CHAPTER 22
SOLUTIONS TO EXERCISES—SET B
EXERCISE 22-1B
(a) Maintenance Costs:
$4,500 – $2,900
800 – 400
=
$1,600
400
= $4 variable cost per machine hour
800
Machine Hours
400
Machine Hours
Total costs
$4,500
$2,900
(b)
$5,000
Total Cost Line
$4,000
$4,000
$3,000
EXERCISE 22-2B
(a)
Contribution margin per lawn
Contribution margin per lawn
=
=
$70 – ($15 + $7 + $6)
$42
(b) Break-even point in dollars = 120 lawns X $70 per lawn
= $8,400 per month
EXERCISE 22-3B
(1)
Contribution margin per room
Contribution margin per room
=
=
$120 – ($32 + $40)
$48
(2) Break-even point in dollars = 375 rooms X $120 per room
EXERCISE 22-4B
(a) Contribution margin in dollars: Sales = 600 X $90 = $54,000
Variable costs = $54,000 X .60 = 32,400
Contribution margin $21,600
EXERCISE 22-5B
(a)
(1) Contribution margin ratio is:
$43,200
= 75%
$57,600
Break-even point in dollars =
(2) Round-trip fare =
(b) At the break-even point fixed costs and contribution margin are equal.
Therefore, the contribution margin at the break-even point would be
$18,000.
$18,000
$18,000
EXERCISE 22-6B
(a) Unit contribution margin =
units in sales Breakeven
costs Fixed
Variable cost per unit = Unit selling price – Unit contribution margin
OR
= ($420,000 ÷ $8) X $8.00
Contribution margin ratio = $2.00 ÷ $8.00 = 25%
(b) Fixed costs = Breakeven sales in units X Unit contribution
margin
Fixed costs = Breakeven sales X Contribution margin ratio
Since fixed costs were $105,000 in 2016, the increase in 2017 is $7,500
EXERCISE 22-7B
(a) AMBER COMPANY
CVP Income Statement
For the Month Ended September 30, 2017
Total
Per Unit
Sales (720 video game consoles) ……………… $360,000 $500
Variable costs …………………………………………. 252,000 350
(b) Sales = Variable costs + Fixed costs
(c) AMBER COMPANY
CVP Income Statement
For the Month Ended September 30, 2017
Total
Per Unit
Sales (480 video game consoles) ……………… $240,000 $500
EXERCISE 22-8B
(a) Sales = Variable cost + Fixed cost + Target net income
(b) Units needed in 2017 =
$540,000 + $162,000*
= 7,800 units
$180 − $90
(c)
$540,000 + $162,000
= 7,000 units, where X = new selling price
X − $90
EXERCISE 22-9B
1. Unit sales price = $350,000 ÷ 5,000 units = $70
Increase selling price to $77, or ($70 X 110%).
Net income = $385,000 – $250,000 – $60,000 = $75,000.
EXERCISE 22-10B
(a)
$3,200
Sales Line
DOLLARS (000)
2,800
Breakeven Point
2,400
Total Cost Line
1,600
1,200
800
Fixed Cost Line
400
100
200
300
400
500
600
700
800
Number of Units (in thousands)
(b) (1) Breakeven sales in units:
$4X = $2.50X + $870,000
EXERCISE 22-11B
VALERO COMPANY
CVP Income Statement (Current)
For the Year Ended December 31, 2017
Total
Per Unit
Sales (60,000 X $30) …………………………………….. $1,800,000 $30
Variable expenses (60,000 X $12) ………………….. 720,000 12
VALERO COMPANY
CVP Income Statement (with Changes)
For the Year Ended December 31, 2017
Total
Per Unit
Sales [66,000 units (1) X $28.80 (2)] ………………. $1,900,800 $28.80
Variable expenses [66,000 X $9.60 (3)] ………….. 633,600 9.60
*EXERCISE 22-12B
(a)
Utility Expense
Months in
a year
X
Kilowatt
hours
X
Hourly
Charge
=
Variable
Utilities
*EXERCISE 22-12B (Continued)
Variable Costing
Labor:
Crate builders
$37,000
Material:
Wood
54,000
Variable Overhead:
Utilities
Nails
Total manufacturing costs
$94,350
(b)
Absorption Costing
Labor:
Crate builders
$ 37,000
Material:
Wood
54,000
Variable overhead:
Utilities
Nails
Fixed overhead:
Utilities
Rent
25,000
Total manufacturing costs
$143,350
(c) The entire difference in costs between the two methods is due to the
fact that fixed overhead is included as part of manufacturing costs
*EXERCISE 22-13B
(a) TALLY CORPORATION
Income Statement
For the Month Ended October 31, 2017
(Absorption Costing)
Sales (22,000 X $45) ……………………………………………. $990,000
Cost of goods sold (22,000 X $37*) ………………………. 814,000
(b) TALLY CORPORATION
Income Statement
For the Month Ended October 31, 2017
(Variable Costing)
Sales (22,000 X $45) …………………………………………… $990,000
Variable cost of goods sold (22,000 X $29)………….. 638,000
(c) Under variable costing, all fixed manufacturing costs ($200,000) are
expensed. Under absorption costing, some of the fixed manufacturing
SOLUTIONS TO PROBLEMS—SET C
PROBLEM 22-1C
(a)
Variable costs (per haircut)
Fixed costs (per month)
Total variable $4.00
Utilities 300
Barbers’ commission $3.00
Rent .60
Barbers’ salaries $8,000
Rent 700
(b)
X = 1,600 haircuts
$10X = $4X + $9,600
1,500 haircuts X $10 = $15,000
(c)
18
Sales Line
Total Cost Line
6
Breakeven Point
15
12
3
300
600
900
1,200
1,500
1,800
Number of Haircuts
PROBLEM 22-2C
(a) FRUITY-ADE COMPANY
CVP Income Statement (Estimated)
For the Year Ending December 31, 2017
Net sales …………………………………………. $2,000,000
Variable expenses
Cost of goods sold ……………………. $1,220,000 (1)
Fixed expenses
Cost of goods sold ……………………. 236,000
Selling expenses ………………………. 150,000
(1) Direct materials $360,000 + direct labor $590,000 + variable manufac-
turing overhead $270,000.
