1 Chapter 22 Helena Company reports the following total costs at two levels of production. 10,000 Units 20,000 Units Direct materials $20,000 $40,000 Maintenance 8,000 10,000 Direct labor 17,000 34,000 Indirect materials 1,000 2,000 Depreciation 4,000 4,000 Utilities 3,000 5,000 Rent 6,000 6,000 Classify each cost as variable, fixed, or mixed. Variable costs: Direct materials, direct labor, and indirect materials are variable costs. Fixed costs: Depreciation and rent are fixed costs. Mixed costs: Maintenance and utilities are mixed costs. Related exercise material: BE22-1, BE22-2, E22-1, E22-2, E22-3, and Byrnes Company accumulates the following data concerning a mixed cost, using units produced as the activity level. Units Produced Total Cost March 9,800 $14,740 April 8,500 13,250 May 7,000 11,100 June 7,600 12,000 July 8,100 12,460 (a) Compute the variable and fixed cost elements using the high-low method. (b) Estimate the total cost if the company produces 6,000 units. (a) Variable cost: ($14,740 2 $11,100) 4 (9, ,000) 5 $1.30 per unit Fixed cost: $14,740 2 $12,740 ($ ,800 units) 5 $2,000 or $11,100 2 $9,100 ($ ,000) 5 $2,000 (b) Total cost to produce 6,000 units: $2,000 1 $7,800 ($ ,000) 5 $9,800 Related exercise material: BE22-3, BE22-4, E22-1, E22-2, E22-3, and Types of Costs Recall that a variable cost varies in total directly and proportionately with each change in activity. Recall that a fixed cost remains the same in total with each change in activity. Recall that a mixed cost changes in total but not proportionately with each change in activity. High-Low Method Determine the highest and lowest levels of activity. Compute variable cost per unit as: Change in total costs 4 High 2 Low activity level 5 Variable cost per unit. Compute fixed cost as: Total cost 2 (Variable cost per unit 3 Units produced) 5 Fixed cost.
2 Break-Even Analysis Apply the formula: Sales 5 Variable costs 1 Fixed costs 1 Net income. Apply the formula: Fixed costs 4 Contribution margin per unit 5 Break-even point in units. Margin of Safety; Required Sales Know the formulas. Recognize that variable costs change with sales volume; fixed costs do not. Avoid computational errors. Lombardi Company has a unit selling price of $400, variable costs per unit of $240, and fixed costs of $180,000. Compute the break-even point in units using (a) a mathematical equation and (b) contribution margin per unit. (a) The formula is $400Q 5 $240Q 1 $180,000. The break-even point in units is 1,125 ($180,000 4 $160). (b) The contribution margin per unit is $160 ($400 2 $240). The formula therefore is $180,000 4 $160, and the break-even point in units is 1,125. Related exercise material: BE22-5, BE22-6, E22-4, E22-5, E22-6, E22-7, E22-8, and Mabo Company makes calculators that sell for $20 each. For the coming year, management expects fixed costs to total $220,000 and variable costs to be $9 per unit. (a) Compute break-even point in units using the mathematical equation. (b) Compute break-even point in dollars using the contribution margin (CM) ratio. (c) Compute the margin of safety percentage assuming actual sales are $500,000. (d) Compute the sales required in dollars to earn net income of $165,000 using the mathematical equation. (a) Sales 5 Variable costs 1 Fixed costs 1 Net income $20Q 5 $9Q 1 $220,000 1 $0 $11Q 5 $220,000 Q 5 20,000 units (b) Contribution margin per unit 5 Unit selling price 2 Unit variable costs $11 5 $20 2 $9 Contribution margin ratio 5 Contribution margin per unit 4 Unit selling price 55% 5 $11 4 $20 Break-even point in dollars 5 Fixed cost 4 Contribution margin ratio 5 $220, % 5 $400,000 Actual sales Break-even sales (c) Margin of safety 5 Actual sales $500,000 2 $400,000 5 $500, % (d) Required sales 5 Variable costs 1 Fixed costs 1 Net income $20Q 5 $9Q 1 $220,000 1 $165,000 $11Q 5 $385,000 Q 5 35,000 units 35,000 units 3 $20 5 $700,000 required sales Related exercise material: BE22-6, BE22-7, BE22-8, E22-5, E22-6, E22-7, E22-8, E22-9, E22-10, E22-11, E22-12, E22-13, and 22-4.
