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EXERCISES

Ex. 20–1 (FIN MAN); Ex. 5–1 (MAN)

a. The inventory valuation under the absorption costing concept would include the fixed factory overhead cost, as follows:

7,500 units × $92.80 = $696,000

Direct materials ........................................................... $52.00 Direct labor .................................................................. 25.00 Fixed factory overhead ............................................... 8.40 Variable factory overhead ........................................... Total .............................................................................. $92.80

7.40

b. The inventory valuation under the variable costing concept would not include

the fixed factory overhead cost, as follows:

7,500 units × $84.40 = $633,000

Direct materials ........................................................... $52.00 Direct labor .................................................................. 25.00 Variable factory overhead ........................................... Total .............................................................................. $84.40

7.40

All of the fixed factory overhead cost would be expensed in the variable cost-

ing income statement as a period cost. Thus, the absorption costing income statement would have a higher net income than would the variable costing income statement.



Ex. 20–2 (FIN MAN); Ex. 5–2 (MAN)

a. THE DULLER EDGE INC.

Absorption Costing Income Statement For the Month Ended May 31, 2012

Sales ......................................................................................................... $4,000,000 Cost of goods sold (20,000 units × $140.00*) ....................................... Gross profit .............................................................................................. $1,200,000

2,800,000

Selling and administrative expenses ($560,000 + $150,000) ............... Income from operations ......................................................................... $ 490,000

710,000

*Production costs per unit:

Direct materials per unit ($1,998,000/27,000 units) ......................... $ 74.00 Direct labor per unit ($972,000/27,000 units) ................................... 36.00 Variable factory overhead per unit ($486,000/27,000 units) ........... 18.00 Fixed factory overhead per unit ($324,000/27,000 units) ................ Total production costs per unit ................................................... $140.00

12.00

b.

THE DULLER EDGE INC. Variable Costing Income Statement For the Month Ended May 31, 2012

Sales ......................................................................................................... $4,000,000 Variable cost of goods sold (20,000 units × $128* per unit) ................ Manufacturing margin ............................................................................. $1,440,000

2,560,000

Variable selling and administrative expenses ...................................... Contribution margin ................................................................................ $ 880,000

560,000

Fixed costs: Fixed factory overhead costs ..................................... $324,000 Fixed selling and administrative expenses .............. 150,000

Income from operations .................................................... $ 406,000 474,000

*$74 + $36 + $18 = $128



Ex. 20–2 (FIN MAN); Ex. 5–2 (MAN) (Concluded)

c. The difference between the absorption and variable costing income from op-erations of $84,000 ($490,000 – $406,000) can be explained as follows:

Increase in inventory ................................................... 7,000 Fixed factory overhead per unit ................................. Difference in income from operations ....................... $ 84,000

× $12.00

Under the absorption costing method, the fixed factory overhead cost in-

cluded in the cost of goods sold is matched with the revenues. As a result, 7,000 units that were produced but unsold (inventory) include fixed factory overhead cost, which is not included in the cost of goods sold.

Under variable costing, all of the fixed factory overhead cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory increases, the absorption costing income statement will have a higher income from operations than will the variable costing income statement.



Ex. 20–3 (FIN MAN); Ex. 5–3 (MAN)

a. PATAGUCCI INC.

Absorption Costing Income Statement For the Month Ended August 31, 2012

Sales .................................................................................... $ 10,890,000 Cost of goods sold:

Beginning inventory (6,000 × $90.00) ........................ $ 540,000 Cost of goods manufactured (60,000 × $92.40) ........

Cost of goods sold ............................................................. 5,544,000

Gross profit ......................................................................... $ 4,806,000 6,084,000

Selling and administrative expenses ............................... Income from operations .................................................... $ 2,202,000

2,604,000

b.

