ACC 252 Chapter Notes - Chapter 5: Earnings Before Interest And Taxes, Budget, Operating Leverage
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Packer Company, which has only one product, has provided thefollowing data concerning its most recent month of operations: |
| Selling price | $ | 112 |
| Units in beginninginventory | 590 | |
| Units produced | 2,000 | |
| Units sold | 2,210 | |
| Units in endinginventory | 380 | |
| Variable costs perunit: | ||
| Directmaterials | $ | 28 |
| Direct labor | $ | 25 |
| Variablemanufacturing overhead | $ | 2 |
| Variable selling andadministrative | $ | 20 |
| Fixed costs: | ||
| Fixed manufacturingoverhead | $ | 48,000 |
| Fixed selling andadministrative | $ | 6,630 |
The company produces the same number of units every month,although the sales in units vary from month to month. The company'svariable costs per unit and total fixed costs have been constantfrom month to month. (Hint: Use the reconciliation method.) |
| Required: |
| a. | What is the unit product cost for the month under variablecosting? (Omit the "$" sign in your response.) |
| Cost perunit | |
| Variablecosting | $ |
| b. | Prepare a contribution format income statement for the monthusing variable costing. (Input all amounts as positivevalues except losses which should be indicated by a minus sign.Omit the "$" sign in your response.) |
| Variable Costing Income Statement | ||
| (Click toselect)Manufacturing overheadContribution marginSalesNet operatingincome (loss)Selling and administrative expensesVariable cost ofgoods soldVariable selling and administrative expenses | $ | |
| Variableexpenses: | ||
| (Click to select)Variableselling and administrative expensesManufacturing overheadNetoperating incomeSalesContribution marginVariable cost of goodssold | $ | |
| (Click toselect)Contribution marginVariable cost of goods soldManufacturingoverheadNet operating incomeSalesVariable selling andadministrative expenses | ||
| (Click toselect)Contribution marginSalesVariable cost of goodssoldManufacturing overheadVariable selling and administrativeexpensesNet operating income (loss) | ||
| Fixed expenses: | ||
| (Click to select)SalesNetoperating incomeFixed selling and administrative expensesVariablecost of goods soldContribution marginFixed manufacturingoverheadVariable selling and administrative expenses | ||
| (Click to select)SalesNetoperating incomeVariable cost of goods soldVariable selling andadministrative expensesFixed selling and administrativeexpensesFixed manufacturing overheadContribution margin | ||
| (Click toselect)Variable selling and administrative expensesManufacturingoverheadNet operating income (loss)Variable cost of goodssoldSelling and administrative expensesContributionmarginSales | $ | |
| c. | Without preparing an income statement, determine the absorptioncosting net operating income for the month. (Omit the "$"sign in your response.) |
| Reconciliation of Variable Costing and Absorption Costing NetOperating Incomes | |
| Variable costing netoperating income | $ |
| (Click toselect)DeductAdd: (Click to select)Fixed manufacturing overheadcosts released from inventory under absorption costingFixedmanufacturing overhead costs deferred in inventory under absorptioncosting | |
| Absorption costingnet operating income | $ |
1) All of the following are examples of product costs except:
depreciation on the company's administrative offices.
salary of the plant manager.
insurance on the factory equipment.
rental costs of the factory facility.
2) Period costs:
are treated as expenses in the period they are incurred
are directly traceable to products
include direct labor
are also referred to as manufacturing overhead costs
.
3) Axle and Wheel Manufacturing currently produces 1,000 axles per month. The following per unit data apply for sales to regular customers:
Direct materials $30
Direct manufacturing labor 5
Variable manufacturing overhead 10
Fixed manufacturing overhead 40
Total manufacturing costs $85
The plant has capacity for 2,000 axles and is considering expanding production to 1,500 axles. What is the total cost of producing 1,500 axles?
a. $85,000
b. $170,000
c. $107,500
d. $102,500
4) In the preparation of the schedule of Cost of Goods Manufactured, the accountant incorrectly included as part of manufacturing overhead the rental expense on the firm's retail facilities. This inclusion would:
overstate period expenses on the income statement.
overstate the cost of goods sold on the income statement.
understate the cost of goods manufactured.
have no effect on the cost of goods manufactured.
