WileyPlus Chapter 19

Which of the following items are viewed as product costs under absorption costing?

(a) Fixed manufacturing overhead (b) Variable manufacturing overhead

______ is the amount of revenue that remains after deducting variable costs in a CVP income statement

Contribution margin

Linburgh Inc manufactures model airplanes and repair kits. The model planes account for 80% of the sales mix, and the kits the remainder. The variable cost ratio for the model planes is 85% and 70% for the kits. Fixed costs are $99,000. Compute the breakeven point in sales dollars.

First the contribution margins for each product are calculated using the variable cost ratio: 1.00 - 0.85 = 0.15; 1.00 - 0.70 = 0.30. The weighted-average contribution margin is determined by multiplying the contribution margin ratio by the respective proportion of the total units sold for each specific product: [(0.80 × 0.15) + (0.20 × 0.30)] = 0.18. To determine the breakeven point, divide the weighted-average contribution ratio into total fixed costs: ($99,000 ÷ .18) = $550,000

Which statement is true about the margin of safety ratio?

It is higher for a company with lower operating leverage.

The format of a CVP income statement is Sales - Cost of goods sold - Operating expenses = Net Income.

The format of a CVP income statement is Sales - Variable costs - Fixed costs = Net income.

Which one of the following is the format of a CVP income statement?

The format of a CVP income statement is Sales - Variable costs - Fixed costs = Net income.

When a company sells multiple products, the breakeven point in sales dollars is computed by

dividing the total fixed costs by the weighted average contribution margin ratio. The breakeven point in sales dollars for multiple products is total fixed costs divided by the weighted average contribution margin ratio.

Net income computed under absorption costing will be

higher than net income under variable costing when units produced are greater than units sold.

Variable costing

is useful for internal reporting purposes.

Fixed manufacturing overhead costs are recognized as

product costs under absorption costing.

If a company makes two products, R1 and R2, what is the formula for the weighted-average unit contribution margin?

(Unit Contribution Margin of R1 × Sales Mix Percentage of R1) + (Unit Contribution Margin of R2 × Sales Mix Percentage of R2) The formula for weighted-average unit contribution margin is based on how much each unit of product contributes to covering fixed costs and profit and the number of units to be sold of each product. In this case, the formula is (Unit Contribution Margin of R1 × Sales Mix Percentage of R1) + (Unit Contribution Margin of R2 × Sales Mix Percentage of R2).

If Valdez Company produces 100,000 units and sells 95,000 units, which costing method will produce a higher net income for the year?

Absorption costing When units produced are greater than units sold, net income will be higher under absorption costing since more fixed costs will remain in inventory.

Marten Corp. has a limited number of machine hours available to produce its three products A11, B22, and C33. Determine the order that these products should be produced given the following data: A11; B22; C33 Unit sales price $14; $36; $10 Unit variable costs 6; 32; 3 Machine hours per unit 5; 4; 2

C33, A11, B22 The product with the highest contribution margin per limited resource should be produced first, followed by the next highest, and then the lowest. A11 = ($14 - $6)/5 MH = $1.60 per machine hour B22 = ($36 - $32)/4 MH = $1.00 per machine hour C33 = ($10 - $3)/2 MH) = $3.50 per machine hour The proper order of production is C33, A11, B22.

Company A has a higher proportion of fixed costs relative to variable costs than Company B. Which statement is true?

Company A has a higher break-even point than Company B. A company must sell more units to breakeven when its contribution margin per unit is smaller.

The following information is available for Jimmy's Tax Service: Sales $450,000 Cost of goods sold 110,000 Total fixed expenses 80,000 Total variable expenses 120,000 Which amount would you find on Jimmy's CVP income statement?

Contribution margin is computed as sales less total variable expenses. The CVP income statement will show Sales $450,000 - Total variable expenses $120,000 = Contribution margin of $330,000

The following information is available for Chap Company: Sales $350,000 Cost of goods sold 120,000 Total fixed expenses 60,000 Total variable expenses 100,000 Which amount would you find on Chap's CVP income statement?

