PFM Chap no 22 all solutions

Practice Problem
BE22-1 Monthly production costs in Dilts Company for two levels of production are as follows. Cost
2,000 Units 4,000 Units Indirect labor $10,000 $20,000 Supervisory salaries 5,000 5,000 Maintenance
4,000 6,000

Answer:
Indirect labor is a variable cost because it increases in total directly and proportionately with
the change in the activity level.

Supervisory salaries is a fixed cost because it remains the same in total regard-less of changes
in the activity level.

Maintenance is a mixed cost because it increases in total but not proportionately with changes
in the activity level.

BE22-2 For Lodes Company, the relevant range of production is 40–80% of capacity. At 40% of
capacity, a variable cost is $4,000 and a fi xed cost is $6,000. Diagram the behavior of each cost
within the relevant range assuming the behavior is linear.

Answer:

 
BE22-3 For Wesland Company, a mixed cost is $15,000 plus $18 per direct labor hour. Diagram the
behavior of the cost using increments of 500 hours up to 2,500 hours on the horizontal axis and
increments of $15,000 up to $60,000 on the vertical axis.

Answer:

BE22-4 Bruno Company accumulates the following data concerning a mixed cost, using miles as
the activity level. Miles Total Miles Total Driven Cost Driven Cost January 8,000 $14,150
March 8,500 $15,000 February 7,500 13,500 April 8,200 14,490 Compute the variable- and fi
xed-cost elements using the high-low method

Answer:

$1,500 ÷ 1,000 = $1.50 x Variable cost per mile.

The mixed cost is $2,250 plus $1.50 per mile.

BE22-5 Determine the missing amounts. Classify costs as variable, fi xed, or mixed. (LO 1)
Diagram the behavior of costs within the relevant range. (LO 1) Diagram the behavior of a
mixed cost. (LO 1) Determine variable- and fi xed-cost elements using the high-low method.
(LO 2) Determine missing amounts for contribution margin. (LO 3) Unit Selling Unit Variable
Unit Contribution Contribution Price Costs Margin Margin Ratio 1. $640 $352 (a) (b) 2. $300 (c)
$93 (d) 3. (e) (f) $325 25%

BE22-6 Rice Company has a unit selling price of $520, variable costs per unit of $286, and fi xed costs of
$163,800. Compute the break-even point in units using (a) the mathematical equation and (b) unit
contribution margin.

Answer:
 

(a)        $520Q – $286Q – $163,800 = $0

          $234Q = $163,800

                     Q = 700 units

(b)      Contribution margin per unit $234, or ($520 – $286)

          X = $163,800 ÷ $234

          X = 700 units

BE22-7 Presto Corp. had total variable costs of $180,000, total fi xed costs of $110,000, and
total revenues of $300,000. Compute the required sales in dollars to break even.

Answer:
Contribution margin ratio  = [(€300,000 – €180,000) ÷ €300,000] = 40%
     Required sales                = €110,000 ÷ 40% = €275,000

BE22-8 For Flynn Company, variable costs are 70% of sales, and fi xed costs are $195,000.
Management’s net income goal is $75,000. Compute the required sales in dollars needed to achieve
management’s target net income of $75,000. (Use the contribution margin approach.

Answer:
 
If variable costs are 70% of sales, the contribution margin ratio is ($1 – $0.70) ÷ $1 = .30.

Required sales in dollars = ($195,000 + $75,000) ÷ .30 = $900,000

BE22-9 For Astoria Company, actual sales are $1,000,000, and break-even sales are $800,000. Compute
(a) the margin of safety in dollars and (b) the margin of safety ratio.

Answer:
 

a.         Margin of safety = $1,000,000 – $800,000 = $200,000

b.         Margin of safety ratio = $200,000 ÷ $1,000,000 = 20%

BE22-10 Deines Corporation has fixed costs of $480,000. It has a unit selling price of $6, unit variable
costs of $4.40, and a target net income of $1,500,000. Compute the required sales in units to achieve its
target net income.

Answer:
 

Contribution margin per unit $1.60 is ($6.00 – $4.40)

Required sales in units                 = ($480,000 + $1,500,000) ÷ $1.60 = 1,237,500.