PATAGUCCI INC. Variable Costing Income Statement

For the Month Ended August 31, 2012

Sales ......................................................................................................... $ 10,890,000 Variable cost of goods sold (66,000 units × $66.00 per unit) .............. Manufacturing margin ............................................................................. $ 6,534,000

4,356,000

Variable selling and administrative expenses ...................................... Contribution margin ................................................................................ $ 4,455,000

2,079,000

Fixed costs: Fixed manufacturing costs ........................................ $1,584,000 Fixed selling and administrative expenses .............. 525,000

Income from operations .................................................... $ 2,346,000 2,109,000

c. The difference between the absorption and variable costing income from op-

erations of �$144,000 ($2,202,000 � $2,346,000) can be explained as follows:

Reduction in inventory .................................................. (6,000) Fixed manufacturing cost per unit (at 100% capacity) Difference in income from operations ......................... $ (144,000)

× $24.00

Under the absorption costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. As a result, 6,000 units that were produced but unsold in July (beginning inventory for August) include fixed manufacturing cost, which is included in the cost of goods sold for August. Un-der variable costing, all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory decreases, the absorption costing income statement will have a lower income from operations than will the variable costing income statement.



Ex. 20–4 (FIN MAN); Ex. 5–4 (MAN)

a. Variable cost of goods

manufactured per unit = Variable cost of goods manufacturedNumber of units produced

Variable cost of goodsmanufactured per unit =

units 4,5000$25,920,00

Variable cost of goodsmanufactured per unit = $5,760

b. Absorption cost of goods

manufactured per unit = produced units of Number

fixed) (variable edmanufactur goods ofcost Total

�

Absorption cost of goodsmanufactured per unit = � �

units 4,5000$11,880,00 0$25,920,00 �

Absorption cost of goodsmanufactured per unit = $8,400

Ex. 20–5 (FIN MAN); Ex. 5–5 (MAN)

CLOWNEY COMPANY Variable Costing Income Statement For the Month Ended June 30, 2013

Sales (9,600 units) .............................................................. $537,600 Variable cost of goods sold:

Variable cost of goods manufactured ....................... $397,6001 Less inventory, June 30 (1,600 units) ........................ 56,800

Variable cost of goods sold .................................... 2

Manufacturing margin ........................................................ $196,800 340,800

Variable selling and administrative expenses ................. Contribution margin ........................................................... $151,200

45,600

Fixed costs: Fixed manufacturing costs ........................................ $ 50,400 Fixed selling and administrative expenses .............. 36,480

Income from operations .................................................... $ 64,320 86,880

1 $448,000 – $50,400 (total manufacturing cost less fixed manufacturing cost) 2 ($397,600/$448,000) × $64,000 (the ratio of variable to total manufacturing costs

times the value of the ending inventory under absorption costing); or $397,600/11,200 units manufactured = $35.50; $35.50 × 1,600 units = $56,800.



Ex. 20–6 (FIN MAN); Ex. 5–6 (MAN)

SEGER EQUIPMENT COMPANY Absorption Costing Income Statement

For the Month Ended May 31, 2012

Sales (36,000 units) ............................................................ $4,320,000 Cost of goods sold:

Cost of goods manufactured ....................................... $2,505,6001 Less inventory, May 31 (7,200 units) ........................... 417,600

Cost of goods sold .................................................. 2

Gross profit ......................................................................... $2,232,000 2,088,000

Selling and administrative expenses ............................... Income from operations .................................................... $ 806,400

1,425,600

1 $2,073,600 + $432,000 (total variable plus fixed manufacturing cost)

2 ($2,505,600/$2,073,600) × $345,600 (the ratio of total to variable manufacturing cost times the ending inventory valuation under variable costing); or $2,505,600/43,200 units manufactured = $58/unit; $58 × 7,200 units = $417,600.

Ex. 20–7 (FIN MAN); Ex. 5–7 (MAN)

a. PROCTER & GAMBLE COMPANY

Variable Costing Income Statement (assumed) (in millions)

Net sales .................................................................................................. $ 78,938 Variable cost of products sold ............................................................... Manufacturing margin ............................................................................. $ 57,708

21,230

Variable marketing, administrative, and other expenses .................... Contribution margin ................................................................................ $ 47,708

10,000

Fixed costs: Fixed manufacturing costs .......................................... $ 16,689 Fixed marketing, administrative, and other expenses 14,998

Income from operations ...................................................... $ 16,021 31,687

b. If Procter & Gamble Company reduced its inventories during the period, then

the cost of products sold would include fixed costs allocated to the beginning inventories. These would not be fixed costs of the current period. Thus, the total fixed costs of products sold on the absorption costing income statement would be higher, and the income from operations would be lower.



