SOLUTION
Requirement 1
Business Segment
Contribution margin / Net sales revenue
Contribution margin ratio
Borden
30%
Morrissey
40%
Flounder
$6,000 / $10,000
60%
Requirement 2
Business Segment
Borden
Service Revenue per Customer
$5,000 / 50 customers
$100 per customer
Variable Cost per Customer
$3,500 / 50 customers
Contribution Margin per Customer
$1,500 / 50 customers
Business Segment
Service Revenue per Customer
$100 per customer
Variable Cost per Customer
Contribution Margin per Customer
Business Segment
Service Revenue per Customer
$100 per customer
Variable Cost per Customer
Contribution Margin per Customer
Requirement 3
The Flounder business segment was the most profitable because the variable cost per customer was the
lowest. Possible reasons for the profitability of this business segment include lower employee wages,
21–41
Problems (Group B)
P21-31B Preparing variable and absorption costing income statements
Learning Objectives 1, 2
2a. OI $2,730
Viviana’s Foods produces frozen meals that it sells for $11 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
Viviana’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?
SOLUTION
Requirement 1
Absorption
Variable
Requirement 2
a) Absorption costing
VIVIANA’S FOODS
Sales Revenue
($11.00/unit × 800 units)
Gross Profit
Operating Income
Income Statement
b) Variable costing
VIVIANA’S FOODS
Contribution Margin Income Statement
For the Month Ending January 31, 2016
Sales Revenue
($11.00/unit × 800 units)
Contribution Margin
Operating Income
Requirement 3
21–43
P21-32B Preparing variable and absorption costing income statements
Learning Objectives 1, 2
2b. CM for Nov. $66,700
Game Depot manufactures video games that it sells for $45 each. The company uses a fixed
manufacturing overhead allocation rate of $3 per game. Assume all costs and production levels are
exactly as planned. The following data are from Game Depot’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
Requirement 2
a) Absorption costing
GAME DEPOT
Income Statement
For the Two Months Ending November 30, 2016
Units Sold
Sales Revenue
Gross Profit
b) Variable costing
GAME DEPOT
Contribution Margin Income Statement
For the Two Months Ending November 30, 2016
Units Sold
Sales Revenue
21–45
P21-32B, cont.
Requirement 3
In October, the operating income is higher under absorption costing. The reason operating income is
higher under absorption costing is because $4,500 of fixed manufacturing overhead is contained in the
unit product cost of the 1,500 units in ending Finished Goods Inventory (2,700 units produced – 1,200
units sold = 1,500 units × $3.00 per unit = $4,500). 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
1,500
0
1,500
+ Units Produced
2,700
2,700
2,700
2,700
– Units Sold
1,200
2,900
1,200
2,900
Ending Balance
1,500
1,300
1,500
1,300
Beginning Inventory
21–46
P21-33B Analyzing profitability
Learning Objective 3
1. CM for Casey $68,000
Generation 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
Ansley
Sales Revenue
(100 tables @ $1,500)
$ 150,000
(100 tables × 6 chairs @ $100)
$ 60,000
$ 210,000
Variable Mfg. Costs
(100 tables @ $915)
(100 tables × 6 chairs @ $41)
Sales Commission
Brett
Sales Revenue
(50 tables @ $1,500)
(50 tables × 4 chairs @ $100)
Variable Mfg. Costs
(50 tables @ $915)
(50 tables × 4 chairs @ $41)
Sales Commission
Casey
Sales Revenue
(80 tables @ $1,500)
(80 tables × 8 chairs @ $100)
Variable Mfg. Costs
(80 tables @ $915)
(80 tables × 8 chairs @ $41)
Sales Commission
Ansley
Brett
Casey
Sales Revenue
$ 210,000
$ 95,000
$ 184,000
Variable Costs:
Variable Manufacturing Costs
116,100
53,950
99,440
Sales Commission
18,900
8,550
16,560
Contribution Margin
$ 75,000
$ 32,500
$ 68,000
Salesperson
Ansley
Brett
Casey
21–48
P21-33B, cont.
