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P7. [LO 1]
Income computed under full costing is $10,000 higher than income computed under
variable costing. Under variable costing, the entire amount of fixed manufacturing
P8. [LO 1]
Fixed manufacturing overhead $600,000
Divided by units produced 50,000
P9. [LO 1, 2]
a. Contribution margin ÷ sales = contribution margin ratio
P10. [LO 1, 2]
a.
Trio Office Supplies
Incremental Income
Contribution margin ratio:
($12,000,000 ÷ $30,000,000) .40
Incremental sales
P11. [LO 1, 2]
a.
Variable Costing 2015 2016 2017
Sales $14,400,000 $15,840,000 $17,760,000
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b. Under full costing, it appears that Ed did a good job since the company hit the break–
even point in its first year and then earned a profit of $360,000 in its second year.
P12. [LO 1, 2]
a.
2015 2016 2017
Fixed manufacturing overhead $2,100,000 $2,100,000 $2,100,000
Variable production cost per unit $ 900 $ 900 $ 900
P13. [LO 1, 2]
a. Fixed manufacturing overhead ÷ Units produced = fixed manufacturing overhead per
unit
P14. [LO 1, 2]
a.
Fixed manufacturing overhead $1,500,000
c.
Fixed manufacturing overhead $1,500,000
P15. [LO 1, 2]
a. 2017
Fixed manufacturing overhead $2,750,000
b.
2017
Sales ($150 × 230,000 units) $34,500,000
Less variable cost of goods sold:
c. The amount of fixed manufacturing overhead included in ending inventory under full
P16. [LO 1, 2]
a.
Dorian Industrial
Income Statement
For the Year Ended December 31, 2017
Sales ($50 × 400,000) $20,000,000
b.
Dorian Industrial
Income Statement
For the Year End December 31, 2017
Sales ($50 × 400,000) $20,000,000
Less Variable Expenses
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c.
Units produced 420,000
P17. [LO 1, 2]
a.
Jorgensen Manufacturing
Income Statement
For the Year Ended December 31, 2017
Sales ($4,500 × 7,000) $31,500,000
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b.
Jorgensen Manufacturing
Income Statement
For the Year End December 31, 2017
Sales ($4,500 × 7,000) $31,500,000
Less variable expenses
c.
Units produced 8,000
d. Net income under both variable costing and full costing would have been $200,000.
Net income would be equal under both methods because the number of units
produced equals the number of units sold. A calculation of net income under
variable costing follows:
Jorgensen Manufacturing
Income Statement
For the Year End December 31, 2017
Sales ($4,500 × 8,000) $36,000,000
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P18. [LO 1, 2]
a.
Axar Products
Income Statement
For the Year Ended December 31, 2017
Sales ($30 × 18,000) $540,000
b.
Axar Industrial
Income Statement
For the Year Ended December 31, 2017
Sales ($30 × 18,000) $540,000
Less Variable Expenses
c. Break-Even Point in Sales Dollars
$240,000 ÷ ($270,000 ÷ $540,000) = $240,000 ÷ 0.50 = $480,000
Case 5-1. [LO 1, 2]
MICROIMAGE TECHNOLOGY, INC.
Summary
A company using full costing is showing a loss. A major investor notes that “It looks like the
more we sell, the more we’ll lose.” Actually, the company’s prospects are fairly good.
• Relates variable costing to planning and decision making.
Questions to ask students
1. What’s the situation at MicroImage Technology?
2. Is it true that the more the company sells, the more it will lose?
3. Is forecasted profit encouraging?
Discussion
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a. Variable manufacturing costs:
Direct material $16.00 ($1,280,000 ÷ 80,000)
Fixed manufacturing costs:
Rent $ 1,800,000
Fixed selling expense:
2017
Sales ($215 × 80,000 units) $17,200,000
Less variable cost of goods sold:
b. Note that the contribution margin in 2017 was $12,640,000, implying a contribution margin
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c. Here are the budgeted income statements for 2018 and 2019. Note that the company
expects to earn a substantial profit by the end of 2019.
2018
Sales ($215 × 104,000 units) $22,360,000 Sales up by 30%
2019
Sales ($215 × 166,400 units) $35,776,000 Sales up by 60%
Less variable cost of goods sold:
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Case 5-2. [LO 1, 2]
RAINRULER STAINS
Summary
RainRuler Stains is considering marketing its products to large construction companies. The
company has an income statement prepared using full costing. To estimate the impact of the
Questions to ask students
1. What’s the situation at RainRuler Stains?
2. What is the contribution margin ratio for sales in the new channel?
3. What is the annual impact of sales in the new channel on profit?
Discussion
Jennifer Jones, an intern at RainRuler, notes that Reggie Sherman’s (VP of marketing)
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Total manufacturing costs (equal to cost of
goods sold since production equals sales) $3,300,000
2017
Sales ($15 × 310,000 gallons) $4,650,000
Less variable cost of goods sold:
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Now, let’s use this as a basis for estimating the annual impact of selling to construction
companies. The new variable costing income will be:
2018
Sales (($15 × 310,000 gallons) + ($12 x 70,000 gallons)) $5,490,000
Less variable cost of goods sold:
($6.25 × 380,000) 2,375,000
Less variable selling expense