Ex. 20–8 (FIN MAN); Ex. 5–8 (MAN)

a. 1. JADELIS INDUSTRIES INC.

Absorption Costing Income Statement For the Month Ending April 30, 2013

36,000 Units 45,000 Units Manufactured Sales ......................................................................

Manufactured $ 4,464,000

Cost of goods sold: $ 4,464,000

Cost of goods manufactured: 36,000 units × $1021 .................................. 45,000 units × $1022 ................................... $ 4,950,000

$ 4,032,000

Less inventory, April 30 (9,000 units × $102) Cost of goods sold ....................................

990,000 $ 4,032,000

Gross profit ........................................................... $ 432,000 $ 504,000 $ 3,960,000

Selling and administrative expenses ................ 108,200 Income from operations ...................................... $ 323,800 $ 395,800

108,200

1 Unit cost of goods manufactured: Direct materials ($2,736,000/36,000) ............. $ 76.00 Direct labor ($648,000/36,000) ....................... 18.00 Variable factory overhead cost ($288,000/36,000) 8.00 Fixed factory overhead cost ($360,000/36,000) Total unit cost ................................................. $112.00

10.00

2 Unit cost of goods manufactured: Direct materials ............................................... $ 76.00 Direct labor ...................................................... 18.00 Variable factory overhead cost ...................... 8.00 Fixed factory overhead cost ($360,000/45,000) Total unit cost ................................................. $110.00

8.00




2. JADELIS INDUSTRIES INC.

Variable Costing Income Statement For the Month Ending April 30, 2013

36,000 Units 45,000 Units Manufactured

Manufactured Sales ...................................................................... $ 4,464,000 Variable cost of goods sold:

$ 4,464,000

Variable cost of goods manufactured: 18,000 units × $51.201 ............................... 20,000 units × $51.201 ............................... $ 4,590,000

$ 3,672,000

Less inventory, April 30 (2,000 units × $51.20) Variable cost of goods sold ......................

918,000 $ 3,672,000

Manufacturing margin .......................................... $ 792,000 $ 792,000 $ 3,672,000

Variable selling and administrative expenses2.. 59,200 Contribution margin .............................................

59,200 $ 732,800

Fixed costs: $ 732,800

Fixed factory overhead ................................... $ 360,000 $ 360,000 Fixed selling and administrative expenses .. 49,000 Total fixed costs .............................................

49,000 $ 409,000

Income from operations ...................................... $ 323,800 $ 323,800 $ 409,000

1 Unit variable cost of goods manufactured: Direct materials ($2,736,000/36,000) ............. $ 76.00 Direct labor ($648,000/36,000) ....................... 18.00 Variable factory overhead cost ($288,000/36,000) Total unit variable cost ................................... $ 102.00

8.00

2 Variable selling and administrative expenses are constant with constant sales levels.

b. If 45,000 units rather than 36,000 units are manufactured, the increase in in-

come from operations of $72,000 ($395,800 – $323,800)under absorption cost-ing is caused by the allocation of $360,000 of fixed factory overhead cost over a larger number of units. If 36,000 units are manufactured, the fixed factory overhead cost is $10.00 per unit ($360,000/36,000) compared to $8.00 per unit ($360,000/45,000) if 45,000 units are manufactured. Thus, the cost of goods sold is $72,000 less by the amount of $2.00/unit ($10.00 – $8.00) times the number of units sold, or $2.00 × 36,000 units = $72,000. The $72,000 differ-ence can also be explained by the amount of fixed factory overhead cost in-cluded in the ending inventory if 45,000 units are manufactured ($8.00 per unit × 9,000 units).