3 COMPREHENSIVE B.T. Hernandez Company, maker of high-quality flashlights, has experienced steady growth over the last 6 years. However, increased competition has led Mr. Hernandez, the president, to believe that an aggressive campaign is needed next year to maintain the company s present growth. The company s accountant has presented Mr. Hernandez with the following data for the current year, 2012, for use in preparing next year s advertising campaign. Cost Schedules Variable costs Direct labor per flashlight $ 8.00 Direct materials 4.00 Variable overhead 3.00 Variable cost per flashlight $15.00 Fixed costs Manufacturing $ 25,000 Selling 40,000 Administrative 70,000 Total fixed costs $135,000 Selling price per flashlight $25.00 Expected sales, 2012 (20,000 flashlights) $500,000 Mr. Hernandez has set the sales target for the year 2013 at a level of $550,000 (22,000 flashlights). (Ignore any income tax considerations.) (a) What is the projected operating income for 2012? (b) What is the contribution margin per unit for 2012? (c) What is the break-even point in units for 2012? (d) Mr. Hernandez believes that to attain the sales target in the year 2013, the company must incur an additional selling expense of $10,000 for advertising in 2013, with all other costs remaining constant. What will be the break-even point in dollar sales for 2013 if the company spends the additional $10,000? (e) If the company spends the additional $10,000 for advertising in 2013, what is the sales level in dollars required to equal 2012 operating income? to Comprehensive (a) Expected sales $500,000 Less: Variable cost (20,000 flashlights 3 $15) $300,000 Fixed costs 135, ,000 Projected operating income $ 65,000 (b) Selling price per flashlight $25 Variable cost per flashlight 15 Contribution margin per unit $10 (c) Fixed costs 4 Contribution margin per unit 5 Break-even point in units $135,000 4 $ ,500 units Know the formulas. Recognize that variable costs change with sales volume; fixed costs do not. Avoid computational errors.
4 (d) Fixed costs 4 Contribution margin ratio 5 Break-even point in dollars $145, % 5 $362,500 Fixed costs (from 2012) $135,000 Additional advertising expense 10,000 Fixed costs (2013) $145,000 Contribution margin per unit (b) $10 Contribution margin ratio 5 Contribution margin per unit 4 Unit selling price 40% 5 $10 4 $25 (e) Required sales 5 (Fixed costs 1 Target net income) 4 Contribution margin ratio $525,000 5 ($145,000 1 $65,000) 4 40% Review Classify types of costs. (SO 1, 3) Compute costs using high-low method and estimate total cost. (SO 3) Compute break-even point in units. (SO 6) Compute margin of safety percentage and required sales. (SO 8, 9) 22-1 Wyoming Company reports the following total costs at two levels of production. 5,000 Units 10,000 Units Indirect labor $ 3,000 $ 6,000 Property taxes 7,000 7,000 Direct labor 27,000 54,000 Direct materials 22,000 44,000 Depreciation 4,000 4,000 Utilities 3,000 5,000 Maintenance 9,000 11,000 Classify each cost as variable, fixed, or mixed Blakely Company accumulates the following data concerning a mixed cost, using units produced as the activity level. Units Produced Total Cost March 10,000 $18,000 April 9,000 16,650 May 10,500 18,750 June 8,800 16,200 July 9,500 17,100 (a) Compute the variable and fixed cost elements using the high-low method. (b) Estimate the total cost if the company produces 8,500 units Lombardi Company has a unit selling price of $250, variable cost per unit of $160, and fixed costs of $135,000. Compute the break-even point in units using (a) a mathematical equation and (b) contribution margin per unit Wales Company makes radios that sell for $30 each. For the coming year, management expects fixed costs to total $200,000 and variable costs to be $20 per unit. (a) Compute the break-even point in dollars using the contribution margin (CM) ratio. (b) Compute the margin of safety percentage assuming actual sales are $750,000. (c) Compute the sales required in dollars to earn net income of $120,000.
