,250,000
Variable selling and administrative @ $2
per unit …………………………………………
80,000
100,000
Total variable expenses ………………………….
1,880,000
2,350,000
Contribution margin ………………………………
520,000
650,000
Fixed expenses:
Fixed manufacturing overhead ………………
400,000
400,000
Fixed selling and administrative …………….
80,000
80,000
Total fixed expenses ……………………………..
480,000
480,000
Net operating income (loss) ……………………
$ 40,000
$ 170,000
2 a. The unit product costs under absorption costing:
Year 1
Year 2
Direct materials ………………………………
$25
$25
Direct labor ……………………………………
15
15
Variable manufacturing overhead ……….
5
5
Fixed manufacturing overhead …………..
*8
**10
Absorption costing unit product cost ……
$53
$55
* $400,000 ÷ 50,000 units = $8 per unit.
** $400,000 ÷ 40,000 units = $10 per unit.
Exercise 6-9 (continued)
2 b. The absorption costing income statements appears below:
Year 1
Year 2
Sales ……………………………………………..
$2,400,000
$3,000,000
Cost of goods sold…………………………….
*2,120,000
**2,730,000
Gross margin …………………………………..
280,000
270,000
Selling and administrative expenses ……..
160,000
180,000
Net operating income ………………………..
$ 120,000
$ 90,000
* 40,000 units × $53 per unit = $2,120,000
** (40,000 units × $55 per unit) + (10,000 units × $53 per unit) =
$2,730,000
3. The net operating incomes are reconciled as follows:
Year 1
Year 2
Units in beginning inventory ……………………
0
10,000
+ Units produced …………………………………
50,000
40,000
− Units sold ………………………………………..
40,000
50,000
= Units in ending inventory …………………….
10,000
0
Year 1
Year 2
Fixed manufacturing overhead in ending
inventory (10,000 units × $8 per unit) ……
$80,000
$ 0
− Fixed manufacturing overhead in
beginning inventory (10,000 units × $8
per unit) …………………………………………..
80,000
= Manufacturing overhead deferred in
(released from) inventory …………………….
$80,000
$(80,000)
Year 1
Year 2
Variable costing net operating income ……..
$ 40,000
$170,000
Add: Fixed manufacturing overhead cost
deferred in inventory under absorption
costing …………………………………………….
80,000
Deduct: Fixed manufacturing overhead cost
released from inventory under absorption
costing …………………………………………….
(80,000)
Absorption costing net operating income …..
$120,000
$ 90,000
Exercise 6-11 (20 minutes)
1.
Division
Total
Company
East
Central
West
Sales …………………………
$1,000,000
$250,000
$400,000
$350,000
Variable expenses ………..
430,000
130,000
160,000
140,000
Contribution margin ……..
570,000
120,000
240,000
210,000
Traceable fixed expenses .
535,000
160,000
200,000
175,000
Divisional segment
margin…………………….
35,000
$(40,000)
$ 40,000
$ 35,000
Common fixed expenses
not traceable to
divisions* ………………..
90,000
Net operating loss ………..
$ (55,000)
*$625,000 – $535,000 = $90,000.
2.
Incremental sales ($350,000 × 20%) …….
$70,000
Contribution margin ratio
($210,000 ÷ $350,000) …………………….
× 60%
Incremental contribution margin …………..
$42,000
Less incremental advertising expense …….
15,000
Incremental net operating income …………
$27,000
Yes, the advertising program should be initiated.
Exercise 6-13 (20 minutes)
1. The company is using variable costing. The computations are:
Variable
Costing
Absorption
Costing
Direct materials ………………………
$ 9
$ 9
Direct labor …………………………...
10
10
Variable manufacturing overhead .
5
5
Fixed manufacturing overhead
($125,000 ÷ 25,000 units) ……..
—
5
Unit product cost …………………….
$24
$29
Total cost, 3,000 units ……………..
$72,000
$87,000
2. a. No, $72,000 is not the correct figure to use because variable costing
is not generally accepted for external reporting purposes or for tax
purposes.
b. The Finished Goods inventory account should be stated at $87,000,
Exercise 6-14 (30 minutes)
1. Under variable costing, only the variable manufacturing costs are
included in product costs.
Direct materials……………………….
$ 50
Direct labor…………………………….
80
Variable manufacturing overhead ..
20
Variable costing unit product cost ..
$150
Note that selling and administrative expenses are not treated as product
costs; that is, they are not included in the costs that are inventoried.
These expenses are always treated as period costs.
2. The variable costing income statement appears below:
Sales …………………………………………………..
$3,990,000
Variable expenses:
Variable cost of goods sold (19,000 units ×
$150 per unit) …………………………………..
$2,850,000
Variable selling and administrative expenses
(19,000 units × $10 per unit) ……………….
190,000
3,040,000
Contribution margin ………………………………..
950,000
Fixed expenses:
Fixed manufacturing overhead ………………..
740,000
Fixed selling and administrative expenses ….
285,000
1,025,000
Net operating loss …………………………..……..
$ (75,000)
3. The break-even point in units sold can be computed using the
contribution margin per unit as follows:
Selling price per unit …………..
$210
Variable cost per unit ………….
160
Contribution margin per unit ..
$ 50
Fixed expenses
Unit sales to break even = Unit contribution margin
$1,025,000
= = 20,500 units
$50 per unit
Exercise 6-15 (20 minutes)
1. Under absorption costing, all manufacturing costs (variable and fixed)
are included in product costs.
Direct materials ………………………………………
$ 50
Direct labor ……………………………………………
80
Variable manufacturing overhead ……………….
20
Fixed manufacturing overhead
($740,000 ÷ 20,000 units) ……………………..
37
Absorption costing unit product cost ……………
$187
2. The absorption costing income statement appears below:
Sales (19,000 units × $210 per unit) ………………….
$3,990,000
Cost of goods sold (19,000 units × $187 per unit) …
3,553,000
Gross margin ………………………………………………..
437,000
Selling and administrative expenses
[$285,000 + (19,000 units × $10 per unit)] ………
475,000
Net operating loss ………………………………………….
$ (38,000)