REVIEW SOLS - 1 Johnson Realty bought a 2,000-acre island...

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1. Johnson Realty bought a 2,000-acre island for $10,000,000 and divided it into 200 equal size lots. As the lots are sold, they are cleared at an average cost of $5,000. Storm drains and driveways are installed at an average cost of $8,000 per site. Sales commissions are 10% of selling price. Administrative costs are $850,000 per year. The average selling price was $160,000 per lot during 20X5 when 50 lots were sold. During 20X6, the company bought another 2,000-acre island and developed it exactly the same way. Lot sales in 20X6 totaled 300 with an average selling price of $160,000. All costs were the same as in 20X5. Required: Prepare income statements for both years using both absorption and variable costing methods. Answer: Cost per site: Absorption Variable Land cost $10,000,000/200 sites $50,000 $0 Clearing costs 5,000 5,000 Improvements 8,000 8,000 Total $63,000 $13,000 Absorption-costing income statements : 20X5 20X6 Sales $8,000,000 $48,000,000 Cost of goods sold: 50 × ($50,000 + $8,000 + $5,000) 3,150,000 300 × ($50,000 + $8,000 + $5,000) ________ 18,900,000 Gross margin $4,850,000 $29,100,000 Variable marketing 800,000 4,800,000 Fixed administrative 850,000 850,000 Operating income $3,200,000 $23,450,000 Variable-costing income statements : 20X5 20X6 Sales $8,000,000 $48,000,000 Variable expenses: Cost of operations: 50 × $13,000 650,000 300 × $13,000 3,900,000 Selling expenses 800,000 4,800,000 Contribution margin $6,550,000 $39,300,000 Fixed expenses: Land 10,000,000 10,000,000 Administrative 850,000 850,000 Operating income $(4,300,000) $28,450,000
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2. The manager of the manufacturing division of Iowa Windows does not understand why income went down when sales went up. Some of the information he has selected for evaluation include: January February Units produced 40,000 30,000 Units sold 30,000 40,000 Sales $600,000 $800,000 Beginning inventory 0 150,000 Cost of production 600,000 550,000 Ending inventory 150,000 0 Operating income 70,000 35,000 The division operated at normal capacity during January. Variable manufacturing cost per unit was $5, and the fixed costs were $400,000. Selling and administrative expenses were all fixed. Required: Explain the profit differences. How would variable costing income statements help the manager understand the division's operating income? Answer: The 10,000 units in inventory being assigned fixed manufacturing costs cause the operating income difference. The fixed manufacturing cost assigned to the inventory is carried into the next month. The fixed costs per unit were $10 per unit ($400,000/40,000), therefore, $100,000 (10,000 × $10) were carried into February. Variable costing helps avoid confusion by relating variations in expenses to sales rather
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This document was uploaded on 11/03/2011 for the course ACCOUNTING 451 at Rutgers.

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REVIEW SOLS - 1 Johnson Realty bought a 2,000-acre island...

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