Exercise 6-5 (10 minutes)
1. The companywide break-even point is computed as follows:
Dollar sales for company
to break even
=
Traceable fixed expenses + Common fixed expenses
Overall CM ratio
=
$120,000 + $50,000
$240,000 ÷ $600,000
=
$170,000
0.40
=
$425,000
2. The break–even point for the North region is computed as follows:
=
Segment CM ratio
=
60,000
$120,000 ÷ $400,000
=
=
$200,000
Exercise 6-5 (continued)
3. The break-even point for the South region is computed as follows:
Exercise 6-6 (30 minutes)
1. a. The unit product cost under absorption costing would be:
Direct materials …………………………………………………….
$ 6
Direct labor ………………………………………………………….
9
Variable manufacturing overhead ………………………………
3
Total variable costs ………………………………………………..
18
Fixed manufacturing overhead ($300,000 ÷ 25,000 units)
12
Absorption costing unit product cost ………………………….
$30
b. The absorption costing income statement:
Sales (20,000 units × $50 per unit) ……………………..
Cost of goods sold (20,000 units × $30 per unit) …….
Gross margin …………………………………………………..
Net operating income ………………………………………..
2. a. The unit product cost under variable costing would be:
Direct materials ………………………
$ 6
Direct labor …………………………...
9
Variable manufacturing overhead ..
3
Variable costing unit product cost .
$18
b. The variable costing income statement:
Sales (20,000 units × $50 per unit) ………..
$1,000,000
Variable expenses:
Variable cost of goods sold
(20,000 units × $18 per unit) ……………
$360,000
(20,000 units × $4 per unit) ……………..
Contribution margin …………………………….
Fixed expenses:
Net operating income …………………………..
Exercise 6-7 (10 minutes)
The completed segmented income statement should appear as follows:
Divisions
Total Company
North
South
Amount
%
Amount
%
Amount
%
Sales………………………………………..
$500,000
100.0
$300,000
100.0
$200,000
100.0
Variable expenses ……………………….
270,000
54.0
150,000
50.0
120,000
60.0
Contribution margin …………………….
230,000
46.0
150,000
50.0
80,000
40.0
Traceable fixed expenses ……………..
130,000
26.0
80,000
25.0
Net operating income …………………..
Exercise 6-8 (10 minutes)
Sales were above the company’s break-even sales and yet the company
sustained a loss. The apparent contradiction is explained by the fact that
the CVP analysis is based on variable costing, whereas the income reported
to shareholders is prepared using absorption costing. Because sales were
Exercise 6-9 (30 minutes)
1. a. Under variable costing, only the variable manufacturing costs are
included in product costs.
Year 1
Year 2
Direct materials ………………………………
$25
$25
Direct labor ……………………………………
15
15
Variable manufacturing overhead ……….
5
5
Variable costing unit product cost ……….
$45
$45
1. b.
Year 1
Year 2
Sales ………………………………………………….
$2,400,000
$3,000,000
Variable expenses:
Variable cost of goods sold @ $45 per unit .
1,800,000
2,250,000
Variable selling and administrative @ $2
per unit ………………………………………….
80,000
100,000
Total variable expenses …………………………..
1,880,000
Contribution margin ……………………………….
Fixed expenses:
250,000
250,000
80,000
Total fixed expenses ………………………………
330,000
Net operating income (loss) …………………….
2. a. The unit product costs under absorption costing:
Year 1
Year 2
Direct materials ………………………………
$25
$25.00
Direct labor ……………………………………
15
15.00
Variable manufacturing overhead ……….
Fixed manufacturing overhead …………..
Absorption costing unit product cost ……
* $250,000 ÷ 50,000 units = $5 per unit.
Exercise 6-9 (continued)
2. b. The absorption costing income statements appears below:
Year 1
Year 2
Sales (see requirement 1(b)) ……………….
$2,400,000
$3,000,000
Cost of goods sold …………………………….
*2,000,000
**2,550,000
Gross margin ……………………………………
Selling and administrative expenses ………
Net operating income …………………………
* 40,000 units × $50 per unit = $2,000,000
3. The net operating incomes are reconciled as follows:
Year 1
Year 2
Units in beginning inventory ……………………
0
10,000
+ Units produced ………………………………….