BE22-11 Hamby Inc. has sales of $2,000,000 for the fi rst quarter of 2017. In making the sales,
the company incurred the following costs and expenses. Compute the break-even point. (LO 4)
Compute the break-even point. (LO 4) Compute sales for target net income. (LO 5) Compute the
margin of safety and the margin of safety ratio. (LO 5) Compute the required sales in units for
target net income. (LO 5) Prepare CVP income statement. (LO 6) Prepare a CVP income
statement for the quarter ended March 31, 2017
BE22-12 Harris Company’s fi xed overhead costs are $4 per unit, and its variable overhead costs
are $8 per unit. In the fi rst month of operations, 50,000 units are produced, and 46,000 units are
sold. Write a short memo to the chief fi nancial offi cer explaining which costing approach will
produce the higher income and what the difference will be.
E22-1 Bonita Company manufactures a single product. Annual production costs incurred in the
manufacturing process are shown below for two levels of production. Defi ne and classify
variable, fi xed, and mixed costs. (LO 1) Costs Incurred Production in Units 5,000 10,000 Total
Cost/ Total Cost/ Production Costs Cost Unit Cost Unit Direct materials $8,000 $1.60 $16,000
$1.60 Direct labor 9,500 1.90 19,000 1.90 Utilities 2,000 0.40 3,300 0.33 Rent 4,000 0.80 4,000
0.40 Maintenance 800 0.16 1,400 0.14 Supervisory salaries 1,000 0.20 1,000 0.10 Find more at
www.downloadslide.com Exercises 995 Instructions (a) Defi ne the terms variable costs, fi xed
costs, and mixed costs. (b) Classify each cost above as either variable, fi xed, or mixed.

Answer:
 

(a)      The determination as to whether a cost is variable, fixed, or mixed can be made by comparing the cost
in total or on a per-unit basis at two different levels of production.

Variable Costs   Vary in total but remain constant on a per-unit basis.

Fixed Costs Remain constant in total but vary on a per-unit basis.
Contain both a fixed element and a variable element.
Mixed Costs
Vary both in total and on a per-unit basis.

(b)     Using these criteria as a guideline, the classification is as follows:

Direct materials   Variable   Rent   Fixed

Direct labor Variable Maintenance Mixed

Utilities Mixed Supervisory salaries Fixed

E22-2 The controller of Norton Industries has collected the following monthly expense data for
use in analyzing the cost behavior of maintenance costs. Determine fi xed and variable costs
using the high-low method and prepare graph. (LO 1, 2) Instructions (a) Determine the fi xed-
and variable-cost components using the high-low method. (b) Prepare a graph showing the
behavior of maintenance costs, and identify the fi xedand variable-cost elements. Use 100-hour
increments and $1,000 cost increments.

Answer:
(a)      
Maintenance Costs:

Thus, maintenance costs are $600 per month plus $7 per machine hour.

(b)
E22-3 Family Furniture Corporation incurred the following costs. 1. Wood used in the
production of furniture. 2. Fuel used in delivery trucks. 3. Straight-line depreciation on factory
building. 4. Screws used in the production of furniture. 5. Sales staff salaries. 6. Sales
commissions. 7. Property taxes. 8. Insurance on buildings. 9. Hourly wages of furniture
craftsmen. 10. Salaries of factory supervisors. 11. Utilities expense. 12. Telephone bill.
Instructions Identify the costs above as variable, fi xed, or mixed.

Answer:
 

  1. Wood used in the production of furniture. Variable.

  2. Fuel used in delivery trucks. Variable.

  3. Straight-line depreciation on factory building. Fixed.

  4. Screws used in the production of furniture. Variable.

  5. Sales staff salaries. Fixed.

   6. Sales commissions. Variable.

  7. Property taxes. Fixed.

  8. Insurance on buildings. Fixed.

  9. Hourly wages of furniture craftsmen. Variable.

10. Salaries of factory supervisors. Fixed.

11. Utilities expense. Mixed.

12. Telephone bill. Mixed.

E22-4 Marty Moser wants Moser Company to use CVP analysis to study the effects of changes
in costs and volume on the company. Marty has heard that certain assumptions must be valid in
order for CVP analysis to be useful. Instructions Prepare a memo to Marty Moser concerning the
assumptions that underlie CVP analysis.

Answer:
MEMO

To: Marty Moser

From: Student

Re: Assumptions underlying CVP analysis

CVP analysis is a useful tool in analyzing the effects of changes in costs and volume on a
company's profits. However, there are some assumptions which underlie CVP analysis. When
these assumptions are not valid, the results of CVP analysis may be inaccurate.

