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Production levels:
Basic (34,000 × 0.50) ÷ 10
1,700
Touring (34,000 × 0.30) ÷ 35
291 (rounded)
Racing (34,000 × 0.20) ÷ 50
136
Contribution margin:
Basic (1,700 × $216)
$ 367,200
Touring (291 × $490)
142,590
Racing (136 × $420)
57,120
Total
$ 566,910
Less: Fixed costs
(500,000)
Pre-tax income
$ 66,910
the company.
d. The company’s tax rate is irrelevant because it does not change across the
42. a. The manufacturing overhead rate is $18 per standard direct labor hour and the
standard product cost includes $9 of manufacturing overhead per pressure
rect labor hours.
b.
Per Unit
120,000 Units
Incremental revenue
$19.00
$2,280,000
Incremental costs:
Variable costs:
Direct material
$ 5.00
$ 600,000
Direct labor
6.00
720,000
Variable overhead
3.00
360,000
Freight expense
1.00
120,000
Total variable costs
$15.00
$1,800,000
Fixed overhead:
Supervisory and clerical costs
(4 months × $12,000)
48,000
Total incremental costs
$1,848,000
Incremental profit before tax
$ 432,000
vant to the incremental analysis.
c. The minimum unit price that Layton Valves could accept without reducing net
income must cover variable costs plus the additional fixed costs.
Variable unit cost
$14.00
Additional fixed cost ($48,000 ÷ 120,000)
0.40
Minimum unit price
$14.40
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d. Layton Valves should consider the following factors before accepting the
Prince Industries order.
The effect of the special order on Layton Valve’s sales at regular prices.
The possibility of future sales to Prince Industries and the effects of par-
ticipating in the international market.
(CMA adapted)
43. a.
Ice Cream
Steaks
Total
Sales
$ 4,000,000
$ 2,000,000
$ 6,000,000
Variable costs
Merchandise sold
(2,600,000)
(1,500,000)
(4,100,000)
Commissions
(200,000)
(150,000)
(350,000)
Delivery costs
(600,000)
(105,000)
(705,000)
CM
$ 600,000
$ 245,000
$ 845,000
Avoidable fixed costs
Allocated corporate
0
(30,000)
(30,000)
Manager’s salary
(80,000)
(75,000)
(155,000)
Segment margin
$ 520,000
$ 140,000
$ 660,000
Unavoidable direct fixed costs
Delivery costs
0
(15,000)
(15,000)
Depreciation
(200,000)
(100,000)
(300,000)
Product line results
$ 320,000
$ 25,000
$ 345,000
Common costs
(100,000)
(70,000)
(170,000)
Net income (loss)
$ 220,000
$ (45,000)
$ 175,000
Steaks segment margin
$140,000
Opportunity cost, rent
(8,500)
Net advantage to keeping steaks line
$131,500
broader product offering.
d. Layoffs could adversely affect morale and trust between employees and man-
agers. If cordial relations existed between managers and workers prior to the
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44. a.
Idaho factory expansion:
Sales
$ 8,400,000
Fixed costs:
Factory
$1,344,000
Administration
484,000
$1,828,000
Variable costs
$2,688,000
Alloc. home office costs
700,000
3,388,000
(5,216,000)
Est. net profit from operations
$ 3,184,000
Montana factory––estimated:
Net profit from operations
2,160,000
Home office expense allocated
to Dakota factory
(400,000)
Estimated net profit from operations
$ 4,944,000
Estimated net profit from operations:
Montana factory
$2,160,000
Idaho factory
1,640,000
Estimated royalties to be received (30,000 $16)
480,000
$4,280,000
Less home office expense allocated to
Dakota factory
(400,000)
Estimated profit from operations
$3,880,000
Estimated net profit from operations:
Montana factory
$2,160,000
Idaho factory
1,640,000
$3,800,000
Less home office expense allocated to
Dakota factory
(400,000)
Estimated profit from operations
$3,400,000
(AICPA adapted)
45. a.
Sales
$1,100,000
Variable costs
(825,000)
Contribution margin
$ 275,000
b.
Plan A
(000s Omitted)
Kentucky
Pennsylvania
Total
Sales
$1,700
$2,000
$3,700
Variable costs:
Direct material
$ 425
$ 500
$ 925
Direct labor
510
500
1,010
Factory overhead
340
350
690
Total
$1,275
$1,350
$2,625
Contribution margin
$ 425
$ 650
$1,075
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Direct fixed costs:
Overhead
$ 350
$ 450
$ 800
Promotion costs
170
50
220
Total
$ 520
$ 500
$1,020
Segment margin
$ (95)
$ 150
$ 55
Allocated fixed costs
71
84
155
Operating income (loss)
$ (166)
$ 66
$ (100)
Plan B
Sales
$ 3,100,000
Variable costs:
Direct material
$775,000
Direct labor
775,000
Variable overhead
542,500
(2,092,500)
Contribution margin
$ 1,007,500
Fixed costs:
Factory overhead
$475,000
Promotion costs
100,000
Allocated costs
155,000
(730,000)
Operating income
$ 277,500
Plan C
Sales
$ 2,000,000
Royalties
137,500
Variable costs:
Direct material
$500,000
Direct labor
500,000
Variable overhead
350,000
(1,350,000)
Contribution margin
$ 787,500
Fixed costs:
Factory overhead
$475,000
Promotion costs
100,000
Allocated costs
155,000
(730,000)
Operating income
$ 57,500
(AICPA adapted)
46. a. For May, it appears that Store 2 is more profitable. Although Store 2 had low-
er sales than Store 1, it is clear that Store 1 incurred more expense. For exam-
ple, Store 1 spent two-thirds of the entire district advertising budget; this was
sales.
b. Store 1 is generating the most revenue. This is given in the first bulleted
statement.
bearing any advertising costs.
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interfere with sales.
e. Both bonus schemes have some problems. The bonus scheme based on sales
volume is not likely to increase profits in the short- or the long-term because
no incentive is given to the manager to be conscious of the costs that are in-
(CMA adapted)
47. a. Clean-N-Brite should price the regular compound at $22 per case and the
heavy-duty compound at $30 per case. The contribution margin is the highest
at these prices as shown below.
Regular Compound
Selling price per case
$ 18
$ 20
$ 21
$ 22
$ 23
Variable cost per case
16
16
16
16
16
Contribution margin/case
$ 2
$ 4
$ 5
$ 6
$ 7
Volume in cases
(000s omitted)
120
100
90
80
50
Total contribution margin
(000s omitted)
$240
$400
$450
$480
$350
Heavy-Duty Compound
Selling price per case
$ 25
$ 27
$ 30
$ 32
$ 35
Variable cost per case
21
21
21
21
21
Contribution margin/case
$ 4
$ 6
$ 9
$ 11
$ 14
Volume in cases
(000s omitted)
175
140
100
55
35
Total contribution margin
(000s omitted)
$700
$840
$900
$605
$490
should continue.
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HouseSafe Compounds––Cincinnati Plant
Pro Forma Contribution Statement
For the Six-Month Period Ending December 31, 2014
($000s omitted)
Heavy-
Regular
Duty
Total
Sales
$1,150
$1,225
$2,375
Variable costs
Selling & admin.
$ 200
$ 245
$ 445
Manufacturing
600
490
1,090
Total variable costs
$ 800
$ 735
$1,535
Contribution margin
$ 350
$ 490
$ 840
The effect on employee morale
The effect on market share
(CMA adapted)