50,000
40,000
− Units sold …………………………………………
40,000
50,000
= Units in ending inventory …………………….
10,000
0
Year 1
Year 2
Deduct: Fixed manufacturing overhead in
Year 1
Year 2
Variable costing net operating income ………
$190,000
$320,000
Add: Fixed manufacturing overhead cost
deferred in inventory under absorption
50,000
Deduct: Fixed manufacturing overhead cost
released from inventory under absorption
Exercise 6-10 (20 minutes)
1. The companywide break-even point is computed as follows:
Dollar sales for company
Overall CM ratio
=
=
$200,000
0.25
=
Traceable fixed expenses + Common fixed expenses
2. The break-even point for the East region is computed as follows:
Dollar sales for a
segment to break even
=
Segment traceable fixed expenses
Segment CM ratio
=
=
$50,000
0.20
Exercise 6-10 (continued)
3. The break-even point for the West region is computed as follows:
4. The new segmented income statement is computed as follows:
Total
Company
East
West
Sales……………………………..
$510,000
$250,000
$260,000
Variable expenses* …………..
369,000
200,000
169,000
Contribution margin** ………
141,000
50,000
91,000
Traceable fixed expenses …..
141,000
50,000
91,000
Net operating loss…………….
5. No, a company should not allocate its common fixed expenses to
business segments. These costs are not traceable to individual segments
and will not be affected by segment-level decisions.
Exercise 6-11 (20 minutes)
1.
Division
Total
Company
East
Central
West
Sales…………………………
$1,000,000
$250,000
$400,000
$350,000
Variable expenses ………..
390,000
130,000
120,000
140,000
Contribution margin ……..
610,000
120,000
280,000
210,000
Traceable fixed expenses
535,000
160,000
200,000
175,000
Divisional segment
$(40,000)
$ 80,000
2. The incremental net operating income is computed as follows:
Incremental West Division sales ($350,000
× 20%) ………………………………………..
$70,000
Incremental contribution margin …………..
$42,000
Less incremental advertising expense …….
Incremental net operating income …………
Contribution margin ratio
Exercise 6-12 (20 minutes)
1.
Sales (35,000 units × $25 per unit) …………….
$875,000
Variable expenses:
Variable cost of goods sold
(35,000 units × $12 per unit*) ……………..
$420,000
Contribution margin …………………………..……
Fixed expenses:
Net operating income ………………………………
*
Direct materials ………………………..
Direct labor ……………………………..
Variable manufacturing overhead ….
Total variable manufacturing cost …
Variable selling and administrative expenses
2. The difference in net operating income can be explained by the $20,000
in fixed manufacturing overhead deferred in inventory under the
absorption costing method:
Units in ending inventory = Units in beginning inventory + Units
produced – Units sold = 0 units + 40,000 units – 35,000 units
= 5,000 units
Variable costing net operating income ………………….
Absorption costing net operating income ………………
Exercise 6-13 (20 minutes)
1. The company is using variable costing. The computations are:
Variable
Costing
Absorption
Costing
Direct materials ……………………….
$ 9
$ 9
Direct labor …………………………….
10
10
Variable manufacturing overhead ..
Unit product cost……………………..
Total cost for 3,000 units …………..
2. a. No, $72,000 is not the correct figure to use because variable costing
is not generally accepted for external reporting purposes or for tax
purposes.
b. The Finished Goods inventory account should be stated at $90,000,
Exercise 6-14 (30 minutes)
1. Under variable costing, only the variable manufacturing costs are
included in product costs.
Direct materials ………………………
$ 50
Direct labor …………………………...
80
Variable manufacturing overhead ..
Variable costing unit product cost .
2. The variable costing income statement appears below:
Sales (19,000 units × $210 per unit) ………….
$3,990,000
Variable expenses:
Variable cost of goods sold (19,000 units ×
$150 per unit) …………………………………..
$2,850,000
3,040,000
Contribution margin ………………………………..
Fixed expenses:
Net operating loss ………………………………….
3. The break-even point in units sold can be computed using the
contribution margin per unit as follows:
Selling price per unit …………..
$210
Variable cost per unit ………….
160
Contribution margin per unit ..