The five assumptions are:

1. The behavior of both costs and revenues is linear throughout the relevant range of the
activity index.

2. Costs can be classified accurately as either fixed or variable.

3. Changes in activity are the only factors that affect costs.

4. All units produced are sold.

5. When more than one type of product is sold, the sales mix will remain constant.

If you want further explanation of any of these assumptions, please contact me.
E22-5 All That Blooms provides environmentally friendly lawn services for homeowners. Its
operating costs are as follows

Depreciation $1,400 per month Advertising $200 per month Insurance $2,000 per month Weed
and feed materials $12 per lawn Direct labor $10 per lawn Fuel $2 per lawn All That Blooms
charges $60 per treatment for the average single-family lawn. Instructions Determine the
company’s break-even point in (a) number of lawns serviced per month and (b) dollars

( Answer:
(a)

Contribution margin per lawn = $60 - ($12 + $10 + $2)

Contribution margin per lawn = $36

Contribution margin ratio = $36 / $60 = 60%

Fixed costs = $1,400 + $200 + $2,000 = $3,600

Break-even point in lawns = $3,600 / $36 = 100

(b) Break-even point in dollars = 100 lawns X $60 per lawn

= $6,000 per month

OR

Fixed costs / Contribution margin ratio = $3,600 / .60

= $6,000 per month

E22-6 The Palmer Acres Inn is trying to determine its break-even point during its off-peak season. The
inn has 50 rooms that it rents at $60 a night. Operating costs are as follows. Compute break-even point.
(LO 3, 4) Salaries $5,900 per month Utilities $1,100 per month Depreciation $1,000 per month
Maintenance $100 per month Maid service $14 per room Other costs $28 per room

Instructions Determine the inn’s break-even point in (a) number of rented rooms per month and (b)
dollars.

Answer:
a.      
Contribution margin per room = $60 – ($14 + $28)
              
 Contribution margin per room = $18  
             
$18 ÷ $60 = 30%
Contribution margin ratio =

Fixed costs = $5,900 + $1,100 + $1,000 + $100 = $8,100

Break-even point in rooms = $8,100 ÷ $18 = 450

b.
Break-even point in dollars                                     =        450 rooms X $60 per room
                                                                                             =        $27,000 per month
OR
Fixed costs ÷ Contribution margin ratio                =        $8,100 ÷ .30
                                                                                              =       $27,000 per month
E22-7 In the month of March, Style Salon services 560 clients at an average price of $120. During the
month, fi xed costs were $21,024 and variable costs were 60% of sales. Instructions (a) Determine the
contribution margin in dollars, per unit, and as a ratio. (b) Using the contribution margin technique,
compute the break-even point in dollars and in units

Answer:
(a)      Contribution margin in dollars:                       Sales = 560 X $120 =                   $67,200

                                                                                  Variable costs = $67,200 X .60 =        40,320

                                                                                  Contribution margin                           $26,880

          Contribution margin per unit:                          $120 – $72 ($120 X 60%) = $48.

          Contribution margin ratio:                               $48 ÷ $120 = 40%.

(b)      Break-even sales in dollars:                              = $52,560.

          Break-even sales in units:                                  = 438.

E22-8 Spencer Kars provides shuttle service between four hotels near a medical center and an
international airport. Spencer Kars uses two 10-passenger vans to offer 12 round trips per day. A recent
month’s activity in the form of a cost-volume-profi t income statement is shown below. Compute
contribution margin and break-even point. (LO 3, 4) Compute break-even point. (LO 3, 4) Instructions (a)
Calculate the break-even point in (1) dollars and (2) number of fares. (b) Without calculations,
determine the contribution margin at the break-even point.

Answer:
(a)

(b) 

At the break-even point fixed costs and contribution margin are equal. Therefore, the
contribution margin at the break-even point would be $18,000

E22-9 In 2016, Manhoff Company had a break-even point of $350,000 based on a selling price of $5 per
unit and fi xed costs of $112,000. In 2017, the selling price and the variable costs per unit did not
change, but the break-even point increased to $420,000. Instructions (a) Compute the variable costs per
unit and the contribution margin ratio for 2016. (b) Compute the increase in fi xed costs for 2017.

Answer:
 

(a)     Unit contribution margin                =  Fixed cost / Break-even sales in units

                                                                 =  $112,000 / $350,000 ÷$5

                                                                 =  $1.60

          Variable cost per unit                     =  Unit selling price – Unit contribution margin

                                                                 =  $5.00 – $1.60

                                                                 =  $3.40

          OR

                                                                 =  70,000 X $5.00 = 70,000X + $112,000

                                                                 =  where X = Variable cost per unit

                                                                 =  Variable cost per unit = $3.40

          Contribution margin ratio                  =   $1.60 ÷ $5.00 = 32%

(b)   Fixed costs ÷ Contribution margin ratio = Break-even sales in dollars

        Fixed costs ÷ .32                                      = $420,000

                                                                         = $134,400 ($420,000 X.32)

Since fixed costs were $112,000 in 2016, the increase in 2017 is $22,400 ($134,400 –
$112,000).

