SOLUTION
Requirement 1
REFRESHADE
Income Statement
For the Month Ending April 30, 2016
Sales Revenue
($30/case × 12,000 cases)
$ 360,000
Cost of Goods Sold:
Variable
($10/case × 12,000 cases)
Fixed
Gross Profit
Selling & Administrative Costs:
Variable
Fixed
Operating Income
Requirement 2
Variable manufacturing costs
Requirement 3
The finished goods inventory under the absorption costing method is higher than under the variable
21–22
Note: Exercises E21-15 and E21-16 must be completed before attempting Exercise E21-17.
E21-17 Comparing variable and absorption costing
Learning Objectives 1, 2
Refer to Exercises E21-15 and E21-16.
Requirements
1. Which costing method produces the highest operating income? Explain why.
2. Which costing method produces the highest April 30 balance in Finished Goods Inventory? Explain
why.
SOLUTION
Requirement 1
The absorption cost method produces the highest operating income. The primary reason for this is that
Requirement 2
The absorption cost method produces the highest Finished Goods Inventory. In this scenario, $9,000 of
Note: Exercise E21-15 must be completed before attempting Exercise E21-18.
E21-18 Preparing variable costing income statements, production less than sales
Learning Objectives 1, 2
1. CM $391,000
Refer to your answers to Exercise E21-15. In May 2016, RefreshAde produced 20,000 cases of
Requirements
1. Prepare the May income statement using variable costing.
2. Determine the balance in Finished Goods Inventory as of May 31.
21–23
SOLUTION
Requirement 1
REFRESHADE
Contribution Margin Income Statement
For the Month Ending May 31, 2016
Sales Revenue
($30/unit × 23,000 units)
$ 690,000
Variable Costs:
Manufacturing
Selling & Administrative
Contribution Margin
Fixed Costs:
Manufacturing Overhead
Selling & Administrative
Operating Income
Requirement 2
The finished goods inventory as of May 31, 2016 is $0.
Note: Exercise E21-18 must be completed before attempting Exercise E21-19.
E21-19 Preparing absorption costing income statements, production exceeds sales
Learning Objectives 1, 2
1. OI $312,000
Refer to Exercise E21-18.
Requirements
1. Prepare the May income statement using absorption costing.
2. Is operating income using absorption costing higher or lower than variable costing income? Explain
why.
3. Determine the balance in Finished Goods Inventory as of May 31.
21–24
SOLUTION
Requirement 1
RERESHADE
Income Statement
For the Month Ending May 31, 2016
Sales Revenue
($30/unit × 23,000 units)
$ 690,000
Cost of Goods Sold:
Variable
Fixed
Gross Profit
Selling & Administrative Costs:
Variable
Fixed
Operating Income
$ 312,000
Requirement 2
The operating income under the absorption cost method is less than the operating income under the
Requirement 3
The finished goods inventory as of May 31, 2016 is $0.
E21-20 Setting sales prices
Learning Objective 3
The Sweetest Candy Company manufactures candy that is sold to food distributors. The company
produces at full capacity for six months each year to meet peak demand during the “candy season” from
Halloween through Valentine’s Day. During the other six months of the year, the manufacturing facility
operates at 75% of capacity. The Sweetest Candy Company provides the following data for the year:
The Sweetest Candy Company receives an offer to produce 9,000 cases of candy for a special event.
This is a one-time opportunity during a period when the company has excess capacity. What is the
minimum sales price The Sweetest Candy Company should accept for the order? Explain why.
SOLUTION
The minimum selling price that Sweetest Candy Company should accept for the special order is the
21–26
E21-21 Analyzing profitability
Learning Objective 3
Total CM $23,120
Simpson Company sells two products, Alpha and Omega, with a sales mix of 30% and 70%,
respectively. Alpha has a contribution margin per unit of $24, and Omega has a contribution margin per
unit of $31. The company sold 800 total units in September. Calculate the total amount each product
contributed to the coverage of fixed costs and the total contribution margin for the company.
SOLUTION
Alpha
Omega
Total
Sales percentage
30%
70%
Sales in units
Contribution margin per unit
Contribution margin
E21-22 Analyzing profitability
Learning Objective 3
Total CM $22,000
Refer to Exercise E21-21. Assume the sales mix shifted to 50% for each product. Calculate the total
amount each product contributed to the coverage of fixed costs and the total contribution margin for the
company.
