absorption costing the 4 unit cost difference is contained in the inventory

# Absorption costing the 4 unit cost difference is

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absorption costing, the \$4 unit cost difference is contained in the inventory, whereas under variable costing, the \$4 unit cost difference is expensed as a period cost. ACCOUNTING - Tenth Edition Solutions Manual Chapter 21: Cost-Volume-Profit Analysis Page 97 of 132 P21-56B Requirements 1. Fill in the blanks for each missing value. (Round the contribution margin per unit to the nearest cent.) 2. Which company has the lowest breakeven point in sales dollars? 3. What causes the low breakeven point? Solution: Requirement 1 Company Up Down Left Right Sales Revenue \$900,000 \$(d) 520,000 \$710,000 \$(j) 300,000 Variable Costs (a) 540,000 208,000 319,500 240,000 Fixed Costs (b) 350,000 135,000 235,000 (k) 11,000 Operating Income (Loss) \$10,000 \$ (e)177,000 \$(g) 155,500 \$49,000 Units Sold 100,000 16,000 (h) 5,000 (l) 6,000 Contribution Margin per Unit \$3.60 \$ (f)19.50 \$78.10 \$10.00 Contribution Margin Ratio (c) 40% 60% (i) 55% 20% ACCOUNTING - Tenth Edition Solutions Manual Chapter 21: Cost-Volume-Profit Analysis Page 98 of 132 Calculations: a. \$900,000 – (100,000 units × \$3.60 per unit) b. \$900,000 – \$540,000 – \$10,000 c. (\$900,000 – \$540,000) / \$900,000 d. \$208,000 / (1 – 60%) e. \$520,000 – \$208,000 – \$135,000 f. (\$520,000 – \$208,000) / 16,000 units g. \$710,000 – \$319,500 – \$235,000 h. (\$710,000 – \$319,500) / \$78.10 per unit i. (\$710,000 – \$319,500) / \$710,000 j. \$240,000 / (1 – 20%) k. \$300,000 – \$240,000 – \$49,000 l. (\$300,000 – \$240,000) / \$10 per unit Requirement 2 Required sales in units = Fixed costs + Target profit Contribution margin ratio Up = \$350,000 + \$0 = \$875,000 40% Down = \$135,000 + \$0 = \$225,000 60% Left = \$235,000 + \$0 = \$427,273 55% ACCOUNTING - Tenth Edition Solutions Manual Chapter 21: Cost-Volume-Profit Analysis Page 99 of 132 Right = \$11,000 + \$0 = \$55,000 20% The breakeven point in sales dollars for Right Company is \$55,000. This is the lowest breakeven point in sales dollars. Requirement 3 The low breakeven point for Right Company is primarily caused by its low fixed costs. ACCOUNTING - Tenth Edition Solutions Manual Chapter 21: Cost-Volume-Profit Analysis Page 100 of 132 P21-57B Requirements 1. Compute revenue and variable costs for each show. 2. Use the equation approach to compute the number of shows British Productions must perform each year to break even. 3. 4. Solution: Requirement 1 Sales revenue per show = 900 tickets × \$65 per ticket = \$58,500 Variable cost per show = Cost of performers + Cost of programs = (55 performers × \$330 per performer) + (900 guests × \$9 per guest) = \$18,150 + \$8,100 = \$26,250 per show Use the contribution margin ratio approach to compute the number of shows needed each year to earn a profit of \$4,128,000. Is this profit goal realistic? Give your reasoning. Prepare British Productions’ contribution margin income statement for 155 shows performed in 2014. Report only two categories of costs: variable and fixed. ACCOUNTING - Tenth Edition Solutions Manual Chapter 21: Cost-Volume-Profit Analysis Page 101 of 132 Requirement 2 Net sales revenue Variable costs Fixed costs = Operating income (\$58,500 × Nbr. of shows) (\$26,250 × Nbr. of shows) \$580,500 = \$0 [(\$58,500 – \$26,250) × Nbr. of shows] = \$580,500 \$32,250 × Nbr. of shows = \$580,500 Nbr. of shows = \$580,500 / \$32,250 Nbr. of shows = 18 shows Requirement 3 Contribution margin ratio = Contribution margin / Net sales revenue = (Net sales revenue – Variable costs) / Net sales revenue = \$58,500 – \$26,250 / \$58,500 = \$32,250 / \$58,500 = 55.13% Required sales in dollars = Fixed costs + Target profit Contribution margin ratio = \$580,500 + \$4,128,000 = \$8,540,722 55.13% ACCOUNTING - Tenth Edition Solutions Manual Chapter 21: Cost-Volume-Profit Analysis Page 102 of 132 Required sales in units = Required sales in dollars Sales price per show = \$8,540,722 = 146 shows \$58,500 per show Because 146 shows is less than the maximum possible shows of 155, the profit goal of \$4,128,000 is a realistic profit goal.  #### You've reached the end of your free preview.

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