E22-10 Billings Company has the following information available for September 2017. Compute
variable costs per unit, contribution margin ratio, and increase in fi xed costs. (LO 3, 4) Prepare
CVP income statements. (LO 3, 4) Unit selling price of video game consoles $ 400 Unit variable
costs $ 280 Total fi xed costs $54,000 Units sold 600 Instructions (a) Compute the unit
contribution margin. (b) Prepare a CVP income statement that shows both total and per unit
amounts. (c) Compute Billings’ break-even point in units. (d) Prepare a CVP income statement
for the break-even point that shows both total and per unit amounts.

Answer:
(a) and (b)
(c)              Sales = Variable costs + Fixed costs

                 $400X = $280X + $54,000

                 $120X = 54,000
                           X = 450 units

(d)

E22-11 Naylor Company had $210,000 of net income in 2016 when the selling price per unit was $150,
the variable costs per unit were $90, and the fi xed costs were $570,000. Management expects per unit
data and total fi xed costs to remain the same in 2017. The president of Naylor Company is under
pressure from stockholders to increase net income by $52,000 in 2017. Instructions (a) Compute the
number of units sold in 2016. (b) Compute the number of units that would have to be sold in 2017 to
reach the stockholders’ desired profi t level. (c) Assume that Naylor Company sells the same number of
units in 2017 as it did in 2016. What would the selling price have to be in order to reach the
stockholders’ desired profi t level?

Answer:
 

(a)      Units sold in 2016 = $570,000 + $210,000 / $150 – $90 = 13,000 units

(b)      Units needed in 2017 = $570,000 + $262,000 / $150 – $90 = 13,867 units (rounded)

           *$210,000 + $52,000 = $262,000

(c)      $570,000 + $262,000 / X – $90 = 13,000 units, where X = new selling price

                                             $832,000 = 13,000X – $1,170,000

                                           $2,002,000 = 13,000X

                                                         X = $154

E22-12 Yams Company reports the following operating results for the month of August: sales $400,000
(units 5,000), variable costs $240,000, and fi xed costs $90,000. Management is considering the
following independent courses of action to increase net income. 1. Increase selling price by 10% with no
change in total variable costs or units sold. 2. Reduce variable costs to 55% of sales. Instructions
Compute the net income to be earned under each alternative. Which course of action will produce the
higher net income?

Answer:
1.         Unit sales price = $400,000 ÷ 5,000 units = $80

            Increase selling price to $88, or ($80 X 110%).

            Net income = $440,000 – $240,000 – $90,000 = $110,000.

2.         Reduce variable costs to 55% of sales.

            Net income = $400,000 – $220,000 – $90,000 = $90,000.

Alternative 1, increasing selling price, will produce the higher net income.
E22-13 Glacial Company estimates that variable costs will be 62.5% of sales, and fi xed costs will total
$600,000. The selling price of the product is $4. Instructions (a) Prepare a CVP graph, assuming
maximum sales of $3,200,000. (Note: Use $400,000 increments for sales and costs and 100,000
increments for units.) (b) Compute the break-even point in (1) units and (2) dollars. (c) Assuming actual
sales are $2 million, compute the margin of safety in (1) dollars and (2) as a ratio.

Answer:
 

(a)

(b)      1.       Break-even sales in units:

                               $4X = $2.50X + $600,000

                         $1.50X = $600,000
                                 X = 400,000 units

          2.       Break-even sales in dollars:

                                 X = .625X + $600,000

                           .375X = $600,000

                                 X = $1,600,000 or $600,000 ÷ 37.5%

(c)      1.       Margin of safety in dollars: $2,000,000 – $1,600,000 = $400,000

          2.       Margin of safety ratio: $400,000 ÷ $2,000,000 = 20%

E22-14 Carey Company had sales in 2016 of $1,560,000 on 60,000 units. Variable costs totaled $900,000,
and fi xed costs totaled $500,000. A new raw material is available that will decrease the variable costs
per unit by 20% (or $3). However, to process the new raw material, fi xed operating costs will increase
by $100,000. Management feels that one-half of the decline in the variable costs per unit should be
passed on to customers in the form of a sales price reduction. The marketing department expects that
this sales price reduction will result in a 5% increase in the number of units sold. Instructions Prepare a
projected CVP income statement for 2017 (a) assuming the changes have not been made, and (b)
assuming that changes are made as described

Answer:
 

(a)                                                           

CAREY COMPANY

CVP Income Statement

For the Year Ended December 31, 2017

                                                                                                                                                                     

