Solutions Guide: Please do not present as your own. This is only meant as a solutions guide for you to answer the problem on your own. I recommend doing this with any content you buy online whether from me or from someone else.
EXERCISE 9 LO.1 (Variable costing income statement) Top Hat Sports Gear manufactures baseball caps. The following information is available for 2008, the company’s first year in business when it produced 150,000 caps. Revenue of $240,000 was generated by the sale of 90,000 caps. Variable Costs Fixed Costs Production Direct material $75,000 Direct labor 50,000 Overhead 37,500 $56,250 Selling and administrative 45,000 50,000 a. What is the variable production cost per unit? b. What is
the total contribution margin per unit? c. Prepare a variable costing income statement.
a. Direct materials$ 75,000
Direct labor 50,000
Manufacturing overhead 37,500
Total variable production cost $162,500
Divided by units produced ÷ 150,000
Variable production cost per cap $1.083 (rounded)
b. Contribution margin per unit:
Revenue $240,000
Less Variable Costs
Cost of goods sold (90,000 x $1.083) $97,470
Selling and Administrative 45,000 142,470
Contribution margin $ 97,530
Divided by units sold ÷ 90,000
Contribution margin per unit $ 1.084 (rounded)
c. Top Hat Sports
Income Statement
For 2008
Sales $240,000
Less Variable Costs
Cost of goods sold (90,000 x $1.083) $97,470
Selling and Administrative 45,000 142,470
Contribution margin $ 97,530
Less Fixed Expenses
Manufacturing Overhead $56,250
Selling and Administrative 50,000 106,250
Net Loss $( 8,720)
EXERCISE 16 LO.3 (CVP) Reno Corp. sells a product for $180 per unit. The company’s variable cost per unit are $30 for direct material, $25 per unit for direct labor, and $17 per unit for overhead. Anunk anually fixed production overhead is $37,400, and fixed selling and administrative and overhead is $25,240. a. What is the contribution margin per unit? b. What is the contribution margin per ratio? c. What is the break-even point in units? d. Using the contribution margin ratio, what is the break-even points in sales dollars? e. If Reno Corp. wants to earn a pre-tax profit of $25,920, how many units must the company sell?
a. Contribution margin per unit = Sales less variable costs
$180 – ($30 + $25 + $17) = $108
b. Contribution margin ratio= contribution margin ÷ sales
$108 ÷ $180 = 60%
c. Breakeven in units is fixed costs ÷ contribution margin per unit
$62,640 ÷ $108 = 580 units
d. Breakeven in dollars is fixed costs ÷ contribution margin ratio
$62,640 ÷ 0.60 = $104,400
e. To earn $25,920 in pretax profit, Reno Corp must sell:
($62,640 + $25,920) ÷ $108 = 820 units
EXERCISE 16 LO.1 & LO.2 (Relevant vs. sunk costs) Your roommate, Jackson Robards, purchased a new portable DVD player just before this school term for $90. Shortly the semester began, Jackson’s DVD player was crushed by an errant “flying plant” during a party at his apartment. Returning the equipment to the retailer, Jackson was informed that the estimated cost of repairs was $65 because the damage was not covered by the manufacturer’s warranty. Pondering the figures, Jackson was ready to decide to make the repairs; after all, he had recently paid $90 for the equipment. However, before making a decision, he asked for your advice. a. Using concepts from this chapter, prepare a brief presentation outlining factors that Jackson should consider in making his decision. b. Continue the presentation in part (a) by discussing the options Jackson should consider in making his decision. Start by defending a base case against which alternatives can be compared.
a. You would explain to Jackson that the purchase cost of $90 is not relevant to any decision he can now make regarding the DVD player. No matter what action he takes now, the $90 is not a recoverable cost. In deciding which action to take, Jackson should consider only those costs that can be avoided by taking one action rather than another. Any cost that is the same across all decision alternatives can be ignored; such a cost is not relevant. Ignoring qualitative factors, Jackson should select the alternative that minimizes total relevant costs.
b. His logical choices are (1) repair the DVD player at an estimated cost of $65 and (2) purchase a new DVD player. Accordingly, the decision would logically be made by comparing the purchase cost of a new player to the repair cost of the broken player. However, Jackson may want to consider differences in features between the existing DVD player and replacement players as well. He may be willing to pay more than $65 for a new player if it has additional features. This would be a qualitative consideration.
EXERCISE 22 LO.4 (allocation of scarce resources) Because the employees of one of the company’s plant are on strike, the Dallas plant is operating at peak capacity. It makes two electronic products: MP3 players and PDAs. Presently, the company can sell as many of each product as can be made, but making a PDA takes twice as long in production labor time as an MP3 player. The company’s production capacity is 100,000 labor hours per month. Data on each product follow: MP3 players PDAs Sales $72 $128 Variable costs (60) (108) Contribution margin $12 $20 Labor hours required 1 2 Fixed costs are $240,000 per month. a. How many each product should Dallas Digital make? Explain your answer. b. What qualitative factors would you consider in making this product mix decision?
a.
MP3 Players PDAs
Contribution margin $12 $20
Divide by labor time per unit ÷1 ÷2
CM per unit of labor time $12 $10
Because the company can sell as many of either product as it can make, it should make only MP3 Players. The company should make 100,000 MP3 Players.
b. The company should consider the need to provide a market assortment of goods and the possibility of customer preferences permanently changing to PDAs not made by Dallas Digital. This is acknowledging the possible long-term consequences of a short-term problem solution.
EXERCISE 27 LO.6 (Special order) Great Plain’s Wire Co. produces 12.5 gauge barbed wire that is retailed through farm supply companies. Presently, the company has the capacity to produce 100,000 tons of wire per year. It is operating at 80 percent of annual capacity and, at this level of operations, the cost per ton of wire is as follows: Direct material $540 Direct labor 50 Variable overhead 60 Fixed overhead 150 Total $800 The average sales price for the output produced by the farm is $900 per ton. The State of Texas has approached the farm to supply 200 tons of wire for the state’s prisons for $620 per ton. No production modifications would be necessary to fulfill the order from the State of Texas. a. What costs are relevant to the decision to accept this special order? b. What would be the dollar effect on pre-tax income if this order were accepted?
a. Only the variable production costs are relevant to this decision:
$540 + $50 + $60 = $650.
b. Incremental revenue: $620 x 200 $124,000
Incremental costs: $650 x 200 (130,000)
Incremental profit $ ( 6,000)
Profits would decrease by $6,000 if this special order was accepted.