5) In CVP analysis, focusing on target net income rather than operating income:
a. will increase the breakeven point
b. will decrease the breakeven point
c. will not change the breakeven point
d. does not allow calculation of breakeven point
6) A variable cost is constant if expressed on a per unit basis but the total dollar amount changes as the number of units increases or decreases.
a. True
b. False
7) As activity increases within the relevant range, fixed costs remain constant on a per unit basis.
a. True
b. False
8) Which of the following statements is correct with regard to a CVP graph?
A CVP graph shows the maximum possible profit.
A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.
A CVP graph assumes that total expense varies in direct proportion to unit sales.
A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.
9) How would the following costs be classified (product or period) under variable costing at a retail clothing store?
| Cost of purchasing clothing | Sales commissions | |
| a. | Product | Product |
| b. | Product | Period |
| c. | Period | Product |
| d. | Period | Period |
10) The principal difference between variable costing and absorption costing centers on:
whether variable manufacturing costs should be included as product costs.
whether fixed manufacturing costs should be included as product costs.
whether fixed manufacturing costs and fixed selling and administrative costs should be included as product costs.
none of these.
11) Joe has a hot dog cart that he parks on the NY sidewalk and sells hotdogs during the day. The variable cost of a hot dog is $.90. The selling price of the hot dog is $2.00. The fixed cost is $3,000 per month which covers the loan for the cart and the salary Joe needs to make to live. How many hotdogs must Joe sell in one month in order to break even?
3,300 hot dogs
3,000 hot dogs
2,727.27 hot dogs
2,728 hot dogs
12) Shun Corporation manufactures and sells a hand held calculator. The following information relates to Shun's operations for last year:
| Unit product cost under variable costing.......................... | $5.20 per unit | |
| Fixed manufacturing overhead cost for the year.............. | $260,000 | |
| Fixed selling and administrative cost for the year............ | $180,000 | |
| Units (calculators) produced and sold.............................. | 400,000 |
What is Shun's unit product cost under absorption costing for last year?
$4.10
$4.55
$5.85
$6.30.
Use the following information to answer questions 13 to 15:
Barnett Company uses the weighted-average method in its process costing system. The company adds materials at the beginning of the process in Department M. Conversion costs were 75% complete with respect to the 4,000 units in work in process at May 1 and 50% complete with respect to the 6,000 units in work in process at May 31. During May, 14,000 units were started, 12,000 units were completed and transferred to the next department.
13) Calculate the number of equivalent units for materials.
10,000 units
12,000 units
14,000 units
15,000 units
18,000 units
14) Calculate the number of equivalent units for conversion?
10,000 units
12,000 units
14,000 units
15,000 units
18,000 units
15) An analysis of the costs relating to work in process at May 1 and to production activity for May follows:
| Materials | Conversion | ||
| Work in process 5/1....................... | $13,800 | $3,740 | |
| Costs added during May................ | $42,000 | $26,260 |
The total cost per equivalent unit for May was:
$5.02
$5.10
$5.12
$5.25
The Hampshire Company manufactures umbrellas that sell for$12.50 each. In 2014, the company made and sold 60,000 umbrellas.The company had fixed manufacturing costs of $216,000. It also hadfixed costs for administration of $79,525. The per-unit costs ofeach umbrella are as follows:
Direct Materials: $3.00
Direct Labor: $1.50
Variable Manufacturing Overhead: $0.40
Variable Selling Expenses: $1.10
Using the information above, perform a cost-volume-profit (CVP)analysis by completing the steps below.
1. Compute net income before tax.
2. Compute the unit contribution margin in dollars and thecontribution margin ratio for one umbrella.
3. Calculate the break-even point in units and dollars ofrevenue.
4. Calculate the margin of safety:
In units
In sales dollars
As a percentage
5. Calculate the degree of operating leverage.
6. Assume that sales will increase by 20% in 2015. Calculate thepercentage of before-tax income for this increase. Providecalculations to prove that your percentage increase is correctbased on the operating leverage calculated in step 5.
