Solution 145(15–20 min.)(a)Contribution Margin÷Net Income=Degree of Operating LeverageAntique$350,000÷$200,000=1.75Contemporary$490,000÷$200,000=2.456 - 36
Cost-Volume-Profit Analysis: Additional IssuesSolution 145(cont.)(b)Antique CompanyContemporary CompanySales revenue$560,000*$560,000*Variable costs280,000**168,000***Contribution margin280,000392,000Fixed costs150,000290,000Net income$130,000$102,000*$700,000 × .8**($350,000 ÷ $700,000) × $560,000***($210,000 ÷ $700,000) × $560,000Ex. 146An investment banker is analyzing two companies that specialize in the production and sale of gourmet cappuccino and chai mixes. Fireside Company uses a labor-intensive approach and Stirring Moments Company uses a mechanized system. Variable costing income statements for the two companies are shown below:FiresideStirring MomentsSales$1,000,000$1,000,000Variable costs650,000300,000Contribution margin350,000700,000Fixed costs150,000500,000Net Income$ 200,000$ 200,000The investment banker is interested in acquiring one of these companies. However, she is concerned about the impact that each company’s cost structure might have on its profitability.Instructions(a)Calculate each company’s degree of operating leverage.(b)Determine the effect on each company’s net income if sales decrease by 10% and if sales increase by 20%. Do not prepare income statements.Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business EconomicsSolution 146(8–10 min.)(a)Contribution Margin÷Net Income=Degree of Operating LeverageFireside$350,000÷$200,000=1.75St. Moments$700,000÷$200,000=3.50(b)Degree of% Change in% Change in Sales×Operating Leverage=Net IncomeFireside(10%)×1.75=(17.5%)St. Moments(10%)×3.50=(35.0%)Fireside20%×1.75=35.0%St. Moments20%×3.50=70.0%6 - 37
Test Bank for Managerial Accounting, Fifth EditionaEx. 147Indicate with a check mark whether each of the following would be a product cost or a period cost under an absorption or a variable system for Carson Company.AbsorptionVariableProductPeriodProductPerioda.Direct materials____________________________________b.Direct labor____________________________________c.Factory utilities____________________________________d.Factory rent____________________________________e.Indirect labor____________________________________f.Factory supervisor salaries____________________________________g.Factory maintenance (variable)____________________________________h.Factory depreciation____________________________________i.Sales salaries____________________________________j.Sales commissions____________________________________Ans: N/A, SO: 6, Bloom: K, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Cost ManagementaSolution 147(10–15 min.)AbsorptionVariableProductPeriodProductPerioda.Direct materials___________________________________b.Direct labor___________________________________c.Factory utilities___________________________________d.Factory rent___________________________________e.Indirect labor___________________________________f.Factory supervisor salaries___________________________________g.Factory maintenance (variable)___________________________________h.Factory depreciation___________________________________i.Sales salaries___________________________________j.Sales commissions___________________________________6 - 38
Cost-Volume-Profit Analysis: Additional IssuesaEx. 148Fresh Air Products Company manufactures and sells a variety of camping products. Recently the company opened a new plant to manufacture a deluxe portable cooking unit. Cost and sales data for the first month of operations are shown below:Manufacturing CostsFixed Overhead$120,000Variable overhead$3 per unitDirect labor$12 per unitDirect material$30 per unitBeginning inventory0 unitsUnits produced10,000Units sold8,000Selling and Administrative CostsFixed$200,000Variable$4 per unit soldThe portable cooking unit sells for $110. Management is interested in the opening month’s results and has asked for an income statement.InstructionsAssume the company uses absorption costing. Calculate the production cost per unit and prepare an income statement for the month of June, 2011.Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting
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