$ 50
Exercise 6-15 (20 minutes)
1. Under absorption costing, all manufacturing costs (variable and fixed)
are included in product costs.
Direct materials …………………………………….
$ 50
Direct labor ………………………………………….
Variable manufacturing overhead ……………..
Absorption costing unit product cost ………….
2. The absorption costing income statement appears below:
Sales (19,000 units × $210 per unit) ………………….
$3,990,000
Cost of goods sold (19,000 units × $185 per unit) ..
3,515,000
Gross margin …………………………..……………………
475,000
Selling and administrative expenses
($285,000 + 19,000 units × $10 per unit) …………
475,000
Net operating income ……………………………………..
$ 0
Exercise 6-16 (20 minutes)
1. The companywide break-even point is computed as follows:
Dollar sales for company
to break even
=
Traceable fixed expenses + Common fixed expenses
Overall CM ratio
=
=
$189,000
0.50
The break-even point for the Chicago office is computed as follows:
Segment traceable fixed expenses
Segment CM ratio
=
Exercise 6-16 (continued)
The break-even point for the Minneapolis office is computed as follows:
The sum of the segment break-even points is less than the
companywide break-even point because the companywide break–even
point takes into account common fixed expenses that do not affect the
segment break-even calculations.
2. $75,000 × 40% CM ratio = $30,000 increased contribution margin in
Minneapolis. Because the fixed costs in the office and in the company as
a whole will not change, the entire $30,000 would result in increased
net operating income for the company.
Exercise 6-16 (continued)
3. a. The segmented income statement follows:
Segments
Total Company
Chicago
Minneapolis
Amount
%
Amount
%
Amount
%
Sales……………………..
$500,000
100.0
$200,000
100
$300,000
100
Variable expenses …….
240,000
48.0
60,000
30
180,000
60
Contribution margin ….
260,000
52.0
140,000
70
120,000
40
134,000
26.8
Net operating income ..
b. The segment margin ratio rises and falls as sales rise and fall due to
the presence of fixed costs. The fixed costs are spread over a larger
base as sales increase.
In contrast to the segment ratio, the contribution margin ratio for a
given segment is stable so long as there is no change in either the
variable expenses or the selling price per unit of service.
Exercise 6-17 (15 minutes)
1. and 2. The profit impacts in both markets are as follows:
Medical
Dental
Increased sales ………………………………………
$40,000
$35,000
Market CM ratio …………………………..………….
× 36%
× 48%
Incremental contribution margin ………………..
$14,400
$16,800
Less cost of the campaign …………………………
5,000
5,000
Increased segment margin and net operating
income for the company as a whole ………….
$ 9,400
$11,800
3. The company should focus its advertising campaign on the Dental
market.
Problem 6-18 (45 minutes)
1. The break-even point in units sold can be computed using the
contribution margin per unit as follows:
Selling price per unit ………………………………….
$58
Variable cost per unit ($20 + $12 + $4 + $2) …
38
Contribution margin per unit ……………………….
2. a. Under variable costing, only the variable manufacturing costs are
included in product costs.
Year 1
Year 2
Year 3
Direct materials ………………………………
$20
$20
$20
Direct labor ……………………………………
12
12
12
Variable manufacturing overhead ……….
Variable costing unit product cost ……….
2. b. The variable costing income statements appear below:
Year 1
Year 2
Year 3
Sales (@ $58 per unit) ……………………………………….
$3,480,000
$2,900,000
$3,770,000
Variable expenses:
Variable cost of goods sold @ $36 per unit …………..
2,160,000
1,800,000
2,340,000
Total variable expenses ………………………………………
2,280,000
Contribution margin …………………………………………..
Fixed expenses:
Fixed manufacturing overhead …………………………..
Total fixed expenses ………………………………………….
Net operating income (loss) ………………………………..
3. a. The unit product costs under absorption costing:
Year 1
Year 2
Year 3
Direct materials ………………………………
$20
$20.00
$20
Direct labor ……………………………………
12
12.00
12
Variable manufacturing overhead ……….
4
4.00
4
Fixed manufacturing overhead …………..
Absorption costing unit product cost ……
$48.80
* $960,000 ÷ 60,000 units = $16 per unit.