(15-20 min.) E6-38A
Req. 1
Wilson’s operating income under variable costing will be lower than its operating income under absorption costing.
This situation is because under absorption costing, some of the fixed MOH remains “trapped” on the balance sheet as
part of the cost of inventory. Under variable costing, all fixed MOH incurred during the period is expensed as a period
cost.
Managerial Accounting 4e Solutions Manual
(continued) E6-39A
Sales revenue (225,000 × $49)
$11,025,000
Variable expenses:
Variable cost of goods sold
4,500,000
Sales commission expense (225,000 × $8)
1,800,000
(6,300,000)
Contribution margin
4,725,000
Fixed expenses:
Manufacturing overhead
$2,400,000
Operating expenses
245,000
(2,645,000)
Operating income
$ 2,080,000
Req. 2
Absorption costing operating income is higher than variable costing operating income. This situation is because
absorption costing defers $150,000 of fixed manufacturing overhead as an asset in ending inventory. In contrast,
variable costing expenses all of the fixed manufacturing overhead during the year.
Variable costing expenses $150,000 more costs during the year, so variable costing operating income is $150,000 less
than absorption costing income.
Req. 3
Increase in contribution margin
$315,000
Increase in fixed expenses
(165,000)
Increase in operating income
$150,000
The company should go ahead with the promotion because the increase in contribution margin exceeds the increase in
fixed costs.
Chapter 6 Cost Behavior
Exercises (Group B)
(15 min.) E6-40B
Req. 1
6,000
garments
7,500
garments
9,000
garments
Total variable costs
$ 5,100
$ 6,375*
$ 7,650
Total fixed costs
18,000
18,000
18,000
Total operating costs
$23,100
$24,375
$25,650
Variable cost per garment
$0.85
$0.85
$0.85
Fixed cost per garment
3.00
2.40*
2.00
Average cost per garment
$3.85
$3.25
$2.85
*Given
Req. 2
The average cost per garment changes as volume changes, due to the fixed component of the dry cleaner’s costs. The
fixed cost per unit decreases as volume increases, while the variable cost per unit remains constant.
Req. 3
Cost from Requirement 1 for 6,000 garments: $23,100
Estimated cost @ 6,000 garments using $2.85: $17,100
Underestimation total: $6,000
She would underestimate her costs by $6,000.
(15 min.) E6-41B
Peltier Dry Cleaners
Projected Absorption Costing Income Statement
Month Ended March 31
Dry cleaning revenue (4,280 × $6)
$25,680
Less: Operating expenses [$18,000 + (4,280 × $0.85)]
(21,638)
Operating income
$4,042
Peltier Dry Cleaners
Projected Contribution Margin Income Statement
Month Ended March 31
Dry cleaning revenue (4,280 × $6)
$25,680
Less: Variable expenses (4,280 × $0.85)
(3,638)
Contribution margin
22,042
Less: Fixed expenses
(18,000)
Operating income
$4,042
Managerial Accounting 4e Solutions Manual
(15 min.) E6-42B
High point June; Low point March
Req. 1
Change in cost = $4,294 – $3,574 = $720
(15 min.) E6-43B
Average cost per unit
=
Total cost ÷ number of units
$23.43
=
Total cost ÷ 1,400 units
$32,802
=
Total cost
Req. 2
Total cost
=
Variable cost component + fixed cost component
y
=
vx + f
$32,802
=
v (1,400) + $20,202
$12,600
=
v (1,400)
$9.00
=
v
The variable cost per unit is $9.00
Req. 3
y
=
$9.00x + $20,202
where x = number of mailboxes
Req. 4
$37,488
=
1,600 × $23.43 average cost per mailbox
Managerial Accounting 4e Solutions Manual
(10-15 min.) E6-44B
Req. 1
Variable cost:
High
$810,000
750,000
Qtr 3
Low
$689,400
616,000
Qtr 1
Difference
$120,600
134,000
$120,600/134,000 units = $0.90 variable cost per unit
Req. 2
Projected total number of bills
640,000
% of customers using paperless billing
40%
Calculated number of customers
256,000
Variable cost per bill saved
$0.90
Total cost saved
$230,400.00
Less cost of paperless system
$187,800.00
Net savings
$ 42,600.00
Projected total number of bills
640,000
% of customers using paperless billing
30%
Calculated number of customers
192,000
Variable cost per bill saved
$0.90
Total cost saved
$172,800.00
Less cost of paperless system
$187,800.00
Net savings (cost)
$ (15,000.00)
Should the company still offer the paperless billing system? The answer to this question is dependent upon the
student’s value system and is meant to be a discussion point.
(10-15 min.) E6-45B
Req. 1
(10-15 min.) E6-46B
Use the high-low method to determine Posies Unlimited’s operating cost equation.
High point – February; Low point – July
Managerial Accounting 4e Solutions Manual
(20-30 min.) E6-47B
Req. 1
y = $0.20x + $1,964.29
(5-10 min.) E6-48B
Req. 1
y = $0.21x + $1,810.75
(10-15 min.) E6-49B
Req. 1
(10-15 min.) E6-50B
Cost
Activity
Variable cost:
High pt.
$26,500
4,100
May
Low pt.
$19,100
2,100
June
Difference
$7,400
2,000
Managerial Accounting 4e Solutions Manual
Copyright © 2015 Pearson Education, Inc.
6-30
(10-15 min.) E6-51B
Req. 1
y
=
$6.21x
+
$5,627.61
Req. 2
The R-square is 0.70373.
