00 50000 contribution margin 186000 fixed costs

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Variable selling and administrative (10,000 x 5.00) 50,000 Contribution margin $186,000 Fixed costs: Overhead (11,000 x $2.85) $31,350 Selling and administrative 81,000 112,350 Operating income $ 73,650
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398 4. In years when the number of units produced is greater than the number of units sold, such as in this first year, absorption costing net income will be higher than variable costing net income because under absorption costing, some of the fixed overhead will be associated with finished goods, an asset on the balance sheet. Under variable costing, all of the fixed overhead is expensed. 5. a. Absorption costing is required under GAAP because in theory, all costs of production should be treated as product costs, associated with finished goods inventory and carried as an asset until the units are sold. Fixed overhead is a necessary cost of production, and is thus treated as an inventoriable cost. b. Variable costing is more appropriate for internal decision making, because it is not affected by the level of production, as is absorption costing. Under absorption, net income will increase as more units are produced due to the inventorying of fixed overhead. Such is not the case under variable costing, where fixed overhead is expensed as incurred. Answer to Part 2 Practice Questions Answer: Question 2.1 – Foyle Inc. 1. a. Year 1 Year 2 Year 3 Revenue 100% 100% 100% Cost of goods sold 60% 50% 60% Gross profit 40% 50% 40% Sales & marketing 10% 8.3% 6.7% General & admin 7.5% 8.3% 10% Research & development 7.5% 8.3% 3.3% Operating income 15% 25% 20% b. Year 1 Year 2 Year 3 Revenue 100% 120% 150% Cost of goods sold 100% 100% 150% Gross profit 100% 150% 150% Sales & marketing 100% 100% 100% General & admin 100% 133% 200% Research & development 100% 133% 66.7% Operating income 100% 200% 200%
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399 2. Revenue Year 2: ($24,000 - $20,000)/$20,000 = 20% Year 3: ($30,000 – $24,000)/$24,000 = 25% Operating income Year 2: ($6,000 - $3,000)/$3,000 = 100% Year 3: ($6,000 – $6,000)/$6,000 = 0% 3. Foyle’s gross profit margin 50% was comparable in Year 2 to competitor 52% and industry average 50%, but Foyle has fallen to 40% in Year 3. Foyle’s operating income percentage 25% was the same in Year 2 to competitor and industry average at 25%, but Foyle has fallen to 20% in Year 3. Foyle in Year 3 has lower Sales and marketing than Competitor and Industry Average (6.7% vs. 11.1% and 10.7%), but higher in General and admin (10% vs. 7% and 8.9%). Foyle’s Research and development is substantially below both Competitor and Industry Average (3.3% vs. 8.9% and 5.4%) Answer: Question 2.2 – Bockman Industries 1. Year 2 Year 1 Revenues 100.0% 100.0% Cost of Goods Sold 48.4 47.5 Gross Margin 51.6 52.5 Selling Expenses 14.8 14.7 Administrative Expenses 17.5 17.5 Loss Due to Strike .3 Interest Expense .5 .5 Income before Taxes 18.4 19.8 Income Tax Expense 7.4 7.9 Income from Continuing Operations 11.1 11.9 Discontinued Operations 1.1 _____ Net Income 12.2 11.9 2. a. Sales increased but the gross margin percentage decreased. This could be caused by: a change in the product mix a decrease in the selling price which resulted in selling more units but if the cost per unit did not change or increased, the gross margin percentage would increase an increase in the cost of goods that was not passed along to customers; sales could have increased because competition did raise their prices b. Selling expenses remained fairly constant as a percentage of sales.
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