Chapter 18: 10DQ (page 832)
What two arguments tend to justify classifying all costs as either fixed or variable even though individual costs might not behave exactly as classified?
Answer
Cost classification is justified by using the following two arguments:
Scatter diagram.
2. High-low cost method.
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The following costs result from the production and sale of 1,000 drum sets manufactured by Tight Drums Company for the year ended December 31, 2017. The drum sets sell for \(500 each. The company has a 25% income tax rate.
Variable production cost | Fixed manufacturing cost | ||
Plastic for casing | \)17,000 | Taxes on factory | $5,000 |
Wages for assembly workers | 82,000 | Factory maintenance | 10,000 |
Drum stand | 26,000 | Factory machinery depreciation | 40,000 |
Variable selling cost | Fixed selling and administrative cost | ||
Sales commission | 15,000 | Lease of equipment for sales staff | 10,000 |
Accounting staff salaries | 35,000 | ||
Administrative management salaries | 125,000 |
Required
1. Prepare a contribution margin income statement for the company.
2. Compute its contribution margin per unit and its contribution margin ratio.
Analysis Component
3. Interpret the contribution margin and contribution margin ratio from part 2.
This year Burchard Company sold 40,000 units of its only product for \(25 per unit. Manufacturing and selling the product required \)200,000 of fixed manufacturing costs and \(325,000 of fixed selling and administrative costs. Its per unit variable costs follow.
Material | \)8.00 |
Direct labor (paid on the basis of completed units) | 5.00 |
Variable overhead cost | 1.00 |
Variable selling and administrative costs | 0.50 |
Next year the company will use new material, which will reduce material costs by 50% and direct labor costs by 60% and will not affect product quality or marketability. Management is considering an increase in the unit selling price to reduce the number of units sold because the factory’s output is nearing its annual output capacity of 45,000 units. Two plans are being considered. Under plan 1, the company will keep the selling price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will increase the selling price by 20%. This plan will decrease unit sales volume by 10%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same.
Required
1. Compute the break-even point in dollar sales for both (a) plan 1 and (b) plan 2.
2. Prepare a forecasted contribution margin income statement with two columns showing the expected results of plan 1 and plan 2. The statements should report sales, total variable costs, contribution margin, total fixed costs, income before taxes, income taxes (30% rate), and net income.
Refer to Vijay Company’s data in QS 18-17. Compute its product cost per unit under variable costing.
Refer to the information in Exercise 18-16. If the company raises its selling price to $240 per unit, compute its (1) contribution margin per unit, (2) contribution margin ratio, (3) break-even point in units, and (4) break-even point in sales dollars.
The following costs result from the production and sale of 12,000 CD sets manufactured by Gilmore Company for the year ended December 31, 2017. The CD sets sell for \(18 each. The company has a 25% income tax rate.
Variable manufacturing costs | |
Plastic for CD Sets | \)1,500 |
Wages of assembly workers | 30,000 |
Labelling | 3,000 |
Variable selling cost | |
Sales commission | 6,000 |
Fixed manufacturing cost | |
Rent on factory | 6,750 |
Factory cleaning services | 4,520 |
Factory machine depreciation | 20,000 |
Fixed selling and administrative cost | |
Lease of office equipment | 1,050 |
System staff salaries | 15,000 |
Administrative management salaries | 120,000 |
Required
1. Prepare a contribution margin income statement for the company.
2. Compute its contribution margin per unit and its contribution margin ratio.
Analysis Component
3. Interpret the contribution margin and contribution margin ratio from part 2.
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