All the solutions for the problems that require calculations are on the attached excel sheet.

When entering your answers, please check the

requirements in the question, some of them ask you to round to 2 or 3 decimal place, some ask you to omit the dollar sign..etc
1.
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The following monthly budgeted data are available for the International

Company:
Sales
Variable
expenses

Product C
$
508,000

Product J
$
308,000

Product R
$
904,000

296,000

204,000

714,000

Contribution
margin

212,000

104,000

190,000

Budgeted net operating income for the month is $215,000.

Required:
a. Calculate the break-even dollar sales for the month. (Round your answer to the
nearest dollar amount. Omit the "$" sign in your response.)
Dollar sales to break even

b. Calculate the margin of safety. (Round your intermediate calculation and final answer to
the nearest dollar amount. Omit the "$" sign in your response.)
Margin of safety

c. Calculate the operating leverage. (Round your answer to 2 decimal places.)

Operating leverage
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Sawaya Co., Ltd., of Japan is a manufacturing company whose

total factory overhead costs fluctuate considerably from year to year according to increases and
decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs
(in Japanese yen, denoted ) at high and low levels of activity for recent years are given below:

Direct labor-hours
Total factory overhead costs

Level of Activity
Low
High
52,800
70,400
233,040
255,920

The factory overhead costs above consist of indirect materials, rent, and maintenance. The
company has analyzed these costs at the 52,800-hour level of activity as follows:
Indirect materials (variable)
Rent (fixed)
Maintenance (mixed)
Total factory overhead costs

58,080
136,000
38,960
233,040

To have data available for planning, the company wants to break down the maintenance cost into
its variable and fixed cost elements.
Requirement 1:
Estimate how much of the 255,920 factory overhead cost at the high level of activity consists
of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the
255,920 consists of indirect materials and rent. Think about the behavior of variable and fixed
costs!) (Omit the "" sign in your response.)
2

Maintenance cost

Requirement 2:
Using the high-low method, estimate a cost formula for maintenance where X represents the
number of direct-labor hours. (Round variable cost per unit to 1 decimal place. Omit the ""
sign in your response.)
Y=

Requirement 3:
What total factory overhead costs would you expect the company to incur at an operating level
of 58,080 direct labor-hours? (Omit the "" sign in your response.)

Indirect materials
Rent
Maintenance:
Variable cost element

Fixed cost element

Total factory overhead cost

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Deavila Inc. produces and sells two products. Data concerning those products for the most
recent month appear below:

Sales
Variable expenses

Product
Product J53Z
Q91I
$16,100
$11,400
$ 5,720
$ 4,940

Fixed expenses for the entire company were $13,920.

Required:
a. Determine the overall contribution margin ratio for the company. (Round your answer to 2
decimal places.)
Contribution margin
ratio
b. Determine the overall break-even point in total sales dollars for the company. (Round your
intermediate calculation to 2 decimal places and final answer to the nearest dollar
amount. Omit the "$" sign in your response.)
Break-even point

c. If the sales mix shifts toward Product Q91I with no change in total sales, what will happen to
the break-even point for the company?
It will result in a decrease in the company's overall break-even point.
It will result in a increase in the company's overall break-even point.
4
The Central Valley Company is a merchandising firm that sells a single product. The companys
revenues and expenses for the last three months are given below:
Central Valley Company
4

Sales in units
Sales revenue
Cost of goods
sold

Gross margin
Selling and
administrative
expenses:
Shipping
expense
Advertising
expense
Salaries and
commissions
Insurance
expense
Depreciation
expense
Total selling
and
administrative
expense
Net operating
income

Comparative Income Statement

For the Second Quarter
April
May
4,400
5,050
616,000
$
707,000

June
6,400
896,000

220,000

252,500

320,000

396,000

454,500

576,000

52,000

57,980

70,400

68,000

68,000

68,000

134,000

149,600

182,000

10,000

10,000

10,000

38,000

38,000

38,000

302,000

323,580

368,400

94,000

130,920

Required:
a. Determine which expenses are mixed and, by use of the high-low method, separate each
5

207,600

mixed expense into its variable and fixed components. State the cost formula for each mixed
expense. (Round "per unit" answers to 2 decimal places. Omit the "$" sign in your
response.)
Cost formula
(Click to select)
+
per unit
$
$
(Click to select)

per unit

b.
Compute the companys total contribution margin for May. (Round your answer to the
nearest whole number. Omit the "$" sign in your response.)
Contribution
margin

5.
The management of Harlow Corporation, a manufacturing company, would like your help in contrasting
the traditional and contribution approaches to the income statement.
The company has provided the following financial data for January:
Sales
Variable production expense
Fixed production expense
Variable selling expense
Fixed selling expense
Variable administrative expense
Fixed administrative expense

$231,000
$22,000
$38,000
$15,000
$27,000
$13,500
$49,000

The company had no beginning or ending inventories.

