Chapter 5 - Cost Volume Profit
If fixed costs are equal to 0, what is the relationship between a company's contribution margin and operating income?
What is: They are equal
Carson Inc. produced 600 snow blowers and sold only 500. Which basis of accounting, absorption or variable, will produce higher operating income?
Absorption as a portion of the fixed manufacturing costs will be included in inventory on the balance sheet.
What is the difference between the static and flexible budget?
The static budget is prepared for one volume of sales only; the flexible budget is prepared for multiple sales levels.
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Association of American Universities (AAU)
Brody's Buttons has the following information:
Sales price $315
Variable cost per unit $210
Fixed cost per month $11,500
What is the contribution margin ratio?
33.33%
CM/Sales price:
Contribution margin = 315 - 210 = $105
105/315 = 33.33%
Why do companies have to use absorption costing for reporting to the SEC and banks?
It is required by Generally Accepted Accounting Principals
What is the final product of the operating budget?
The budgeted income statement
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Ruth Inc. has total fixed and variable costs of $600,000, of which $150,000 are variable at a sales level of 30,000 units. What are the total costs if the volume decreases to 20,000 units?
$550,000
Fixed costs = $600,000 total costs - 150,000 = $450,000
Variable cost/unit = $150,000 / 30,000 units = $5
To calculate total costs at 20,000 units:
Quantity 20,000 * cost/unit $5 = $100,000 variable costs
Fixed costs $450,000
Total costs $550,000
Last year, Adam Company produced 15,000 units and sold 12,000 units. The company had no beginning inventory. They incurred the following costs:
Direct materials per unit 50
Direct labor per unit 10
Variable overhead per unit 5
Total fixed manufacturing overhead $200,000
Total selling and administrative $150,000
Adam's product (inventoriable) cost per unit under variable costing is ________.
$65; all other costs would be expensed as incurred.
Direct materials 50
Direct labor 10
Variable OH 5
Total 65
Jack is preparing the production budget for Candy Cane Corporation (CCC). Jack determines that the production department generally holds 20% of the following month's budgeted sales in ending inventory each month. From the sales and marketing department, Jack learned that budgeted unit sales for the next 3 months are: January; 1,000 units, February; 1,500 units, and March; 2,500 units. How many units should Jack have the production department produce in February?
1,700 units
Ending inventory = 20% March sales
2,500 * .2 = 500 units
Plus sales Feb. 1,500 units
= Needed items 2,000 units
- Beg inventory 20% Feb sales (300)
= Production Feb 1,700
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Emma's posters has the following information:
Sales $6,750
Variable cost per unit $5
Fixed costs $1,900
Operating income $1,100
What is the sales volume?
750 units - WORK backwards (start at operating inc)
Sales $6,750
VC 3,750 (6,750 - 3000)
CM $3,000 (OI 1,100 + FC 1,900)
Fixed costs 1,900 (given)
Operating inc 1,100 (given)
As variable costs are $3,750 and the cost per unit is $5, quantity = $3,750/5 = 750
Last year, Adam Company produced 15,000 units and sold 12,000 units. The company had no beginning inventory. They incurred the following costs:
Direct materials per unit 50
Direct labor per unit 10
Variable overhead per unit 5
Total fixed manufacturing overhead $200,000
Total selling and administrative $150,000
Adam's product (inventoriable) cost per unit under absorption costing is ________.
Direct materials 50
Direct labor 10
Variable OH 5
Fixed OH 13.33
Total 78.33
Fixed OH $200,000 / 15,000 units produced = $13.33 per unit
Jackson Company has budgeted production of 10,000 units for the month of March. Variable overhead per unit is $25. Fixed costs are $5,000 for plant depreciation expense, $20,000 for plant supervisor's salaries and $12,500 for accounting department salaries. What is the total budgeted manufacturing overhead costs for the month of March?
Variable overhead: 10,000 units * $25 = $250,000
Fixed overhead:
Plant depreciation $5,000
Plant supervisor $20,000
Total $275,000
What city has the highest proportion of high-tech workers relative to all workers?
Seattle
The degree of operating leverage for Bucs Inc is 4.
The actual operating income is $15,000. If the Company can increase sales by 20%, what is the new expected operating income?
Increase in operating income =
DOL * % change in sales
4.0 * 20% = 80% change in income
Former income $15,000 * 1.8 = $27,000 new income
Scarlett, Inc. reports the following information:
Units produced 450, units sold 500
Sales price $150 per unit
Direct materials $30 per unit
Direct labor $14 per unit
Variable manufacturing overhead $15 per unit
Fixed manufacturing overhead $9,000/yr
Variable selling and admin costs $6 per unit
Fixed selling and admin costs $13,000/yr
What is the operating income using variable costing?
$19,500
Sales $150 * 500 = $75,000
COGS $79 * 500 = 39,500
Gross margin $35,500
Variable selling $6 * 500 = $3,000
Fixed selling 13,000
Operating income $19,500
Inventoriable cost/unit:
DM $30 + DL $14 + VOH $15 = $59/unit
FOH = $9,000 / 450 units produced = $20 unit
Total inventoriable cost $79/unit
Dean Manufacturing expects to produce 12,800 shirts in January and 14,100 shirts in February. The company budgets $20 per yard for direct materials and each shirt has been budgeted 1 yard of material.The balance in the Raw Materials Inventory account (all direct materials) on January 1 is 3,600 yards. The company desires the ending balance in Raw Materials Inventory to be 17% of the next month's direct materials needed for production. What is the cost of the budgeted purchases of direct materials needed for January?
$231,940
Production 12,800 shirts
* yards per shirt 1 yard
= yards for production 12,800 yards
+ TEI (14,100 * 1 * 17%) 2,397 Yards
- Beg inventory (3,600) yards
= Yards to purchase 11,597
* cost per yard $20
= Purchases budget $231,940
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