Contribution margin is computed as sales less total variable expenses. The CVP income statement would show Sales $350,000 - Total variable expenses $100,000 = Contribution margin of $250,000.

If the contribution per unit is $15 and it takes 3.0 machine hours to produce the unit, how much is the contribution margin per unit of limited resource?

Contribution margin per unit of limited resource is contribution margin per unit divided by units of limited resource needed for the product. So, the answer is $15/3.0 = $5 per machine hour.

Everest Spas has a master masseuse on staff. His schedule is such that he only works 4 hours per day. Each 45-minute stone massage generates $90 of revenue and each deep tissue massage generates $65 of revenue. Deep tissue massages take 30 minutes. Variable costs are $30 for a stone massage and $20 for a deep tissue massage. Which massage should be 'pushed' to customers given the limited labor hours of the masseuse and how much?

Deep tissue massage, because it contributes $90 per labor hour towards profit The product with the higher contribution margin per limited resource should be emphasized to maximize profit: Stone massage: ($90 - $30)/0.75 hours = $80 per labor hour Deep tissue massage: ($65 - $20)/0.50 hours = $90 per labor hour Deep tissue massages should be emphasized since they produce the higher contribution margin of $90 per labor hour.

Donovan Company had sales of $50,000, fixed costs of $30,000 and a variable cost ratio of 25%. If sales increase by 6% next year, by how much will net income increase?

First, determine the degree of operating leverage by dividing contribution margin by net income. Contribution margin = ${50,000 × (1 - 0.25)} = $37,500 Net income = ($37,500 - $30,000) = $7,500 Degree of operating leverage = 37,500 ÷ $7,500 = 5.0 The percentage increase in profits is the degree of operating leverage multiplied by the 6% change in sales. Percentage increase in profits = 5.0 × 0.06 = 30% The increase in profit is the percentage increase in profits multiplied by the current net income. Increase in profits = $7,500 × .30 = $2,250

Yi Ling Company has two repair Divisions: Computers and Appliances. Given the following data, what is the break-even point in dollars for Yi Ling? Total fixed costs $500,000 Sales-mix percentages 0.40 for Computers and 0.60 for Appliances Contribution margin ratio 0.45 for Computers and 0.35 for Appliances

First, multiply the contribution margin ratio times the sales mix percentage for each product. Second, total fixed costs are divided by the total of the weighted-average contribution margins of all products to arrive at the breakeven point. ($500,000/[(0.45 × 0.40) + (0.35 × 0.60)] = $1,282,051

Gabriel Corporation has fixed costs of $180,000 and variable costs of $8.50 per unit. It has a target income $268,000. How many units must Gabriel sell at $12 per unit to achieve its target income?

Fixed costs plus target income are added together and divided by the contribution margin per unit. Required sales in units = ($180,000 + $268,000)/($12 - $8.50) = 128,000 units

Which of the following is treated as a period cost under variable costing?

Fixed overhead Fixed overhead is treated as a period cost under variable costing.

Which one of the following describes the break-even point?

It is the point where total sales equals total variable costs plus total fixed costs.

Which statement is not true about the degree of operating leverage?

It is the same for companies that have the same net income. Companies with different proportions of fixed and variable costs have different degrees of operating leverage even when net income is the same.

Which of the following is not an advantage of variable costing?

It makes it difficult to evaluate the impact of fixed costs on a company's results.

Croc Catcher calculates its contribution margin to be less than zero. Which statement is true?

Its selling price is less than its variable costs. If contribution margin is less than zero, selling price is less than variable costs.

Valerio Company sells Mountain Bikes and Racing Bikes. The Mountain Bikes sell for $300 and have variable costs of $125. The Racing Bikes sell for $450 and have variable costs of $275. Valerio Company has limited machine hours for production. If Mountain Bikes take 2 machine hours and racing bikes take 2.5 machine hours which product should be emphasized if capacity (machine hours) is increased and sufficient demand exists for each product?

Mountain Bikes The product with the higher contribution margin per limited resource should be emphasized to maximize profit. Racing Bikes produce a contribution margin of only $70 per machine hour [($450-$275)/2.5]. Mountain bikes should be emphasized since they produce the higher contribution margin of $87.50 per machine hour [($300 - $125)/2].