6

The contribution margin for January was:

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$156,000
$180,500
$184,000
$66,500

= $231,000 ($22,000 + $15,000 + $13,500)

6.
Boening Enterprises, Inc., produces and sells a single product whose selling price is $148 per
unit and whose variable expense is $48 per unit. The company's monthly fixed expense is
$510,500. Assume the company's monthly target profit is $11,900. The unit sales to attain that
target profit is closest to:
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7,195
5,224
10,883
3,530

$510,500 $11,900
($148 $48)

7.
Ringstaff Corporation produces and sells a single product. Data concerning that product appear below:

Selling price
Variable expenses
Contribution margin

Per Unit Percent of Sales

$141
100%
28.2
20%
$112.8
80%

The company is currently selling 7,800 units per month. Fixed expenses are $609,000 per month. The marketing manager believes that a $26,072 increase in the
monthly advertising budget would result in a 240 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating
income of this change?
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Decrease of $26,072
Increase of $1,000
Increase of $27,072
Decrease of $1,000

8.
The management of Harlow Corporation, a manufacturing company, would like your help in
contrasting the traditional and contribution approaches to the income statement. The company
has provided the following financial data for January:
Sales
Variable production expense
Fixed production expense
Variable selling expense
Fixed selling expense
Variable administrative expense
Fixed administrative expense

$232,000
$31,000
$25,000
$18,000
$33,000
$12,500
$36,000

The company had no beginning or ending inventories.

The gross margin for January was:
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$125,000
$76,500
$188,500
$176,000

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The management of Archie Corporation would like to better

understand the behavior of the companys warranty costs. Those costs are listed below for a
number of recent months:
Product Returns
May
June
July
August
September
October
November
December

34
37
30
40
46
38
39
43

Warranty
Cost
$3,869
$3,915
$3,799
$3,936
$4,012
$3,903
$3,916
$3,962

Management believes that warranty cost is a mixed cost that depends on the number of product
returns.
Required:
Estimate the variable cost per product return and the fixed cost per month using the least-squares
regression method. (Do not round intermediate calculations. Round your fixed cost to the
nearest dollar amount and the variable cost to 2 decimal places. Omit the "$" sign in your
response.)

Variable cost

per product return

Fixed cost

per month

y = 12.43x + 3858
Variable Cost = $12.43
Fixed Cost = $3,858
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10.
Riven Corporation has a single product whose selling price is $17. At an expected sales level of
$1,938,000, the company's variable expenses are $684,000 and its fixed expenses are $283,000.
The marketing manager has recommended that the selling price be increased by 25%, with an
expected decrease of only 8% in unit sales. What would be the company's net operating income
if the marketing manager's recommendation is adopted?
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$971,000
$1,945,700
$1,316,420
$1,261,700

11.
Wertman Corporation produces and sells a single product with the following characteristics:
Per unit Percent of Sales
Selling price
$152.00
100%
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Variable expenses
Contribution
margin

103.36

68%

$48.64

32%

The company is currently selling 3,800 units per month. Fixed expenses are $215,800 per month.
Management is considering using a new component that would increase the unit variable cost by $3.
Since the new component would increase the features of the company's product, the marketing
manager predicts that monthly sales would increase by 300 units. What should be the overall effect on
the company's monthly net operating income of this change?
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increase of $13,692
increase of $2,292
decrease of $13,692
decrease of $2,292

12.
Monsky Corporation produces and sells a single product whose contribution margin ratio is 65%. The company's monthly fixed expense is $416,000 and the
company's monthly target profit is $63,050. The dollar sales to attain that target profit is closest to:
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$270,400
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$311,382
$640,000
$737,000

13.
When the level of activity increases within the relevant range, how does each of the following change?

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Choice C
Choice B
Choice A
Choice D

14.
What is the cause of the difference between absorption costing net operating income and variable costing net operating income?
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Absorption costing includes variable manufacturing costs in product costs; variable costing considers variable manufacturing costs to be period costs.
Absorption costing deducts all manufacturing costs from net operating income; variable costing deducts only prime costs.
13

Absorption costing includes fixed administrative costs in product costs; variable costing considers fixed administrative costs to be period costs.
Absorption costing allocates fixed manufacturing costs between cost of goods sold and inventories; variable costing considers all fixed
manufacturing costs to be period costs.