5 Problems: Set B P22-1B The All Cuts Barber Shop employs four barbers. One barber, who also serves as the manager, is paid a salary of $3,900 per month. The other barbers are paid $1,900 per month. In addition, each barber is paid a commission of $2 per haircut. Other monthly costs are: store rent $700 plus 60 cents per haircut, depreciation on equipment $500, barber supplies 40 cents per haircut, utilities $300, and advertising $100. The price of a haircut is $10. (a) Determine the variable cost per haircut and the total monthly fixed costs. (b) Compute the break-even point in units and dollars. (c) Prepare a CVP graph, assuming a maximum of 1,800 haircuts in a month. Use increments of 300 haircuts on the horizontal axis and $3,000 increments on the vertical axis. (d) Determine the net income, assuming 1,700 haircuts are given in a month. P22-2B Mobley Company bottles and distributes No-FIZZ, a fruit drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers, who charge customers 70 cents per bottle. For the year 2012, management estimates the following revenues and costs. Net sales $2,000,000 Selling expenses variable $ 80,000 Direct materials 360,000 Selling expenses fixed 150,000 Direct labor 450,000 Administrative expenses Manufacturing overhead variable 40,000 variable 270,000 Administrative expenses Manufacturing overhead fixed 70,000 fixed 280,000 (a) Prepare a CVP income statement for 2012 based on management s estimates. (b) Compute the break-even point in (1) units and (2) dollars. (c) Compute the contribution margin ratio and the margin of safety ratio. (d) Determine the sales dollars required to earn net income of $390,000. P22-3B Werner Manufacturing had a bad year in For the first time in its history, it operated at a loss. The company s income statement showed the following results from selling 60,000 units of product: Net sales $1,500,000; total costs and expenses $1,890,000; and net loss $390,000. Costs and expenses consisted of the amounts shown below. Total Variable Fixed Cost of goods sold $1,350,000 $ 930,000 $420,000 Selling expenses 420,000 65, ,000 Administrative expenses 120,000 55,000 65,000 $1,890,000 $1,050,000 $840,000 Management is considering the following independent alternatives for Increase unit selling price 40% with no change in costs, expenses, and sales volume. 2. Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $30,000 plus a 4% commission on net sales. 3. Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50. (a) Compute the break-even point in dollars for (b) Compute the break-even point in dollars under each of the alternative courses of action. Which course of action do you recommend? P22-4B Kay Jo is the advertising manager for Costless Shoe Store. She is currently working on a major promotional campaign. Her ideas include the installation of a new lighting system and increased display space that will add $24,000 in fixed costs to the $210,000 currently spent. In addition, Kay is proposing that a 6 2 3% price decrease (from $30 to $28) will produce an increase in sales volume from 16,000 to 20,000 units. Variable costs will remain at $15 per pair of shoes. Management is impressed with Kay s ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety. Determine variable and fixed costs, compute break-even point, prepare a CVP graph, and determine net income. (SO 1, 3, 5, 6) Prepare a CVP income statement, compute break-even point, contribution margin ratio, margin of safety ratio, and sales for target net income. (SO 5, 6, 7, 8, 9) Compute break-even point under alternative courses of action. (SO 5, 6) Compute break-even point and margin of safety ratio, and prepare a CVP income statement before and after changes in business environment. (SO 6, 8, 9)
6 (a) Compute the current break-even point in units, and compare it to the break-even point in units if Kay s ideas are used. (b) Compute the margin of safety ratio for current operations and after Kay s changes are introduced. (Round to nearest full percent.) (c) Prepare a CVP income statement for current operations and after Kay s changes are introduced. Would you make the changes suggested? Compute break-even point and margin of safety ratio, and prepare a CVP income statement before and after changes in business environment. (SO 5, 6, 7, 8) Prepare income statements under absorption and variable costing. (SO 10) P22-5B Perkins Corporation has collected the following information after its first year of sales. Net sales were $2,000,000 on 100,000 units; selling expenses $400,000 (30% variable and 70% fixed); direct materials $600,000; direct labor $340,000; administrative expenses $500,000 (30% variable and 70% fixed); manufacturing overhead $480,000 (20% variable and 80% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 20% next year. (a) Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.) (b) Compute the break-even point in units and sales dollars. (c) The company has a target net income of $374,000. What is the required sales in dollars for the company to meet its target? (d) If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio? (e) The