(b) Variable costs = 68% of sales ($1,360,000 ÷ $2,000,000) or $.34 per
bottle ($.50 X 68%). Total fixed costs = $512,000.
(c) Contribution margin ratio = ($.50 – $.34) ÷ $.50
= 32%
(d) Required sales
PROBLEM 22-3C
(a) Sales were $1,500,000 and variable expenses were $900,000, which
means contribution margin was $600,000 and CM ratio was 40%. Fixed
expenses were $760,000. Therefore, the breakeven point in dollars is:
(b) 1. The effect of this alternative is to increase the selling price per unit
to $28 ($20 X 130%). Total sales become $1,950,000 (75,000 X $26).
Thus, the contribution margin ratio changes to 50% ($900,000 ÷
2. The effects of this alternative are to change total fixed costs to
$590,000 ($760,000 – $170,000) and to change the contribution margin
to .34 [($1,500,000 – $900,000 – $90,000) ÷ $1,500,000]. The new
breakeven point is:
3. The effects of this alternative are: (1) variable and fixed cost of
goods sold become $600,000 each, (2) total variable costs become
$720,000 ($600,000 + $65,000 + $55,000), and (3) total fixed costs
are $940,000 ($600,000 + $275,000 + $65,000). The new breakeven
point is:
X = ($720,000 ÷ $1,500,000)X + $940,000
PROBLEM 22-4C
(a) Current breakeven point: $30X = $13X + $221,000
(where X = pairs of shoes)
(b) Current margin of safety percentage =
(16,000 X $30) – (13,000 X $30)
(16,000 X $30)
(c) SASSY SHOE STORE
CVP Income Statement
Current
New
Sales (16,000 X $30)
Variable expenses (16,000 X $13)
$480,000
208,000
$644,000
299,000
(23,000 X $28)
(23,000 X $13)
PROBLEM 22-5C
(a)
(1)
Current Year
Selling expenses ($360,000 X .30)
Contribution margin
Net sales
Variable costs
Direct materials
Direct labor
$2,400,000
626,500
570,500
Current Year
Projected Year
Contribution margin
Sales
Variable costs
Direct materials
$2,400,000
626,500
X 1.2
X 1.2
$2,880,000
751,800
(2)
Fixed Costs
Current Year
Projected year
Manufacturing overhead ($540,000 X .50)
Selling expenses ($360,000 X .70)
$270,000
252,000
$270,000
252,000
PROBLEM 22-5C (Continued)
(b) Unit selling price = $2,400,000 ÷ 200,000 = $12.00
Unit variable cost = $1,743,000 ÷ 200,000 = $8.72
Unit contribution margin = $12.00 – $8.72 = $3.28
(c) Sales dollars
required for
=
(Fixed costs
+
Target net income)
÷
Contribution margin ratio
target net income
=
+
Break-even point in units
=
Fixed costs
÷
Unit contribution margin
=
÷
Break-even point in dollars
Fixed costs
÷
Contribution margin ratio
=
÷
*PROBLEM 22-6C
(a) RAGGED METAL COMPANY
Income Statement
For the Year Ended December 31
(Variable Costing)
2016
2017
Income from operations …………………….
Sales …………………………………………………
Variable expenses
Variable cost of goods sold
Inventory, January 1 ……………
Variable manufacturing
sold…………………………………
Variable selling expenses …………..
Total variable expenses ……….
Contribution margin …………………………..
Fixed expenses
$2,600,000
0
600,000
320,000
920,000
1,680,000
(3)
$3,250,000
150,000
750,000
400,000
1,150,000
2,100,000
(5)
2016 Computations
(3)
(5)
*PROBLEM 22-6C (Continued)
(b) RAGGED METAL COMPANY
Income Statement
For the Year Ended December 31
(Absorption Costing)
2016
2017
Sales …………………………………………………………..
Cost of goods sold
Inventory, January 1 …………………………...
Cost of goods manufactured ……………….
Cost of goods available for sale …………..
Operating expenses
Selling expenses …………………………………
Administrative expenses ……………………..
$2,600,000
0
1,850,000
1,850,000
320,000
220,000
(1)
$3,250,000
370,000
1,700,000
2,070,000
400,000
220,000
(3)
2016 Computations
2017 Computations
(2)
(c) The variable costing and the absorption costing income from operations
can be reconciled as follows:
2016
2017
Variable costing income
Fixed manufacturing overhead
expensed with variable costing
$1,100,000
$360,000
$1,100,000
$780,000
Absorption costing income
*PROBLEM 22-6C (Continued)
(2)In 2017, with absorption costing $1,320,000 of fixed manufacturing overhead is expensed
(d) Income is more sensitive to changes in sales under variable costing as
seen in the increase in income from operations in 2017 when 10,000