7. Compute the number of umbrellas that Hampshire is required tosell if it plans to earn $150,000 in income before taxes by usingthe target income formula. Proof your calculation.
8. A company that specializes in tours in England has offered topurchase 5,000 umbrellas at $11 each from Hampshire. The variableselling costs of these additional units will be $1.30 as opposed to$1.10 per unit. Also, this production activity will incur another$15,000 of fixed administrative costs. Should Hampshire agree tosell these additional 5,000 umbrellas to the touring business?Provide calculations to support your decision.
| Requirement 1 | ||||
| Units | Price | Totals | ||
| Sales | X | $ | $ | |
| Variable Costs | X | $ | $ | |
| Fixed Costs | $ | |||
| Net Income | $ | |||
| Requirement 2 | ||||
| Contribution Margin per Unitin Dollars = Selling Price â Variable Costs | ||||
| Selling Price | Variable Costs | Contribution Margin per Unit | ||
| Contribution Margin Ratio =Contribution Margin/Selling Price | ||||
| Contribution Margin | Selling Price | Contribution Margin Ratio | ||
| Requirement 3 | ||||
| Break-Even Point = Fixed Costs/ Contribution Margin | ||||
| Fixed Costs | Contribution Margin | Break-Even Point in Units (Rounded) | ||
| Break-Even Point in Units XSelling Price per Unit = Break-Even Point Sales | ||||
| Break-Even Point in Units | Selling Price per Unit | Break-Even Point in Sales (Rounded) | ||
| Requirement 4A | ||||
| Margin of Safety in Units =Current Unit Sales â Break-Even Point in Unit Sales | ||||
| Current Unit Sales | Break-Even Point in Sales | Margin of Safety in Units | ||
| Requirement 4B | ||||
| Margin of Safety in Dollars =Current Sales in Dollars â Break-Even Point Sales in Dollars | ||||
| Current Sales in Dollars | Break-Even Point in Dollars | Margin of Safety in Dollars | ||
| Requirement 4C | ||||
| Margin of Safety as aPercentage = Margin of Sales in Units / Current Unit Sales | ||||
| Margin of Safety in Units | Current Unit Sales | Margin of Safety Percentage | ||
| Requirement 5 | ||||
| Degree of Operating Leverage =Contribution Margin / Operating Income | ||||
| Contribution Margin | Operating Income | Operating Leverage | ||
| Requirement 6 | ||||
| Units | $ Per Unit | Totals | ||
| Sales | X | $ | $ | |
| Variable Costs | X | $ | $ | |
| Fixed Costs | $ | |||
| Net Income | $ | |||
| Operating Leverage | Times % Increase | Increase would be XX% | ||
| Prior Income | $ | From Part 1 | ||
| Increase | $ | Prior Income X XX% Above | ||
| Total | $ | |||
| Requirement 7 | ||||
| Targeted Income = (Fixed Costs+ Target Income) / Contribution Margin | ||||
| Fixed Costs + Target Income | Divided by Contribution Margin | # of Units (Rounded) | ||
| Fixed Costs | $ | |||
| Target Income | $ | |||
| Total | $ | $ | X | |
| # of Units Above X $ Per Unit | ||||
| Proof | Revenue | XX,XXX X $XX.XX | $ | |
| Variable Costs | XX,XXX X $X.XX | $ | ||
| Contribution Margin | $ | |||
| Fixed Costs | $ | |||
| Net Income | $ | |||
| Requirement 8 | ||||
| Sales Mix | ||||
| Current | Specialty | Total | ||
| Expected Sales Units | X | X | ||
| Revenue = Sales X Price | $ | $ | $ | |
| Variable Costs X Units | $ | $ | $ | |
| Contribution Margin | $ | $ | $ | |
| Fixed Costs | $ | $ | $ | |
| Operating Income | $ | |||
| Prior Net Income FromRequirement 1 | $ | |||
| Additional Operating Income | (Operating Income Above Less Prior Income) | $ | ||
| Decision With Explanation | ||||