Requirement 2
Casey has the greatest contribution margin ratio because of his product sales mix. The contribution
P21-34B Using variable and absorption costing, making decisions
Learning Objectives 1, 2, 3
1. FC variable costing $1,860,000
The 2016 data that follow pertain to Sam’s Superb Eyewear, a manufacturer of swimming goggles.
(Sam’s Superb 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 Sam’s Superb Eyewear for the year ended December 31, 2016.
2. Which statement shows the higher operating income? Why?
3. Sam’s Superb Eyewear’s marketing vice president believes a new sales promotion that costs
$120,000 would increase sales to 190,000 goggles. Should the company go ahead with the
promotion? Give your reasoning.
21–49
SOLUTION
Requirement 1
SAM’S SUPERB EYEWEAR
Income Statement
For the Year Ended December 31, 2016
Cost of Goods Sold:
Variable
Fixed
Gross Profit
Selling and Admin Costs:
Variable
Operating Income
SAM’S SUPERB EYEWEAR
Contribution Margin Income Statement
For the Year Ended December 31, 2016
Sales Revenue
($26.00/unit × 180,000 units)
$ 4,680,000
Variable Costs:
Selling & Admin Costs
Contribution Margin
Fixed Costs:
Manufacturing
21–50
P21-34B, cont.
Requirement 2
The conventional income statement shows the higher operating income. The operating income under
absorption costing is higher because of the 210,000 units produced, only 180,000 units were sold with
Requirement 3
Sam’s Superb Eyewear should go forward with the sales promotion suggested by the vice president. The
P21-35B Using variable costing, service company
Learning Objective 4
1. CMR Mitz 70%
Utopia Pool Cleaning Service provides pool cleaning services to residential customers. The company
has three employees, each assigned to specific customers. The company considers each employee’s
territory as a business segment. The company incurs variable costs that include the employees’ wages,
pool chemicals, and gas for the service vans. Fixed costs include depreciation on the service vans.
Following is the income statement for the month of August:
Requirements
1. Calculate the contribution margin ratio for each business segment.
2. The business segments had the following number of customers: Bently, 100; Mitz, 70; and Fanning,
50. Compute the service revenue per customer, variable cost per customer, and contribution margin
per customer for each business segment.
3. Which business segment was most profitable? List some possible reasons why this segment was
most profitable. How might the various reasons affect the company in the long term?
21–51
SOLUTION
Requirement 1
Business Segment
Contribution margin / Net sales revenue
Contribution margin ratio
Bently
Mitz
Fanning
Requirement 2
Business Segment
Bently
Service Revenue per Customer
$7,000 / 100 customers
$70 per customer
Variable Cost per Customer
$4,900 / 100 customers
$49 per customer
Contribution Margin per Customer
$2,100 / 100 customers
$21 per customer
Business Segment
Service Revenue per Customer
$4,900 / 70 customers
$70 per customer
Variable Cost per Customer
$1,470 / 70 customers
$21 per customer
Contribution Margin per Customer
$3,430 / 70 customers
$49 per customer
Business Segment
Service Revenue per Customer
$3,500 / 50 customers
$70 per customer
Variable Cost per Customer
$1,400 / 50 customers
$28 per customer
Contribution Margin per Customer
$2,100 / 50 customers
$42 per customer
Requirement 3
The Mitz business segment was the most profitable because the Mitz segment had the lowest variable
cost per customer. Possible reasons for the profitability of this business segment include lower employee
21–52
Critical Thinking
Decision Case 21-1
The Hurley Hat Company manufactures baseball hats. Hurley’s primary customers are sporting goods
stores that supply uniforms to youth baseball teams. Following is Hurley’s income statement for 2016:
In 2016, Hurley produced and sold 200,000 baseball hats. Of the Cost of Goods Sold, $150,000 is
fixed; 80% of the Selling and Administrative Expenses are fixed. There were no beginning inventories
on January 1, 2016.