SOLUTION
Alpha
Omega
Total
Sales percentage
50%
50%
Sales in units
Contribution margin per unit
Contribution margin
21–27
E21-23 Using variable costing, service company
Learning Objective 4
VC at 220 Svc Calls $7,920
Harry’s Helpers provides locksmith services. One type of service call is to evaluate private residences
for security concerns and make recommendations for a safety plan. Use the data below to determine the
company’s total contribution margin, contribution margin per service call, and contribution margin ratio
when 220 service calls are made in the month of June.
SOLUTION
Per Call
220 Calls
Sales Revenue
$ 180
$ 39,600
Variable Costs
Contribution Margin (Sales Revenue – Variable Costs)
$ 31,680
Contribution Margin Ratio (Contribution Margin / Sales Revenue)
E21-24 Using variable costing, service company
Learning Objective 4
CMR for Residential 70%
Samson Company provides carpet cleaning services to commercial and residential customers. Using the
data below, determine the contribution margin ratio for each business segment:
SOLUTION
Business Segment
Contribution margin / Net sales revenue
Contribution margin ratio
Commercial
21–28
Note: Exercise E21-24 must be completed before attempting Exercise E21-25.
E21-25 Using variable costing, service company
Learning Objective 4
VC per Customer for Commercial $87
Refer to Exercise E21-24. The commercial business segment provided services to 300 customers. The
residential business segment provided services to 475 customers. Determine the average amount Samson
Company charged each type of customer for services, the average variable cost per customer, and the
average contribution margin per customer. What caused the difference in contribution margin in the two
segments?
SOLUTION
Commercial
Residential
Nbr. of Customers
300
475
Sales Revenue per Customer
($ 69,600 / 300 Customers)
$ 232
($104,500 / 475 Customers)
$ 220
Variable Cost per Customer
($ 26,100 / 300 Customers)
($ 31,350 / 475 Customers)
66
Contribution Margin per Customer
$ 145
$ 154
Contribution Margin Ratio
($145 / $232)
21–29
Problems (Group A)
P21-26A Preparing variable and absorption costing income statements
Learning Objectives 1, 2
2b. VC $4,750
Gia’s Foods produces frozen meals that it sells for $8 each. The company computes a new monthly fixed
manufacturing overhead allocation rate based on the planned number of meals to be produced that
month. Assume all costs and production levels are exactly as planned. The following data are from Gia’s
Foods’s first month in business:
Requirements
1. Compute the product cost per meal produced under absorption costing and under variable costing.
2. Prepare income statements for January 2016 using
a. absorption costing.
b. variable costing.
3. Is operating income higher under absorption costing or variable costing in January?
21–30
SOLUTION
Requirement 1
Variable manufacturing cost
Fixed manufacturing overhead
($690 / 1,150 units)
Total unit product cost
Absorption
Variable
Requirement 2
a) Absorption costing
GIA’S FOODS
Sales Revenue
($8.00/unit × 950 units)
Cost of Goods Sold
Gross Profit
Selling & Administrative Costs
[($1.00/unit × 950 units) + $700]
Operating Income
Income Statement
b) Variable costing
GIA’S FOODS
Contribution Margin Income Statement
For the Month Ending January 31, 2016
Sales Revenue
($8.00/unit × 950 units)
$ 7,600
Variable Costs
Contribution Margin
Fixed Costs
Operating Income
Requirement 3
21–31
P21-27A Preparing variable and absorption costing income statements
Learning Objectives 1, 2
1. Absorption costing $19.00
Game Play manufactures video games that it sells for $39 each. The company uses a fixed
manufacturing overhead allocation rate of $6 per game. Assume all costs and production levels are
exactly as planned. The following data are from Game Play’s first two months in business during 2016:
Requirements
1. Compute the product cost per game produced under absorption costing and under variable costing.
2. Prepare monthly income statements for October and November, including columns for each month
and a total column, using these costing methods:
a. absorption costing.
b. variable costing.
SOLUTION
Requirement 1
Absorption
Costing
Variable
Costing
Variable manufacturing cost
Fixed manufacturing overhead
($13,800 / 2,300 units)
Total unit product cost
Requirement 2
a) Absorption costing
GAME PLAY
Income Statement
For the Two Months Ending November 30, 2016
October
November
Total
Units Sold
1,300 units
2,500 units
Sales Revenue
($39 per unit)
$ 50,700
$ 97,500
$ 148,200
Cost of Goods Sold
($19 per unit)
Gross Profit
S & A Costs
b) Variable costing
GAME PLAY
Contribution Margin Income Statement
For the Two Months Ending November 30, 2016
October
November
Total
Units Sold
1,300 units
2,500 units
Sales Revenue
($39 per unit)
$ 50,700
$ 97,500
$ 148,200
Variable Costs
($13 per unit + $5 per unit)
Fixed Costs
($13,800 + $8,500)
21–33
P21-27A, cont.