    Total   Per Unit

Sales (60,000 X $26)..............................................................   $1,560,000   $26

Variable costs (60,000 X $15)................................................    900,000  15

Contribution margin (60,000 X $11)......................................    660,000 $11

Fixed costs.............................................................................    500,000

Net income............................................................................. $  160,000

(b)                                                          

CAREY COMPANY

CVP Income Statement

For the Year Ended December 31, 2017

                                                                                                                                                                     

    Total   Per Unit

Sales [(60,000 X 105%) X $24.50*]......................................   $1,543,500   $24.50

Variable costs (63,000 X $12.00**).......................................    756,000  12.00

Contribution margin (63,000 X $12.50).................................    787,500 $12.50

Fixed costs ($500,000 + $100,000)........................................    600,000

Net income............................................................................. $  187,500

*$26.00 – ($3 X 50%) = $24.50.

**$15.00 – ($15 X 20%) = $12.00.

E22-15 Crate Express Co. produces wooden crates used for shipping products by ocean liner. In 2017,
Crate Express incurred the following costs. Compute various components to derive target net income
under different assumptions. (LO 4, 5) Compute net income under different alternatives. (LO 5) Prepare
a CVP graph and compute break-even point and margin of safety. (LO 4, 5) Prepare a CVP income
statement before and after changes in business environment. (LO 6) Compute manufacturing cost under
absorption and variable costing and explain difference. (LO 7) Wood used in crate production $54,000
Nails (considered insignifi cant and a variable expense) $ 350 Direct labor $43,000 Utilities for the plant:
$1,500 each month, plus $0.50 for each kilowatt-hour used each month Rent expense for the plant for
the year $21,400 Assume Crate Express used an average 500 kilowatt-hours each month over the past
year. Instructions (a) What is Crate Express’s total manufacturing cost if it uses a variable costing
approach? (b) What is Crate Express’s total manufacturing cost if it uses an absorption costing
approach? (c) What accounts

Answer:
(a)
 Utility Expense

Months in Variable
X Kilowatt hours X Hourly Charge =
a year Utilities

12 X 500 X $0.50 = $3,000

Months in Fixed
X =
a year Monthly Fee Utilities

12 X $1,500 = $18,000

Variable Costing

Labor:

Crate builders $43,000

Material:

Wood 54,000

Variable Overhead:

Utilities 3,000

Nails         350

Total manufacturing costs $100,350

(b)

Absorption Costing

Labor:

Crate builders $ 43,000

Material:

Wood 54,000

Variable overhead:

Utilities 3,000

Nails 350

Fixed overhead:
 Utilities 18,000

Rent     21,400

Total manufacturing costs $139,750

(c) The entire difference in costs between the two methods is due to the fact that fixed
overhead is included as part of manufacturing costs only under the absorption costing
method. This difference amounts to $39,400 ($18,000 + $21,400).

*E22-16 Montier Corporation produces one product. Its cost includes direct materials ($10 per
unit), direct labor ($8 per unit), variable overhead ($5 per unit), fi xed manufacturing
($225,000), and fi xed selling and administrative ($30,000). In October 2017, Montier
produced 25,000 units and sold 20,000 at $50 each. Instructions (a) Prepare an absorption
costing income statement. (b) Prepare a variable costing income statement. (c) Explain
the difference in net income in the two income statements.

Answer:
 

(a)                                                                             

                                                                  MONTIER CORPORATION

                                                                      Income Statement

                                                   For the Month Ended October 31, 2014

                                                                  (Absorption Costing)

                                                                                                                                                            

Sales revenue (20,000 X $50)....................................................................                         $1,000,000

Cost of goods sold (20,000 X $32*).........................................................                               640,000

Gross profit................................................................................................                             360,000

Selling and administrative expenses..........................................................                              30,000

Net income................................................................................................                            $  330,000

   *$10 + $8 + $5 + ($225,000 ÷ 25,000)

 
 

(b)

                                                                                   

                                                                  MONTIER CORPORATION

                                                                      Income Statement

                                                  For the Month Ended October 31, 2014

                                                                      (Variable Costing)

                                                                                                                                                            

Sales revenue (20,000 X $50)...................................................................                         $1,000,000 

Cost of goods sold (20,000 X $23)...........................................................                              460,000 

Contribution margin..................................................................................                            540,000 

Fixed costs ($225,000 + $30,000).............................................................                              255,000

Net income................................................................................................                          $  285,000

(c)... Under variable costing, all fixed manufacturing costs ($225,000) are expensed. Under
absorption costing, some of the fixed manufacturing costs have been deferred to a later
period [5,000 X ($225,000/25,000) = $45,000].