(15-20 min.) E6-52B
y
=
$4.16x
+
$10,604.32
Req. 3
The R-square is 0.923756.
(15 min.) E6-53B
High point: 90% x 750 units = 675 units, $217,150
Low point: 80% x 750 units = 600 units, $212,800
Determine the formula that is used to calculate the variable cost (slope).
Change in cost
÷
Change in volume
=
Variable cost (slope)
($217,150 – $212,800) / (675 – 600) = $58
Now determine the formula that is used to calculate the fixed cost component.
Total operating cost
÷
Total variable cost
=
Fixed cost
Choosing the high point here:
$217,150 = ($58 x 675) + FC
FC = $178,000
Cost equation: y = $58x + $178,0000
The owner should expect his operating costs to be $208,450 if occupancy falls to 70% [($58 x (70% x 750)) + $178,000].
Chapter 6 Cost Behavior
(10-20 min.) E6-54B
Fabulous Flamingos
Contribution Margin Income Statement
For the Year Ended December 31
Sales revenue
$ 1,005,000
Variable expenses:
Cost of goods sold
669,000
Variable selling and marketing expenses
27,720
Variable web site maintenance expenses
14,125
Other variable operating expenses
1,700
Total variable expenses
712,545
Contribution margin
292,455
Fixed expenses:
Fixed selling and marketing expenses
33,280
Fixed web site maintenance expenses
42,375
Other fixed operating
expenses
15,300
Total fixed expenses
90,955
Operating income
$ 201,500
Calculations for selling and marketing expenses:
Total selling and marketing expenses
$ 61,000
Variable freight-out
(19,400)
Remaining selling and marketing expenses
$ 41,600
Chapter 6 Cost Behavior
(continued) E6-56B
Req. 2
Direct Material
$38
$38
Direct Labor
$16
$16
Variable MOH
Cost per unit
$64
$64
Less Variable Expenses:
Contribution Margin
Less Fixed Expenses:
Change in inventory (in units)
Year 1
Year 2
Fixed MOH cost per unit
$13
$13
Managerial Accounting 4e Solutions Manual
(15-20 min.) E6-57B
Req. 1
Wentworth’s operating income under variable costing will be lower than its operating income under absorption
costing. This situation is because under absorption costing, some of the fixed MOH remains “trapped” on the balance
sheet as part of the cost of inventory. Under variable costing, all fixed MOH incurred during the period is expensed as
Reconciling between two methods
Fixed MOH cost per unit $161,000/7,000
$23
Change in inventory (in units) (0+7,000 – 6,500)
500
Difference between methods
11,500
Absorption income – difference = Variable income
$32,500 – 11,500 = $21,000
Req. 3
The figures below can be calculated using the percentage of
produced units sold without the costs per unit, but you need
to change the formula for Variable Cost of Goods Sold since
the costs per unit are not provided in the problem.
Sales revenue (6,500 x $76)
$494,000
Less Variable Expenses:
Variable Cost of Goods Sold
$396,500 / 6,500 = $61 – $23 = $38
6,500 x $38
$247,000
Variable Operating Expenses (6,500 x $1.538 rounded)
$10,000
Contribution Margin
$237,000
Less Fixed Expenses:
Fixed MOH
$161,000
Fixed Operating Expenses
$55,000
Operating Income
$21,000
*Total operating expenses $65,000
Less fixed portion 55,000
Variable $10,000
# of units ÷6,500
(15 min.) E6-58B
Req. 1
Goggle Water optics
Conventional (Absorption Costing) Income Statement
Year Ended December 31
Sales revenue (200,000 × $45)
$9,000,000
Cost of goods sold (200,000 x $27*)
(5,400,000)
Gross profit
3,600,000
Operating expenses [(200,000 × $14) + $235,000]
(3,035,000)
Operating income
$ 565,000
__________
*Variable manufacturing expense per unit of $18 plus $9 fixed manufacturing expense per unit ($1,980,000 fixed
manufacturing overhead / 220,000 units produced.)
Goggle Water Optics
Contribution Margin (Variable Costing) Income Statement
Year Ended December 31
Sales revenue (200,000 × $45)
$9,000,000
Variable expenses:
Variable cost of goods sold (200,000 x $18)
3,600,000
Sales commission expense (200,000 × $14)
2,800,000
(6,400,000)
Contribution margin
2,600,000
Fixed expenses:
Manufacturing overhead
$1,980,000
Operating expenses
235,000
(2,215,000)
Operating income
$ 385,000
Req. 2
Absorption costing operating income is higher than variable costing operating income. This situation is because
absorption costing defers $180,000 of fixed manufacturing overhead as an asset in ending inventory. In contrast,
variable costing expenses all the fixed manufacturing overhead during the year.
Variable costing expenses $180,000 more costs during the year, so variable costing operating income is $180,000 less
than absorption costing income during the year.
Req. 3
Increase in contribution margin (20,000 × $13)*….
$260,000
Increase in fixed expenses…………………..…………
(140,000)
Increase in operating income……………………………
$ 120,000
*Contribution margin per unit:
Variable operating cost………………………..
Managerial Accounting 4e Solutions Manual
Problems (Group A)
(45-60 min.) P6-59A
Req. 1
The hospital’s overhead appears to be a mixed cost. If it were a fixed cost, it would remain constant each month. If it
Chapter 6 Cost Behavior
Req. 5
Cost
Activity
Variable cost:
High pt.
$555,000
30,000
Nov
Low pt.
$424,000
20,000
Sep
Difference
$131,000
10,000
highest.