Starwise Company had the following amounts from its income statement: Sales revenue $100,000 Cost of goods sold-fixed 32,000 Cost of goods sold-variable 25,000 Selling expenses-fixed 9,000 Selling expenses-variable 11,000 Administrative expenses-fixed 12,000 Administrative expenses-variable 8,000 How much is Starwise's contribution margin?

Sales less variable costs equals contribution margin: $100,000 - $25,000 - $11,000 - $8,000 = $56,000

In the month of April, Carly's Carwash provided 3,000 car washes at an average price of $25. Fixed costs are $9,300 and variable costs are 85% of sales. How much is the contribution margin and the contribution margin ratio, respectively?

Sales less variable costs equals contribution margin: Sales = 3,000 × $25 = $75,000 Contribution margin = ${75,000 × (1 - .85)} = $11,250 The contribution margin ratio is sales less variable costs divided by sales: Contribution margin ratio = $11,250/$75,000 = 15%

Deighan Company had the following amounts from its income statement: Sales revenue (800 units) $80,000 Cost of goods sold-fixed 20,000 Cost of goods sold-variable 18,500 Selling expenses-fixed 7,000 Selling expenses-variable 6,000 Administrative expenses-fixed 5,000 Administrative expenses-variable 7,500 How much is Deighan's contribution margin?

Sales less variable costs equals contribution margin: $80,000 - $18,500 - $6,000 - $7,500 = $48,000

If Morton Company expects to sell blu-ray players at $100 a unit with variable costs of $60 per unit and DVR's at $200 per unit with variable costs of $120 per unit, what is the weighted average contribution margin if the sales mix is 4 DVR's for 1 blu-ray player?

The contribution margin for one unit of each product is multiplied by the proportion of the total units sold for the specific product: [($200 - $120) × (4/5)] + [($100 - $60) × (1/5)] = $72

Given the following information, what is the contribution margin ratio? Sales $900,000 Variable expenses 400,000 Fixed expenses 300,000 Net income 200,000

The contribution margin ratio is contribution margin divided by sales revenue. This ratio indicates the amount from each sales dollar available to cover fixed costs and to contribute to profit: ($900,000 - $400,000)/ $900,000 = 55.6%.

In the month of April, Carly's Carwash provided 3,000 car washes at an average price of $25. Fixed costs are $9,300 and variable costs are 85% of sales. How much is the margin of safety ratio?

The margin of safety is the difference between the current level of sales and breakeven sales. The margin of safety ratio is the margin of safety in dollars divided by current sales dollars. April sales = 3,000 × $25 = $75,000 Breakeven sales = ${9,300 ÷ (1 - .85)} = $62,000 Margin of safety = ($75,000 - $62,000) = $13,000 Margin of safety ratio = ($13,000 ÷ $75,000) = 17.33%

Cross Advisors is a financial advising firm. The service provided to clients includes a financial advising session that is 1 hour in length and the client is charged $200 for this session. If the firm's fixed costs equal $15,000 per month, how much should the CFO of the firm estimate for the number of sessions to breakeven if the contribution margin ratio is 25%?

The method to compute break even in units is to divide the fixed costs by the contribution margin ratio. This results in the breakeven sales and dividing this by the price per session yields the breakeven in units: Breakeven sales = $15,000/.25 = $60,000 Breakeven units = $60,000/$200 = 300 units

Ralph's Rent-a-Center offers two products for construction firms, bulldozers and backhoes. The contribution margin ratio for each bulldozer per hour is 25% of sales and 45% of sales for each backhoe. Ralph sells 3 backhoes to every 1 bulldozer sold to customers. What is the weighted average contribution margin rate per hour for Ralph's two products?

The sales mix is 3/(1 + 3), or 0.75 for backhoes, and 1/(1 + 3) or 0.25 for bulldozers. The weighted-average contribution margin is determined by multiplying the contribution margin ratio by the respective proportion of the total units sold for each specific product: [(0.75 × 0.45) + (0.25 × 0.25)] = 0.40 = 40%

In general, which products should a company sell more units?