Ex. 20–9 (FIN MAN); Ex. 5–9 (MAN)

a. WHIRLPOOL CORPORATION

Variable Costing Income Statement (assumed) (in millions)

Sales ...................................................................... $ 17,099.0 Variable cost of goods sold:

Beginning inventory (70% × $2,591) .............. $ 1,813.7 Variable cost of goods manufactured ........... 10,639.01 Less: Ending inventory (70% × $2,197) ......... (1,537.9 Variable cost of goods sold ......................

)

Manufacturing margin .......................................... $ 6,184.2 10,914.8

Variable selling and administrative expenses ... 654.0Contribution margin ............................................. $ 5,530.2

2

Fixed costs: Fixed manufacturing costs ............................ $3,680.0 Fixed selling and administrative expenses 890.0 Income from operations ............................ $ 960.2

4,570.0

1 Variable cost of goods manufactured: Cost of goods sold ......................................... $ 14,713 Plus: Ending inventory ................................... 2,197 Less: Beginning inventory ............................. (2,591 Cost of goods manufactured ......................... $ 14,319

)

Less: Manufacturing fixed costs ................... Variable cost of goods manufactured ........... $ 10,639

3,680

2 Variable selling and administrative expenses: Selling and administrative expenses ............ $ 1,544 Less: Selling and administrative fixed expenses ....................................................... Variable selling and administrative expenses $ 654

890




b. The income from operations under the variable costing concept will not be the same as the income from operations under the absorption costing con-cept when the inventories either increase or decrease during the year. In this case, Whirlpool’s inventory decreased, meaning it sold more than it pro-duced. As a result, the income from operations under the variable costing concept will be greater than the income from operations under the absorption costing concept. The reason is because the variable costing concept will de-duct the fixed costs in the period that they are incurred, regardless of changes in inventory balances. In contrast, absorption costing will match costs with sales by allocating the fixed costs to the beginning and ending in-ventories. When sales are less than the cost of goods manufactured (when inventories decrease), fixed costs from the beginning inventory are included in cost of goods sold under absorption costing. Thus, more fixed costs will be included in cost of goods sold than were actually incurred during the pe-riod. This will result in a lower income from operations than would be re-ported under the variable costing concept.

The difference between the income from operations under the two concepts

can be explained as follows: Fixed cost portion of Jan. 1 inventory (30% × $2,591) ............... $777.3 Less: Fixed cost portion of Dec. 31 inventory (30% × $2,197) ... Difference in income from operations ......................................... $118.2

659.1

Income from operations—variable costing ................................. $960.2 Income from operations—absorption costing ............................ Difference ....................................................................................... $118.2

842.0

Ex. 20–10 (FIN MAN); Ex. 5–10 (MAN)

a. Management’s decision and conclusion are incorrect. The profit will not be improved by $85,500 because the fixed costs used in manufacturing and sell-ing dress shoes will not be avoided if the line is eliminated. These fixed costs total $144,000 for the dress shoe line. Thus, the actual profit will go down by $58,500 ($144,000 – $85,500) if the dress shoe line is eliminated. This is shown in the variable costing income statements in (b). The absorption cost-ing product profit reports should not be used for making this type of decision.




b. SHOES R’ US, INC Variable Costing Income Statements—Three Product Lines

For the Year Ended December 31, 2012

Party Play Dress Shoes Shoes

Shoes Revenues .................................................... $522,000 $441,000 $378,000 Variable cost of goods sold ...................... 189,000 157,500 Manufacturing margin ................................ $333,000 $283,500 $198,000

180,000

Variable selling and administrative expenses ................................................. 153,000 108,000 Contribution margin ...................................

139,500 $180,000 $175,500

Fixed costs: $ 58,500

Fixed manufacturing costs .................. $ 81,000 $ 58,500 $ 72,000 Fixed selling and administrative expenses ........................................... 63,000 54,000

72,000

$144,000 $112,500 Income from operations ............................ $ 36,000 $ 63,000 $ (85,500)

$144,000

c. If the dress shoe line were eliminated, then the contribution margin of the

product line would also be eliminated. The fixed costs would not be eliminat-ed. Thus, the profit of the company would actually decline by $58,500. Man-agement should keep the line and attempt to improve the profitability of the product by increasing prices, increasing volume, or reducing costs. Alterna-tively, if the volume of the other two products were to increase, then the dress shoe line could be eliminated and replaced with volume from the other two products.

