PROBLEM 6-6A (Continued)
The calculations indicate that at a sales level of $75 million, a percentage
change in sales and contribution margin will result in 2.70 times that
The higher contribution margin per dollar of sales and higher
fixed costs from Bonita employing their own agents gives them more
(d) The sales level at which operating incomes will be identical is called
the point of indifference. This would be when the cost of the network of
agents (18% of sales) is exactly equal to the cost of paying employees
Let the sales volume = S
18% X S = (8% X S) + $7,500,000
*PROBLEM 6-7A
(a) GARDNER COMPANY
Income Statement
For the Year Ended December 31, 2013
Variable Costing
Sales (2,500 tons X $2,000) …………………….
Variable cost of goods sold
Inventory, January 1 ……………………….
Variable cost of goods manufactured
[4,000 tons X ($2,000 X .15)]………….
Variable cost of goods available
for sale …………………………..…………..
Inventory, December 31
[1,500 tons X ($2,000 X .15)] …………
Variable cost of goods sold ……………..
Variable selling expenses
[2,500 tons X ($2,000 X .10)]………….
Contribution margin ………………………………
Fixed manufacturing overhead ……………….
Fixed administrative expenses ……………….
Net income ……………………………………………
$ –0–
1,200,000
1,200,000
450,000
750,000
500,000
2,000,000
500,000
$5,000,000
1,250,000
3,750,000
2,500,000
$1,250,000
*PROBLEM 6-7A (Continued)
GARDNER COMPANY
Income Statement
For the Year Ended December 31, 2014
Variable Costing
Sales (4,000 tons X $2,000) ………………………
Variable cost of goods sold
Inventory, January 1 …………………………
Variable cost of goods manufactured
[2,500 tons X ($2,000 X .15)] …………..
Variable cost of goods available
for sale …………………………………………
Inventory, December 31 …………………….
Variable cost of goods sold ………………
Variable selling expenses
[4,000 tons X ($2,000 X .10)] …………..
Contribution margin ………………………………..
Fixed manufacturing overhead …………………
Fixed administrative expenses …………………
Net income ……………………………………………..
$ 450,000
750,000
1,200,000
–0–
1,200,000
800,000
2,000,000
500,000
$8,000,000
2,000,000
6,000,000
2,500,000
$3,500,000
(b) GARDNER COMPANY
Income Statement
For the Year Ended December 31, 2013
Absorption Costing
Sales (2,500 tons X $2,000) ………………….
Cost of goods sold
Inventory, January 1 …………………….
Cost of goods manufactured…………
Cost of goods available for sale ……
Inventory, December 31 ………………..
$ –0–
3,200,000
3,200,000
1,200,000
(1)
(2)
$5,000,000
*PROBLEM 6-7A (Continued)
GARDNER COMPANY
Income Statement
For the Year Ended December 31, 2014
Absorption Costing
Sales (4,000 tons X $2,000) ………………
Cost of goods sold
Inventory, January 1 …………………
Cost of goods manufactured ……..
Cost of goods available for sale …
Inventory, December 31 …………….
Cost of goods sold ……………………
Gross profit …………………………..………..
Variable selling expenses
[4,000 tons X ($2,000 X .10)] ………….
Fixed administrative expenses …………
Net income ……………………………………..
$1,200,000
2,750,000
3,950,000
–0–
800,000
500,000
(1)
$8,000,000
3,950,000
4,050,000
1,300,000
$2,750,000
(1) 2,500 X [($2,000 X .15) + ($2,000,000 ÷ 2,500)]
reconciled as follows:
2013
2014
Variable costing net income
Fixed manufacturing overhead
expensed with variable costing
Less: Fixed manufacturing overhead
expensed with absorption costing
Difference
Absorption costing net income
$2,000,000
(1,250,000
)(1)
$1,250,000
750,000
$2,000,000
$2,000,000
(2,750,000
)(2)
$3,500,000
(750,000
$2,750,000
)
(1)In 2013, with absorption costing $1,250,000
$2,000,000 X 2,500 units sold
4,000 units produced
of the
*PROBLEM 6-7A (Continued)
1,500 tons.