company is considering a purchase of equipment that would reduce its direct labor costs by $140,000 and would change its manufacturing overhead costs to 10% variable and 90% fixed (assume total manufacturing overhead cost is $480,000, as above). It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 80% variable and 20% fixed (assume total selling expense is $400,000, as above). Compute (1) the contribution margin and (2) the contribution margin ratio, and recompute (3) the break-even point in sales dollars. Comment on the effect each of management s proposed changes has on the break-even point. *P22-6B Azul Metal Company produces the steel wire that goes into the production of paper clips. In 2012, the first year of operations, Azul produced 50,000 miles of wire and sold 45,000 miles. In 2013, the production and sales results were exactly reversed. In each year, selling price per mile was $60, variable manufacturing costs were 20% of the sales price, variable selling expenses were $8.00 per mile sold, fixed manufacturing costs were $1,200,000, and fixed administrative expenses were $230,000. (a) Prepare comparative income statements for each year using variable costing. (b) Prepare comparative income statements for each year using absorption costing. (c) Reconcile the differences each year in income from operations under the two costing approaches. (d) Comment on the effects of production and sales on net income under the two costing approaches. Waterways Continuing Problem (Note: This is a continuation of the Waterways Problem from Chapters 19 through 21.) WCP22 The Vice President for Sales and Marketing at Waterways Corporation is planning for production needs to meet sales demand in the coming year. He is also trying to determine how the company s profits might be increased in the coming year. This problem asks you to use cost-volume-profit concepts to help Waterways understand contribution margins of some of its products and to decide whether to mass-produce certain products. Go to the book s companion website, to see the completion of this problem.
Chapter 22: Cost-Volume-Profit DO IT! 1 Types of Costs Helena Company reports the following total costs at two levels of production. 10,000 Units 20,000 Units Direct materials $20,000 $40,000 Maintenance
CHAPTER 22 Cost-Volume-Profit Relationships ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Exercises A Problems B Problems * 1. Distinguish between variable and fixed costs.
Cost-Volume-Profit Analysis Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating income and net income. In performing this analysis, there
Chapter 6-1 Chapter 6 Cost-Volume-Profit Relationships McGraw-Hill /Irwin The McGraw-Hill Companies, Inc., 2007 Basics of Cost-Volume-Profit Analysis Contribution Margin (CM) is the amount remaining from
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Accounting Building Business Skills Paul D. Kimmel Chapter Fourteen: Cost-volume-profit Relationships PowerPoint presentation by Kate Wynn-Williams University of Otago, Dunedin 2003 John Wiley & Sons Australia,
Prepare, Apply, and Confirm etext Features Keep students engaged in learning on their own time, while helping them achieve greater conceptual understanding of course material through author-created solutions
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Chapter 18 Identify how changes in volume affect Total variable change in direct proportion to changes in the volume of activity Unit variable cost remains constant Units produced 3 5 Total direct materials
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Part Five Cost Volume Profit Analysis COST VOLUME PROFIT ANALYSIS Study of the effects of changes of costs and volume on a company s profits A critical factor in management decisions Important in profit
Part Three Cost Behavior Analysis Cost Behavior Cost behavior is the manner in which a cost changes as some related activity changes An understanding of cost behavior is necessary to plan and control costs
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19 Cost-Volume-Profit Analysis Learning Objectives 1 Identify how changes in volume affect costs 2 Use CVP analysis to compute breakeven points 3 Use CVP analysis for profit planning, and graph the CVP
SOLUTIONS TO EXERCISES EXERCISE 3-1 (20 minutes) 1. Fixed costs B E point in units = Contribution margin per unit $180,000 $180,000 = = = 7,500 units $40 - $16 $24 B E point in sales dollars = Fixed costs
5-1 Cost-Volume-Profit Managerial Accounting Fifth Edition Weygandt Kimmel Kieso 5-2 study objectives 1. Distinguish between variable and fixed costs. 2. Explain the significance of the relevant range.
Types of Cost Behavior Patterns Cost Behavior: Analysis and Use Chapter Five Recall the summary of our cost behavior discussion from an earlier chapter. Summary of Variable and Fixed Cost Behavior Cost
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UNIT2:- Session 1-3 :- Cost analysis for planning and decision making :- * Cost classification and approach :- A- Marginal costing :- - variable and fixed. - Variable cost is charged to the product unit.