Ex. 20–11 (FIN MAN); Ex. 5–11 (MAN) Noise Total Resistant Silence Headphone

Headphone Unit volume increase ......................................................... 29,750 33,000 Contribution margin per unit ............................................. × $12.00 Increase in profitability ...................................................... $357,000 $554,400

× $16.80

The increase in total profitability would be $911,400 ($357,000 + $554,400). Note that the income from operations per unit figures are not used in the analysis, since the fixed costs should be excluded in determining the incremental income from operations to be earned from the incremental sales. This is because the company has sufficient capacity for the additional production. Thus, fixed costs will not be affected by the decision.



Ex. 20–12 (FIN MAN); Ex. 5–12 (MAN)

a. OUTDOOR MOTOR SPORTS INC. Contribution Margin by Product

4WD

2WD Sales ...................................................................... $16,275,000 $ 8,125,000 Variable cost of goods sold ................................ 9,610,000 Manufacturing margin .......................................... $ 6,665,000 $ 2,875,000

5,250,000

Variable selling and administrative expenses ... 2,759,000 Contribution margin ............................................. $ 3,906,000 $ 1,625,000

1,250,000

Contribution margin ratio .................................... 24.00% 20.00% b. The 4WD line provides the largest total contribution margin and the largest

contribution margin ratio. If the sales mix were shifted more toward the 4WD, the overall profitability of the company would increase.

Ex. 20–13 (FIN MAN); Ex. 5–13 (MAN)

a. ZEN SKATEBOARDS INC.

Contribution Margin by Territory

Southern Northern

Sales ...................................................................... $ 6,250,000 $ 5,000,000 Variable cost of goods sold ................................ 4,375,000 Manufacturing margin .......................................... $ 1,875,000 $ 1,500,000

3,500,000

Variable selling expenses ................................... 1,250,000 Contribution margin ............................................. $ 625,000 $ 562,500

937,500

Contribution margin ratio .................................... 10.00% 11.25%




b. The total contribution margin is slightly higher for Southern, while the contri-bution margin ratio is slightly higher for Northern. This is because Southern sells only Street Machines, which have a lower contribution margin ratio (10.0% vs. 11.25%)* but a higher contribution margin per unit ($25 vs. $20). In attempting to improve the company’s profitability, it is unlikely that changing the mix of products to the two territories will have much effect. Southern will sell very few Winter Warriors (due to climate), while Northern has a mixed climate. However, there appears to be a number of profit opportunities. First, the Street Machine has a manufacturing margin of $75 per unit, while the Win-ter Warrior is only $45 per unit. Why such a large difference? Maybe the Win-ter Warrior is underpriced or made in inefficient manufacturing processes. Second, the variable selling expense per unit for the Street Machines is much higher than that of the Winter Warriors ($50 vs. $25). This suggests that the variable selling expenses per unit for the Street Machine may be too high. It seems difficult to justify a more than two-to-one difference in this expense. Reducing the variable selling expense for the Street Machines by half, for ex-ample, would have a significant impact on the firm’s overall profitability.

* 10% = $25/$250, rounded to one decimal place 13.33% = $20/$150

Ex. 20–14 (FIN MAN); Ex. 5–14 (MAN)

a. 1. LOOM INDUSTRIES INC.

Contribution Margin by Salesperson

Kurt W. Bart T. Jody T.