Requirements
1. Use the data from the 2016 income statement to prepare an income statement using variable costing.
Assume no beginning or ending inventories. Calculate the contribution margin ratio. Round to two
decimal places.
2. Prepare an absorption costing income statement assuming the company increases advertising and
production and sales increase to 300,000 hats.
3. Refer to the original data. Prepare an absorption costing income statement assuming the company
increases capacity and sales and production increases to 400,000 total hats.
4. Which option should the company pursue? Explain your reasoning.
21–53
SOLUTION
Requirement 1
HURLEY HAT COMPANY
Contribution Margin Income Statement
For the Year Ended December 31, 2016
Sales Revenue
Variable Costs:
Manufacturing
Selling & Admin Costs
Contribution Margin
Fixed Costs:
Manufacturing
Selling & Admin Costs
Operating Income
Contribution Margin Ratio = Contribution margin / Sales revenue
Contribution Margin Ratio = $850,000 / $1,500,000
Contribution Margin Ratio = 56.67%
Requirement 2
Sales revenue per unit = $1,500,000 / 200,000 units = $7.50
Variable Manufacturing Cost per unit = $550,000 / 200,000 units = $2.75
Variable S&A Expenses per unit = $100,000 / 200,000 units = $0.50 per unit
Sales Revenue
Cost of Goods Sold
Gross Profit
Operating Income
21–54
Decision Case 21-1, cont.
Requirement 3
Calculations for expansion:
Sales Revenue = $7.50 × 200,000 units = $1,500,000
HURLEY HAT COMPANY
Projected Income Statement
For the Year Ended December 31, 2017
Current
Operations
With
Expansion
Total
Sales Revenue
$ 1,500,000
$ 1,500,000
$ 3,000,000
Cost of Goods Sold
Gross Profit
Selling and Admin. Expenses
Operating Income
$ 450,000
Requirement 4
21–55
Ethical Issue 21-1
Sampson Company operates a manufacturing facility where several products are made. Each product is
considered a business segment, and the product managers have the opportunity to receive a bonus based
on the profit of the segment. Franco Hopper is the manager for the scissors product line. Production and
sales data for the scissors product line for the past three years are shown below:
Hopper’s bonus is 0.5% of the gross profit of the scissors product line, based on absorption costing.
Upper management is discussing changing the bonus system so that bonuses are based on operating
income using variable costing. Hopper is opposed to this change and has been trying to convince the
other product mangers to join him in voicing their opposition. There are no beginning inventories in
Year 1.
Requirements
1. Calculate the fixed cost per unit produced for each year.
2. Prepare income statements for the three years using absorption costing.
3. Calculate Hopper’s bonus based on the current plan.
4. Prepare income statements for the three years using variable costing.
5. Calculate Hopper’s bonus based on the proposed plan.
6. Give possible reasons why Hopper is opposed to the proposed bonus plan. Do you think Hopper’s
actions have been ethical the past three years? Why or why not?
21–56
SOLUTION
Requirement 1
Fixed Cost per unit
Year 1
Year 2
Requirement 2
Sales Revenue = $12.00 per unit × 100,000 units = $1,200,000
Variable Mfg. Costs = $5.00 per unit × 100,000 units = $500,000
Sales Revenue
Cost of Goods Sold:
Variable
Fixed
Gross Profit
Requirement 3
Bonus
Year 2
21–57
Ethical Issue 21-1, cont.
Requirement 4
SAMPSON COMPANY
Contribution Margin Income Statement
Year 1
Year 2
Year 3
Sales Revenue
Variable Costs
Contribution Margin
Fixed Costs
Operating Income
Requirement 5
Bonus
Year 1
Year 2
Requirement 6
A possible reason that Hopper is opposed to the new bonus plan is the reduction in his yearly bonus.
Under variable costing, his bonus amount would have been constant over all three years, which the data
shows would lead to a reduction in his bonus.
21–58
Communication Activity 21-1
In 100 words or fewer, explain the main differences and similarities between variable costing and
absorption costing.
SOLUTION
The main similarity between absorption costing and variable costing is that the variable manufacturing