*PROBLEM 6-8A
(a)
DILITHIUM BATTERIES DIVISION
Income Statement
For the Year Ended December 31, 2014
Absorption Costing
_______________________________________________________________
60,000 90,000
Produced Produced
Sales (60,000 units X $30) $1,800,000 $1,800,000
Cost of goods sold
(60,000 units X $21) 1,260,000 (60,000 X $18) 1,080,000
(b)
DILITHIUM BATTERIES DIVISION
Income Statement
For the Year Ended December 31, 2014
Variable Costing
_______________________________________________________________
60,000 90,000
Produced Produced
Sales (60,000 units X $30) $1,800,000 $1,800,000
Variable cost of goods sold
(60,000 units X $12) 720,000 720,000
Variable selling and
*PROBLEM 6-8A (Continued)
(c) If the company produces 90,000 units, but only sells 60,000 units,
then 30,000 units will remain in ending inventory. Under absorption
costing these 30,000 units will each include $6 of fixed manufacturing
summarized as:
Net income under absorption costing $550,000
Less: Fixed manufacturing overhead included
in ending inventory (30,000 units X $6) 180,000
Net income under variable costing $370,000
is. (3) Net income computed under variable costing is closely tied to
changes in sales levels (not production levels), and therefore provides
a more realistic assessment of the company’s success or failure during
a period. (4) The presentation of fixed and variable cost components
company’s results.
PROBLEM 6-1B
$936,000
=
$2,600,000
.36
to $15 ($12 X 125%). Total sales become $3,000,000 (200,000 X
$15). Thus, contribution margin changes to 48.8% [($3,000,000 –
$816,000
=
$2,720,000
.30
$1,411,600
$2,529,749 (rounded)
PROBLEM 6-2B
(a)
(1)
Current Year
Sales
Variable costs
Direct materials
Direct labor
Manufacturing overhead ($240,000 X .20)
Selling expenses ($200,000 X .30)
Administrative expenses ($250,000 X .30)
Total variable costs
Contribution margin
$1,000,000
327,000
190,000
48,000
60,000
75,000
700,000
$ 300,000
Current Year
Projected Year
Sales
Variable costs
Direct materials
Direct labor
Manufacturing overhead
Selling expenses
Administrative expenses
Total variable costs
Contribution margin
$1,000,000
327,000
190,000
48,000
60,000
75,000
700,000
$ 300,000
X 1.2
X 1.2
X 1.2
X 1.2
X 1.2
X 1.2
X 1.2
X 1.2
$1,200,000
392,400
228,000
57,600
72,000
90,000
840,000
$ 360,000
(2)
Fixed Costs
Current Year
Projected year
Manufacturing overhead ($240,000 X .80)
Selling expenses ($200,000 X .70)
Administrative expenses ($250,000 X .70)
Total fixed costs
$192,000
140,000
175,000
$507,000
$192,000
140,000
175,000
$507,000
PROBLEM 6-2B (Continued)
(b) Unit selling price = $1,000,000 ÷ 40,000 = $25.00
Unit variable cost = $700,000 ÷ 40,000 = $17.50
Break-even point in units
=
Fixed costs
÷
Unit contribution margin
67,600 units
=
$507,000
÷
$7.50
Break-even point in dollars
=
Fixed costs
÷
Contribution margin ratio
$1,690,000
=
$507,000
÷
.30
(c) Sales dollars
required for
=
(Fixed costs
+
Target net income)
÷
Contribution margin ratio
target net income
$2,090,000
=
($507,000
+
$120,000)
÷
.30
(d) Margin of safety
ratio
=
(Expected sales
–
Break-even sales)
÷
Expected sales
19.1%
=
($2,090,000
–
$1,690,000)
÷
$2,090,000
(e)
(1)
Current Year
Sales
Variable costs
Direct materials
Direct labor ($190,000 – $90,000)
Manufacturing overhead ($240,000 X .10)
Selling expenses ($200,000 X .80)
Administrative expenses ($250,000 X .30)
Total variable costs
Contribution margin
$1,000,000
327,000
100,000
24,000
160,000
75,000
686,000
$ 314,000
Fixed cost
Manufacturing overhead ($240,000 X .90)
Selling expenses ($200,000 X .20)
Administrative expenses ($250,000 X .70)
Total fixed costs
$ 216,000
40,000
175,000
$ 431,000