Big T. Sales ....................................... $672,000 $504,000 $648,000 $741,000 Variable cost of goods sold .. 403,200 201,600 388,800 Manufacturing margin ........... $268,800 $302,400 $259,200 $444,600

296,400

Variable commission expense .............................. 67,200 70,560 90,720

Contribution margin .............. $201,600 $231,840 $168,480 $370,500 74,100

Contribution margin ratio ..... 30.00% 46.00% 26.00% 50.00%




2. Big T. earns the highest contribution margin and has the highest contribu-tion margin ratio. This is because he sells the most units, has a low commission rate, and sells a product mix with a high manufacturing mar-gin (60% of sales, $23,400/$39,000). Bart T. also sells products with a high average manufacturing margin (60% of sales, $25,200/$42,000) but at a high commission rate. This accounts for the four percentage point differ-ence in the contribution margin ratio between Big T. and Bart T. The other two salespersons sell products with lower average manufacturing margins (40% of sales). Combining this with the high commission rate causes Jody T. to have the poorest contribution margin ratio among the four salespersons. In addition, because Jody T. has the lowest sales volume and the highest variable cost of goods sold, he also provides the lowest overall contribution margin. Again, the four percentage point dif-ference between Jody T. and Kurt W. is due to the difference in their commission rates.

b. 1.

LOOM INDUSTRIES, INC. Contribution Margin by Territory

North

South Sales ............................................................... $1,176,000 $1,389,000 Variable cost of goods sold .......................... 604,800 Manufacturing margin ................................... $571,200 $703,800

685,200

Variable commission expense ..................... 137,760 Contribution margin ...................................... $433,440 $538,980

164,820

Contribution margin ratio ............................. 36.9% 38.8%

2. The South Region has $213,000 more sales and $105,540 more contribu-tion margin. In addition, the South Region has the largest contribution margin ratio. In the South Region, the salesperson with the highest sales unit volume also has the highest contribution margin ratio (Big T.). The South Region has the highest performance, even though it also has the salesperson with the lowest sales volume and contribution margin ratio (Jody T.). In the North Region, both salespersons are performing similarly. The North Region contribution margin is less than the South Region be-cause of the outstanding performance of Big T. Big T. is driving the South Region’s performance.

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c. The Building Construction Products segment has the highest contribution margin ratio. The manufacturing margin is high, while the dealer commission rate is average. The variable promotion expenses as a percent of sales is higher than average. EAME is the poorest performing segment in terms of contribution margin ratio. This is because the manufacturing margin is the lowest and dealer commissions are the highest. The high dealer commission is out of balance with the rest of the business segments. This may be the re-sult of the high labor cost structure of Europe. The Large Power Systems are sold mostly to other manufacturers. As a result, each sale has more volume and requires less effort, so the commission rate is lower. This helps the Large Power Systems segment perform well in light of a low manufacturing margin. The Electric Power segment operates similarly to the Large Power Systems segment and exhibits similar contribution margin characteristics.



Ex. 20–16 (FIN MAN); Ex. 5–16 (MAN)

a. Filmed Entertainment Networks

Publishing Revenues ................................. $11,066.0 $11,703.0 $3,736.0 Variable costs ......................... 3,541.1 3,510.9 2,689.9 Contribution margin ............... $ 7,524.9 $ 8,192.1 $1,046.1

Contribution margin ratio ...... 68% 70% 28% b. The Filmed Entertainment, and Networks segments sell an information or

media product that has a very small variable cost per unit. For example, the Networks segment earns revenue monthly from each customer. However, the variable cost of each customer is rather small. The cost of providing the ser-vice is essentially fixed. The same holds true for the Filmed Entertainment segment. The variable cost per ticket sold to a motion picture is rather small. The costs of producing and promoting a new film are essentially fixed to the number of tickets sold. The studio will have enough capacity to release a set number of films per year. The costs will be incurred regardless of the number of tickets sold. The same logic holds for HBO and the cable network. Much of their costs are fixed to the number of subscribers. The Publishing segment produces and sells products that do have a variable cost per unit. The total cost of producing a magazine will increase as more units are sold. The edi-torial costs will likely be fixed, but the printing and distribution costs will be variable to the number of units sold. Thus, the Publishing segment will have a much lower contribution margin ratio than the other segments.

c. The higher contribution margin ratios of the Filmed Entertainment and Net-works segments should not be interpreted as being the most profitable. The fixed costs cannot be ignored. These segments will have high fixed costs. If the volume of business is not sufficient to exceed the break-even point, then the segments would be unprofitable. In the final analysis, the fixed costs should also be considered in determining the overall profitability of the seg-ments. The contribution margin ratio shows how sensitive the profit will be to changes in volume. These segments increase their profitability rapidly with increases in subscription or audience volume, compared to the Publishing segment.



