During Denton Company’s first two years of operations, the company reported absorption costing net operating income as follows:

During Denton Company’s first two years of operations, the company reported absorption costing net operating income as follows:

	Year 1		Year 2
Sales (@ $50 per unit)	$	1,000,000	$	1,500,000
Cost of goods sold (@ $34 per unit)		680,000		1,020,000
Gross margin		320,000		480,000
Selling and administrative expenses*		310,000		340,000
Net operating income	$	10,000	$	140,000

* $3 per unit variable; $250,000 fixed each year.

The company’s $34 unit product cost is computed as follows:

Direct materials	$	8
Direct labor		10
Variable manufacturing overhead		2
Fixed manufacturing overhead ($350,000 ÷ 25,000 units)		14
Absorption costing unit product cost	$	34

   

Production and cost data for the two years are given below:

	Year 1	Year 2
Units produced	25,000	25,000
Units sold	20,000	30,000

Required:

1.	Prepare a variable costing contribution format income statement for each year. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Variable Costing Income Statement
	Year 1	Year 2
Sales	$	$
Variable expenses:
Variable cost of goods sold
Variable selling and administrative expenses
Total variable expenses
Contribution margin
Fixed expenses:
Fixed manufacturing overhead
Fixed selling and administrative expenses
Total fixed expenses
Net operating income (loss)	$	$

2.	Reconcile the absorption costing and variable costing net operating income figures for each year. (Loss amounts and amounts to be deducted should be indicated with a minus sign. Omit the "$" sign in your response.)

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
	Year 1	Year 2
Variable costing net operating income (loss)	$	$
Add (deduct) fixed manufacturing overhead   deferred in (released from) inventory under   absorption costing
Absorption costing net operating income (loss)	$	$

Explanation:

1. 

The unit product cost under the variable costing is computed as follows:

Direct materials	$	8
Direct labor		10
Variable manufacturing overhead		2
Variable costing unit product cost	$	20

 

	Year 1		Year 2
Variable cost of goods sold @ $20 per unit	$	400,000	$	600,000
Variable selling and administrative expenses @ $3 per unit	$	60,000	$	90,000

2.

Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing (5,000 units × $14 per unit in Year 1; 5,000 units × $14 per unit in Year 2) = $70,000

Kalox, Inc., manufactures an antacid product that passes through two departments. Data for May for the first department follow:

Kalox, Inc., manufactures an antacid product that passes through two departments. Data for May for the first department follow:          

	Gallons	Materials		Labor		Overhead
Work in process, May 1	87,000	$	84,400	$	42,200	$	55,900
Gallons started in process	829,000
Gallons transferred out	850,000
Work in process, May 31	66,000
Cost added during May		$	1,116,480	$	521,025	$	689,290

     

The beginning work in process inventory was 70% complete with respect to materials and 55% complete with respect to labor and overhead. The ending work in process inventory was 50% complete with respect to materials and 25% complete with respect to labor and overhead.

   

Required:

Assume that the company uses the weighted-average method of accounting for units and costs.

   

1.	Compute the equivalent units for May’s activity for the first department.

   

	Materials	Labor	Overhead
Equivalent units of production

   

2.	Determine the costs per equivalent unit for May. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

     

	Materials	Labor	Overhead
Cost per equivalent unit	$	$	$

Explanation:

1.

	Materials	Labor	Overhead
Units transferred to the next department	850,000	850,000	850,000
Work in process, ending:
Materials: 66,000 units × 50% complete	33,000
Labor and overhead: 66,000 units × 25% complete		16,500	16,500
Equivalent units of production	883,000	866,500	866,500

2.

	Materials		Labor		Overhead
Cost of beginning work in process	$	84,400	$	42,200	$	55,900
Costs added during the period		1,116,480		521,025		689,290
Total cost (a)	$	1,200,880	$	563,225	$	745,190
Equivalent units of production (b)		883,000		866,500		866,500
Cost per equivalent unit (a) ÷ (b)	$	1.36	$	0.65	$	0.86

Maxson Products distributes a single product, a woven basket whose selling price is $8 and whose

Maxson Products distributes a single product, a woven basket whose selling price is $8 and whose variable cost is $6 per unit. The company’s monthly fixed expense is $5,500.

Required:
1.	Compute for the company’s break-even point in unit sales using the equation method.

Break-even point in unit sales

2,750

baskets

2.	Compute for the company’s break-even point in sales dollars using the equation method and the CM ratio. (Do not round intermediate calculations. Round your CM ratio to 2 decimal places.Omit the "$" sign in your response.)

CM ratio	.25
Break-even point in dollar sales	$ 22,000

3.	Compute for the company’s break-even point in unit sales using the formula method.

Break-even point in unit sales

2,750

baskets

4.	Compute for the company’s break-even point in sales dollars using formula method and the CM ratio. (Do not round intermediate calculations. Round your CM ratio to 2 decimal places. Omit the "$" sign in your response.)