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Management Accounting 303 Segmental Profitability Analysis and Evaluation Unless a business is a not-for-profit business, all businesses have as a primary goal the earning of profit. In the long run, sustained
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12 CHAPTER Managerial Accounting and Cost-Volume-Profit When asked by a marketing or production manager what a certain item or activity costs, the management accountant who asks Why do you want to know?
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9-35 Connelly Inc., a manufacturer of quality electric ice cream makers, has experienced a steady growth in sales over the past few years. Since her business has grown, Jan Delany, the president, believes
C 6 - ACRONYMS notesc6.doc Instructor s Supplemental Information ACRONYMS (ABBREVIATIONS) FOR USE WITH MANAGERIAL ACCOUNTING RELATING TO COST-VOLUME-PROFIT ANALYSIS. CM Contribution Margin in total dollars
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Chapter 2 Solutions Solution 2.1 a) Explain what you understand by the term 'cost' The term cost can be defined as 'the resources consumed or used up to achieve a certain objective'. This objective may
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1. Austin Manufacturing had the following operating data for the year just ended. Selling price per unit $60 per unit Variable expense per unit $22 per unit Fixed expense $504,000 Management plans to improve
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Management Accounting 137 Comprehensive Business Budgeting Goals and Objectives Profit planning, commonly called master budgeting or comprehensive business budgeting, is one of the more important techniques
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Answers for Weekly Challenge 2 Challenge 1 (i) The key to calculating the breakeven point is to determine the contribution per unit. Contribution point = $120 ($22 + $36 + $14) = $48 Fixed overhead Breakeven
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Exam No: Dr. M.D. Chase Accounting 310 Examination 3 Garrison/Noreen 10 th Spring 2003 Business ethics are the cornerstone of a successful free enterprise economy. Personal ethics are the foundation for
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7 Marginal and absorption costing this chapter covers... This chapter focuses on the costing methods of marginal and absorption costing and compares the profit made by a business under each method. The
Cost-Volume-Profit Analysis Cost-Volume-Profit Assumptions and Terminology 1 Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units produced
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Brief Exercise 2-3 (10 minutes) The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead... $134,000 Estimated total direct labor hours (DLHs)... 20,000 DLHs = Predetermined
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Chapter 6 CVP Income Statement Use the CVP income statement format. Use the formula for contribution margin per unit. Use the formula for the contribution margin ratio. Garner Inc. sold 20,000 units and
Chapter 4 Solutions Question 4.1 A) Explain the following The term marginal cost refers to the additional costs incurred in providing a unit of product or service. The term contribution refers to the amount
DOWNLOAD FREE TEXT BOOKS AT BOOKBOON.COM Introduction Nikolaos Tsorakidis, Huron University, London Sophocles Papadopoulos, Huron University, London Michael Zerres, Universität Hamburg Christopher Zerres,
CHAPTER 3 Overview Cost-Volume-Profit Analysis This chapter explains a planning tool called costvolume-profit (CVP) analysis. CVP analysis examines the behavior of total revenues, total costs, and operating
Section 1.5: Linear Models An asset is an item owned that has value. Linear Depreciation refers to the amount of decrease in the book value of an asset. The purchase price, also known as original cost,
Management Accounting 31 Financial Statements for Manufacturing Businesses Importance of Financial Statements Accounting plays a critical role in decision-making. Accounting provides the financial framework
1 SALES NEEDED TO EARN TARGET INCOME Head-First Company plans to sell 5,000 bicycle helmets at $70 each in the coming year. Variable cost is 70 percent of the sales price; contribution margin is 30 percent
6-1 Cost-Volume-Profit Analysis: Additional Issues 6-2 Managerial Accounting Fifth Edition Weygandt Kimmel Kieso study objectives 1. Describe the essential features of a cost-volume-profit income statement.
MANAGERIAL ACCOUNTING PROJECT From: MR. HORTENSI 305-237-5143 firstname.lastname@example.org I am available to help you, make sure you let me know if you need help. To: MANAGERIAL ACCOUNTING STUDENTS. This project