Ex. 20–17 (FIN MAN); Ex. 5–17 (MAN)

a. BLUEBERRY, INC.

Contribution Margin Analysis—Sales For the Year Ended December 31, 2013

Effect of change in sales: Sales quantity factor (48,000 – 43,000) × $27.50 ...... $137,500 Unit price factor ($25 – $27.50) × 48,000 ................... Total effect of change in sales* ............................ $17,500

–120,000

*This represents the total effect that the change in sales has on Blueberry, Inc.’s contribution margin.

b. The sales will increase by $17,500. If the variable cost per unit were $5, and there were 5,000 more units than planned, then the variable cost will increase by $25,000 due to the variable cost quantity factor. Thus, the contribution margin will decrease by $7,500 ($17,500 – $25,000) as a result of the price reduction.

Ex. 20–18 (FIN MAN); Ex. 5–18 (MAN)

GARDOT PRODUCTS INC. Contribution Margin Analysis—Sales

For the Year Ended December 31, 2012

Effect of change in sales: Sales quantity factor (27,500 – 28,800) × $235 ......... –$305,500 Unit price factor ($250 – $235) × 27,500 .................... Total effect of change in sales* ............................ $107,000

412,500

*This represents the total effect that change in sales has on Gardot Products,

Inc.’s contribution margin.



Ex. 20–19 (FIN MAN); Ex. 5–19 (MAN)

GARDOT PRODUCTS INC.

Contribution Margin Analysis—Variable Costs For the Year Ended December 31, 2012

Effect of changes in variable costs of goods sold: Variable cost quantity factor (28,800 – 27,500) × $122 ...... $ 158,600 Unit cost factor ($122 – $132) × 27,500 ............................... (275,000 Total effect of change in variable cost of

)

goods sold .................................................................. $(116,400) Effect of changes in variable and administrative expenses: Variable cost quantity factor (28,800 – 27,500) × $28 ........ $ 36,400 Unit cost factor ($28 – $26) × 27,500 ................................... Total effect of changes in selling and administrative expenses ...........................................

55,000

91,400

Decrease in contribution margin from change in variable costs ........................................................................ $ (25,000)



Ex. 20–20 (FIN MAN); Ex. 5–20 (MAN)

a. MID-ATLANTIC RAILROAD COMPANY

Contribution Margin by Route For the Month Ended May 31, 2012

Boston/ Philadelphia/ Buffalo/ Philadelphia Buffalo Boston

Total Revenues ...................................... $326,648 $813,120 $729,120 Variable costs:

$1,868,888

Labor costs for loading and unloading railcars ............... $ 27,132 $134,640 $ 75,888 $ 237,660 Fuel costs ................................. 200,830 157,080 215,040 572,950 Train crew labor costs ............. 114,760 89,760 122,880 327,400 Switchyard labor costs ............ 18,620 92,400 52,080 Total variable costs ............

163,100 $361,342 $473,880 $465,888

Contribution margin ..................... $ (34,694) $339,240 $263,232 $ 567,778 $1,301,110

Contribution margin ratio ............ (10.6%) 41.7% 36.1% 30.4% Revenues: Revenue per railcar × Number of railcars Labor costs for loading and unloading railcars: $51.00 × Number of railcars Fuel costs: $14.00 × Number of train-miles Train crew labor costs: $8.00 × Number of train-miles Switchyard labor costs: $35 × Number of railcars b. The Boston/Philadelphia route performs significantly worse than do the other

two routes. A close examination of the operating statistics indicates that this route runs very few railcars, combined with fairly high total mileage. This combination suggests that the railroad is running many short trains on the railroad. That is, the railroad’s profitability is very sensitive to the size, or length, of the train in railcar terms. A short train costs nearly as much fuel and crewing costs as does a longer train. Thus, short trains will be inherently less profitable than longer trains. The other two routes have much better ratios of train-miles to railcars, indicating that their train sizes are larger.