CM ratio	.25
Break-even point in dollar sales	$ 22,000

Stratford Company distributes a lightweight lawn chair that sells for $15 per unit. Variable

Problem 5-21 Basic CVP Analysis [LO1, LO3, LO4, LO6, LO8]

Stratford Company distributes a lightweight lawn chair that sells for $15 per unit. Variable expenses are $6 per unit, and fixed expenses total $180,000 annually.

Required:
1.	What is the product's CM ratio? (Omit the "%" sign in your response.)

CM ratio

60  %

2.	Use the CM ratio to determine the break-even point in sales dollars. (Omit the "$" sign in your response.)

Break-even point in sales dollars

$ 300,000

3.	The company estimates that sales will increase by $45,000 during the coming year due to increased demand. By how much should net operating income increase? (Omit the "$" sign in your response.)

Net operating income increases by

$ 27,000

4.	Assume that the operating results for last year were as follows:

Sales	$	360,000
Variable expenses		144,000
Contribution margin		216,000
Fixed expenses		180,000
Net operating income	$	36,000

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

Degree of operating leverage

6

b.	The president expects sales to increase by 15% next year. By how much should net operating income increase? (Omit the "$" sign in your response.)

Net operating income increases by

$ 32,400

5.	Refer to the original data. Assume that the company sold 28,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $70,000 increase in advertising expenditures, would increase annual unit sales by 50%.

a.

Prepare two contribution format income statements, one showing the results of last year’s operations and one showing what the results of operations would be if these changes were made. (Do not round intermediate calculations. Round your "Per unit" answers to 2 decimal places. Input all amounts as positive values except losses which should be indicated by minus sign. Omit the "$" sign in your response.)

Last Year 28,000 units

Proposed     42,000  units

	Total	Per Unit	Total	Per Unit
Sales	$ 420,000	$ 15.00	$ 567,000	$ 13.50
Variable expenses	168,000	6.00	252,000	6.00
Contribution margin	252,000	$ 9.00	315,000	$ 9.00
Fixed expenses	180,000		250,000
Net operating income (loss)	$ 72,000		$ 65,000

b.	Would you recommend that the company do as the sales manager suggests?
	No

6.

Refer to the original data. Assume again that the company sold 28,000 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $2 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach. (Omit the "$" sign in your response.)

The amount by which advertising can be increased is

$ 140,000

Maxson Products distributes a single product, a woven basket whose selling price is $8 and

Exercise 5-7 Compute the Break-Even Point [LO6]

Maxson Products distributes a single product, a woven basket whose selling price is $8 and whose variable cost is $6 per unit. The company’s monthly fixed expense is $5,500.

Required:
1.	Compute for the company’s break-even point in unit sales using the equation method.

Break-even point in unit sales

2,750

baskets

2.	Compute for the company’s break-even point in sales dollars using the equation method and the CM ratio. (Do not round intermediate calculations. Round your CM ratio to 2 decimal places.Omit the "$" sign in your response.)

CM ratio	.25
Break-even point in dollar sales	$ 22,000

3.	Compute for the company’s break-even point in unit sales using the formula method.

Break-even point in unit sales

2,750

baskets

4.	Compute for the company’s break-even point in sales dollars using formula method and the CM ratio. (Do not round intermediate calculations. Round your CM ratio to 2 decimal places. Omit the "$" sign in your response.)

CM ratio	.25
Break-even point in dollar sales	$ 22,000

The following information is available for Wonderway, Inc., for 2010.

The following information is available for Wonderway, Inc., for 2010.

 

Factory rent	$	29,600
Company advertising		20,600
Wages paid to laborers		85,100
Depreciation for president's vehicle		8,040
Indirect production labor		1,820
Utilities for factory		30,400
Production supervisor salary		31,100
President's salary		60,400
Direct materials used		35,400
Sales commissions		7,660
Factory insurance		13,800
Depreciation on factory equipment		26,900
Requirement 1:
Calculate the direct labor cost for Wonderway. (Omit the "$" sign in your response.)

 

Direct labor	$ 85,100
Requirement 2:
Calculate the manufacturing overhead cost for Wonderway. (Omit the "$" sign in your response.)

 

Manufacturing overhead	$ 133,620
Explanation: Manufacturing Overhead = $29,600 + $1,820 + $30,400 + $31,100 + $13,800 + $26,900 = $133,620 Requirement 3:
Calculate the prime cost for Wonderway. (Omit the "$" sign in your response.)

 

Prime cost

$ 120,500

Explanation:

Prime Cost = $35,400 + $85,100 = $120,500

Requirement 4:

Calculate the conversion cost for Wonderway. (Omit the "$" sign in your response.)

 

Conversion cost

$ 218,720

Explanation:

Conversion Cost = $85,100 + $133,620 = $218,720

Requirement 5:

Calculate the total manufacturing costs for Wonderway. (Omit the "$" sign in your response.)

 

Total manufacturing costs

$ 254,120

Explanation:

Total Manufacturing Costs = $35,400 + $85,100 + $133,620 = $254,120

Requirement 6:

Calculate the period expenses for Wonderway. (Omit the "$" sign in your response.)

 

Period expenses

$ 96,700

Explanation:

Period Expenses = $20,600 + $8,040 + $60,400 + $7,660 = $96,700