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Chapter 6

Problems cowed:
T^PROBLEM 6-19 Basics of CVP Analysis (LOl. L03, L04. L06, L08]
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable costs are $8 per unit, and fixed costs total $180,000 per year.
Required:
Answer the following independent questions:
1. What is the product's CM ratio?
2. Use the CM ratio to determine the break-even point in sales dollars.
3. Due to an increase in demand, the company estimates that sales will increase by $75,000 during the next year. By how much should net operating income increase (or net loss decrease)
assuming that fixed costs do not change?
4. Assume that the operating results for last year were:
Sales
Variable expenses

$400,000
160,000

Contribution margin
Fixed expenses

240,000
180,000

Net operating income

$ 60,000

a.
b.

Compute the degree of operating leverage at the current level of sales.

The president expects sales to increase by 20% next year. By what percentage should net
operating income increase?
Refer to the original data. Assume that the company sold 18,000 units last year. The sales
manager is convinced that a 10%reductionin the selling price, combined with a $30,000 increase in advertising, would cause annual sales in units to increase by one-third. Prepare two
contribution format income statements, one showing the results of last year's operations and
one showing the results of operations if these changes are made. Would you recommend that
the company do as die sales manager suggests?
Refer to the original data. Assume again that the company sold 18,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1 per unit. He thinks lhat this move, combined with some increase in advertising, would
increase annual sales by 25%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement, use die incremental analysis approach.
PROBLEM 6-20 Sales Mix; MuWproduct Break-Even Analysis (L09]
Gold Star Rice, Ltd., of Thailand exports Thai rice throughout Asia. The company grows three
varieties ofriceFragrant,White, and Loonzain. (The currency in Thailand is the baht, which is
denoted by B.) Budgeted sales by product and in total for the coming month are shown below:

Fragrant
Percentage of total sales
Sales
Variable expenses

20%
B150.000
108,000

100%
72%

52%
B390.000
78,000

100%
20%

28%
B210,000
84,000

100%
40%

Contribution margin

B 42,000

28%

B312,000

80%

B126,000

60%

100%
B750.00O
270,000

100%
36%

480,000

64%

Fixed expenses

449,280

Net operating income

B30.720

Dollar sales
breakeven

to

Fixed expenses
=

C M m i o

B449.280
"
0 M

= B702.000

As shown by these data, net operating income is budgeted at B30.720 for the month and
break-even sales at B702.000.

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Chapter 7
Ms. Tyler is discouraged over die loss shown for the quarter, particularly because she had planned
to use the statement as support for a bank loan. Anolherfriend,a CPA, insists that die company should
be using absorption costing rather than variable costing and argues that if absorption costing had been
used die company would probably have reported at least some profit for the quarter.
At this point, Ms. Tyler is manufacturing only one product, a swimsuit. Production and cost
data relating to the swimsuit for the first quarter follow:

44

Units produced
Units sold

30,000
28,000

Variable costs per unit:

Direct materials
Direct labor
Variable manufacturing overhead
Variable selling and administrative

$3.50
$12.00
$1.00
$6.00

Required:
1. Complete the following:
a. Compute the unit product cost under absorption costing.
b. Redo the company's income statement for the quarter using absorption costing.
c. Reconcile the variable and absorption costing net operating income (loss) figures.
2. Was the CPA correct in suggesting that die company really earned a "profit" for the quarter?
Explain.
3. Dining the second quarter of operations, the company again produced 30,000 units but sold
32,000 units. (Assume no change in total fixed costs.)
a. Prepare a contribution format income statement for the quarter using variable costing.
b. Prepare an income statement for die quarter using absorption costing.
c. Reconcile the variable costing and absorption costing net operating incomes.
PROBLEM 7-14 Prepare and Reconcile Variable Costing Statements (L01. L02. L03. L041
Denton Company manufactures and sells a single product. Cost data for the product are given
below:

Variable costs per unit:

Direct materials
Direct labor
Variable manufacturing overhead
Variable selling and administrative

$7
10
5
3

Total variable cost per unit

$25

Fixed costs per month:

Fixed manufacturing overhead
Fixed selling and administrative
Total fixed cost per month

$315,000
245,000
$560,000

The product sells for $60 per unit. Production and sales data for July and August, the first two
months of operations, follow:

July
August

Units
Produced

Units
Sold

17,500
17,500

15,000
20,000

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Variable Costing: A Tool for Management

The company's Accounting Department has prepared absorption costing income statements for
July and August as presented below:

Sales
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income

July

August

$900,000
600,000

$1,200,000
800,000

300,000
290,000

400,000
305,000

$ 10,000

95,000

Required:
1. Determine the unit product cost under
a. Absorption costing.
b. Variable costing.
2. Prepare contributionformatvariable costing income statements for July and August.
3. Reconcile the variable costing and absorption costing net operating income figures.
4. The company's Accounting Department has determined the company's break-even point to be
16,000 units per month, computed as follows:
Fixed cost per month
$560,000

:
=
~ - 16,000 units
Unit contribution margin
$35 per unit
"I'm confused," said the president. "The accounting people say that our break-even point is
16,000 units per month, but we sold only 15,000 units in July, and the income statement they
prepared shows a $10,000 profit for that month. Either the income statement is wrong or the
break-even point is wrong ." Prepare a brief memo for the president, explaining what happened
on the July income statement.
PROBLEM 7-15 Comprehensive Problem with Labor Rxed [L01, L02, L03, L04]
Far North Telecom Ltd., of Ontario, has organized a new division to manufacture and sell specialty cellular telephones. The division's monthly costs are shown below:
*
Manufacturing costs:
Variable cpsts per unit:
Direct materials
Variable manufacturing overhead
Fixed manufacturing overhead costs (total)
Selling and administrative costs:
Variable
Fixed (total)

$48
$2
$360,000
12% of sales
$470,000

Far North Telecom regards all of its workers as full-time employees and the company has a
long-standing no layoff policy. Furthermore, production is highly automated. Accordingly, the
company includes its labor costs in its fixed manufacturing overhead. The cellular phones sell for
$ 150 each. During September, the first month of operations, the following activity was recorded:
Units produced
Units sold

12,000
10,000

Required:
1. Compute the unit product cost under:
a. Absorption costing.
b. Variable costing.
2. Prepare an absorption costing income statement for September.
3. Prepare a contribution format income statement for September using variable costing.

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