Those with a higher contribution margin Products with higher contribution margins contribute more to covering fixed costs and to profit, resulting in higher net income.

Under what circumstances will net income under variable costing be higher than net income under absorption costing?

Units produced are less than units sold. Whenever units produced are less than units sold, variable costing net income will be higher than absorption costing net income because only the current period's fixed overhead is expensed.

Absorption costing net income is $50,000 for Wilkes Lumber. Its beginning inventory is zero and the ending inventory consists of 1,000 units, the variable overhead rate is $10 per unit, and the fixed overhead rate is $15 per unit. How much is net income under variable costing?

Variable costing net income differs from absorption net income because fixed overhead is expensed when incurred for variable costing and capitalized on units not sold under absorption costing: $50,000 - ($15 × 1,000) = $35,000

If a company has limited resources,

When a company has limited resources, the sales mix is determined by computing the contribution margin per unit of limited resource for each product.

Genesis Company manufactures digital televisions and computer monitors. The limiting resource for the company is 7,200 hours per month. Televisions have a contribution margin per unit of $400 and computer monitors have a contribution margin per unit of $100. Machine hours per unit for televisions and monitors are 0.80 and 0.25, respectively. If Genesis is able to increase machine capacity to 7,500 hours and increase the production of only one of these products, what amount of contribution margin is available under Digital TVs versus computer monitors separately, for the additional 300 hours?

When a company has limited resources, the sales mix is determined by computing the contribution margin per unit of limited resource for each product. Contribution margin per unit of limited resource for TVs = $400 ÷ 0.80 = $500 Contribution margin for TVs: $500 x 300 additional hours = $150,000 Contribution margin per unit of limited resource for Monitors = $100 ÷ 0.25 = $400 Contribution margin for TVs: $400 x 300 additional hours = $120,000

Sales mix is

a measure of the relative percentage in which a company's products are sold. Sales mix is the relative percentage in which a company sells its multiple products.

The degree of operating leverage is computed by dividing

contribution margin by net income. Contribution margin divided by net income yields the degree of operating leverage.

The degree of operating leverage can be computed as

contribution margin divided by net income.

A high degree of operating leverage

exposes a company to greater earnings volatility risk. A high degree of operating leverage exposes a company to greater earnings volatility risk.

Determining the sales mix with limited resources requires selecting the products with the highest contribution margin.

false Determining the sales mix with limited resources requires selecting the products with the highest contribution margin per unit of limited resource.

In general, a company should try to sell more low contribution margin products.

false Net income will be greater if a company sells more products with higher contribution margin.

Sales mix is important for companies that sell only one product.

false Sales mix is the proportion of each product sold, which is important for companies that sell multiple products.

Variable costing treats fixed manufacturing overhead as product costs.

false Under variable costing, only direct materials, direct labor, and variable manufacturing overhead costs are considered product costs.

Net income will be

greater if more higher-contribution margin units are sold than lower-contribution margin units.

A company with high operating leverage

has a greater proportion of fixed costs to variable costs.

In order to maximize profits when limited resources are available, a company should concentrate on the producing products with

the highest contribution margin per unit of limited resource. Profits will be maximized when a company produces those products with the highest contribution margin per unit of limited resource.

Cost structure refers to the relative proportion of fixed versus variable costs that a company incurs.

true

Margin of safety measures how far sales can drop before a company will be operating at a loss.

true

Operating leverage refers to the extent to which a company's net income reacts to a given change in sales.

true

The formula for computing the break-even point in sales dollars for a company with multiple products or multiple divisions is fixed costs divided by the weighted average contribution margin ratio.

true

The contribution margin ratio is calculated as contribution margin divided by sales.

true This ratio indicates the amount of each sales dollar that is available to cover fixed costs and to contribute to profit.

Management may be tempted to overproduce in a given period

when using absorption costing, in order to increase net income. When production exceeds sales, some of the fixed overhead is deferred in ending inventory, thereby increasing net income under absorption costing.