Requirement 3
In October, the operating income is higher under absorption costing. The reason operating income is
higher under absorption costing is that $6,000 of fixed manufacturing overhead is contained in the unit
product cost of the 1,000 units in ending Finished Goods Inventory (2,300 units produced – 1,300 units
sold = 1,000 units × $6.00 per unit = $6,000). These fixed manufacturing overhead costs are expensed
under variable costing.
Requirement 4
Absorption Costing
Variable Costing
October
November
October
November
Beginning Balance (in units)
0
1,000
0
1,000
+ Units Produced
2,300
2,300
2,300
2,300
– Units Sold
1,300
2,500
1,300
2,500
Ending Balance
1,000
800
1,000
800
Beginning Inventory
21–34
P21-28A Analyzing profitability
Learning Objective 3
1. CMR for Archie 39.38%
Parent Furniture Company manufactures and sells oak tables and chairs. Price and cost data for the
furniture follow:
Requirements
1. Calculate the total contribution margin and the contribution margin ratio for each sales
representative (round to two decimal places).
2. Which sales rep has the highest contribution margin ratio? Explain why.
SOLUTION
Requirement 1
Tables
Chairs
Total
Archie
Sales Revenue
(50 tables @ $1,300)
$ 65,000
(50 tables × 6 chairs @ $50)
$ 15,000
$ 80,000
Variable Mfg. Costs
(50 tables @ $806)
40,300
(50 tables × 6 chairs @ $6)
1,800
42,100
Sales Commission
($80,000 × 8%)
6,400
Brett
Sales Revenue
(60 tables @ $1,300)
78,000
(60 tables × 8 chairs @ $50)
24,000
102,000
Variable Mfg. Costs
(60 tables @ $806)
48,360
(60 tables × 8 chairs @ $6)
2,880
51,240
Sales Commission
($102,000 × 8%)
8,160
Cory
Sales Revenue
(100 tables @ $1,300)
130,000
(100 tables × 4 chairs @ $50)
20,000
150,000
Variable Mfg. Costs
(100 tables @ $806)
80,600
(100 tables × 4 chairs @ $6)
2,400
83,000
Sales Commission
($150,000 × 8%)
12,000
Archie
Brett
Cory
Sales Revenue
$ 80,000
$ 102,000
$ 150,000
Variable Costs:
Variable Manufacturing Costs
42,100
51,240
83,000
Sales Commission
6,400
8,160
12,000
Contribution Margin
$ 31,500
$ 42,600
$ 55,000
Salesperson
Archie
Brett
Cory
21–36
P21-28A, cont.
Requirement 2
Brett has the greatest contribution margin ratio because of his product sales mix. The contribution
P21-29A Using variable and absorption costing, making decisions
Learning Objectives 1, 2, 3
1. COGS absorption costing $2,755,000
The 2016 data that follow pertain to Frank’s Fantastic Eyewear, a manufacturer of swimming goggles.
(Frank’s Fantastic Eyewear had no beginning Finished Goods Inventory in January 2016.)
Requirements
1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income
statements for Frank’s Fantastic Eyewear for the year ended December 31, 2016.
2. Which statement shows the higher operating income? Why?
3. Frank’s Fantastic Eyewear’s marketing vice president believes a new sales promotion that costs
$50,000 would increase sales to 155,000 goggles. Should the company go ahead with the
promotion? Give your reasoning.
21–37
SOLUTION
Requirement 1
FRANK’S FANTASTIC EYEWEAR
Income Statement
For the Year Ended December 31, 2016
Sales Revenue
($35.00/unit × 145,000 units)
$ 5,075,000
Cost of Goods Sold:
Variable
($15.00/unit × 145,000 units)
$ 2,175,000
Fixed
Gross Profit
Selling and Administrative Costs:
Variable
Fixed
Operating Income
FRANK’S FANTASTIC EYEWEAR
Contribution Margin Income Statement
For the Year Ended December 31, 2016
Sales Revenue
($35.00/unit × 145,000 units)
$ 5,075,000
Variable Costs:
Selling & Admin Costs
Contribution Margin
Fixed Costs:
Manufacturing
21–38
P21-29A, cont.
Requirement 2
The conventional income statement shows the higher operating income. The operating income under
Requirement 3
Frank’s Fantastic Eyewear should go forward with the sales promotion suggested by the vice president.
21–39
P21-30A Using variable costing, service company
Learning Objective 4
2. VC per Customer for Flounder $40
Requirements
1. Calculate the contribution margin ratio for each business segment.