Note to Instructors: Part (b) is somewhat subtle but a worthy discussion. The

cost behavior issues discussed in (b) are common in service companies. For example, large classes in a university are inherently more profitable than small classes, dense data traffic on a telecommunication system is more profitable than less traffic, full airplanes are more profitable than empty air-planes, and faster table turns in a restaurant create greater profitability than do slower turns, etc.



Ex. 20–21 (FIN MAN); Ex. 5–21 (MAN)

a. MID-ATLANTIC COMPANY

Contribution Margin for Boston/Philadelphia Route For the Month Ended June 30, 2012

Revenues ($556 × 768 railcars) ................................................................. $427,008 Labor costs for loading and unloading railcars ($51.00 × 768 railcars) ..................................................................... $ 39,168 Fuel costs ($14.00 × 14,345 train-miles) ............................................. 200,830 Train crew labor costs ($8.00 × 14,345 train-miles) ........................... 114,760 Switchyard labor costs ($35.00 × 768 railcars) ..................................

Total variable costs ......................................................................... 26,880

Contribution margin ................................................................................... $ 45,370 $381,638

Contribution margin ratio .......................................................................... 10.6% b.

MID-ATLANTIC COMPANY Contribution Margin Analysis—Boston/Philadelphia Route

For the Month Ended June 30, 2012

Planned contribution margin .................................................... –$34,694 Effect of change in sales: Sales quantity factor (768 – 532) × $614 ............................. $144,904 Unit price factor ($556 – $614) × 768 ................................... Total effect of change in sales ....................................... 100,360

– 44,544

Effect of changes in variable cost of goods sold: Variable cost quantity factor (768 – 532) × $86 .................. –$20,296 Unit cost factor ($86.00 – $86.00) × 532 .............................. Total effect of changes in variable cost of goods sold

0

– 20,296

Actual contribution margin........................................................ $ 45,370 Note to Instructors: If Exercise 20–20 was assigned, the increase in contribution margin can be reconciled. The increase in the contribution margin is reconciled from the planned contribution margin for the route from Exercise 20–20 of $(34,694) to the actual contribution margin of $45,370 in part (a).



Ex. 20–22 (FIN MAN); Ex. 5–22 (MAN)

a. FLY UNIVERSITY Variable Costing Income Statement

For the Fall Term 2012

Revenue ................................................................................................ Variable costs:

$ 12,896,000

Registration, records, and marketing cost ................................... $ 2,223,700 Instructional costs .......................................................................... Total variable costs ...................................................................

6,851,000

$ 9,074,700

Contribution margin ............................................................................. $ 3,821,300 Depreciation on classrooms and equipment ..................................... Income from operations ...................................................................... $ 2,721,300

1,100,000

Supporting Calculations Revenue: $160 × 80,600 credit hours Registration, records, and marketing costs: $370 × 6,010 students Instructional costs: $85 × 80,600 credit hours

b. FLY UNIVERSITY Contribution Margin Analysis

For the Fall Term 2012

Planned contribution margin ............................................ $ 3,725,000* Effect of change in revenue: Revenue quantity factor (80,600 – 57,600) × $180 ....... $ 4,140,000 Unit price factor ($160 – $180) × 80,600 ....................... Total effect of change in sales .................................. 2,528,000

– 1,612,000

Effect of changes in registration, records, and marketing costs: Variable cost quantity factor (5,500 – 6,010) × $370 .... – $188,700 Unit cost factor ($370 – $370) × 6,010 .......................... Total effect of changes in registration, records, and marketing costs .................................................. –188,700

0

Effect of changes in instructional costs: Variable cost quantity factor (57,600 – 80,600) × $80 .. – $1,840,000 Unit cost factor ($80 – $85) × 80,600 ............................ Total effect of changes in instructional cost ...........

– 403,000

– 2,243,000

Actual contribution margin................................................ $ 3,821,300

Note: There was no unit cost change for registration, records, and marketing cost. *$10,368,000 – $2,035,000 – $4,608,000

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