15.
On a cost-volume-profit graph, the break-even point is located:
-2-2

where the total revenue line intersects the volume axis.

where the total expenses line intersects the dollars axis.
at the origin.
where the total revenue line intersects the total expenses line.

16.
The margin of safety is equal to:
-2-2

Sales - (Variable expenses/Contribution margin).

Sales - Net operating income.
Sales - (Variable expenses + Fixed expenses).
Sales - (Fixed expenses/Contribution margin ratio).
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17.
Net operating income computed using variable costing would exceed net operating income computed using absorption costing if:
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the average fixed cost per unit is zero.

units sold are less than units produced.
units sold exceed units produced.
units sold equal units produced.

18.
Witczak Company has a single product and currently has a degree of operating leverage of 5. Which of the following will increase Witczak's degree of
operating leverage?

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Choice C
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Choice A
Choice B
Choice D

19.
A disadvantage of the high-low method of cost analysis is that:
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It relies totally on the judgment of the person performing the cost analysis.
It uses two extreme data points, which may not be representative of normal conditions.
It is too time consuming to apply.
It cannot be used when there are a very large number of observations.
20.
Assuming that direct labor is a variable cost, product costs under variable costing include only:
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direct materials and direct labor.

direct materials, direct labor, variable manufacturing overhead, and variable selling and administrative expenses.
direct material, variable manufacturing overhead, and variable selling and administrative expenses.
direct materials, direct labor, and variable manufacturing overhead.

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Denton Company manufactures and sells a single product. Cost data for the product are given
below:
Variable costs per unit:
Direct materials
Direct labor
Variable manufacturing overhead
Variable selling and administrative
Total variable cost per unit
Fixed costs per month:
Fixed manufacturing overhead
Fixed selling and administrative
Total fixed cost per month

$7
12
3
5
$27
$297,000
186,000
$483,000

The product sells for $40 per unit. Production and sales data for July and August, the first two
months of operations, follows:

July
August

Units
Produced
33,000
33,000

Units
Sold
29,000
37,000
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The company's Accounting Department has prepared absorption costing income statements for
July and August as presented below:
July
$1,160,000
899,000
261,000
331,000
$-70,000

Sales
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income

August
$1,480,000
1,147,000
333,000
371,000
$-38,000

Requirement 1:
Determine the unit product cost under Absorption costing and Variable costing. (Omit the "$"
sign in your response.)
Unit product cost
Absorption costing

Variable costing

Requirement 2:
Prepare contribution format variable costing income statements for July and August. (Input all
amount as positive value except net loss which should be indicated with a minus sign. Omit
the "$" sign in your response.)
July
(Click to select)

August
$

Variable expenses:
(Click to select)
(Click to select)

Total variable expenses

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(Click to select)

Fixed expenses:
(Click to select)
(Click to select)

Total fixed expenses

Net operating income (loss)

Requirement 3:
Reconcile the variable costing and absorption costing net operating income figures. (Input all
amount as positive value except net loss which should be indicated with a minus sign.
Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your
response.)
July
Variable costing net operating income (loss)
(Click to select)

August

fixed manufacturing overhead cost deferred in inventory under

absorption costing
(Click to select)

fixed manufacturing overhead cost released from inventory under

absorption costing
Absorption costing net operating income

Requirement 4:
Which is the most appropriate method of costing?
(Click to select)

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"This makes no sense at all," said Bill Sharp, president of Essex Company. "We sold the same
number of units this year as we did last year, yet our profits have more than doubled. Who made
the goofthe computer or the people who operate it?"
The statements to which Mr. Sharp was referring are shown below (absorption costing basis):
Sales (34,000 units each year)
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income

Year 1
$1,267,000
680,000
587,000
334,000
$253,000

Year 2
$1,267,000
578,000
689,000
334,000
$355,000

The statements above show the results of the first two years of operation. In the first year, the
company produced and sold 34,000 units; in the second year, the company again sold 34,000
units, but it increased production as shown below:
Production in units
Sales in units
Variable manufacturing cost per unit produced
Variable selling and administrative expense per unit
sold
Fixed manufacturing overhead costs (total)

Year 1
34,000
34,000
$5

Year 2
44,000
34,000
$5

$1

$1

$510,000

$510,000

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Essex Company applies fixed manufacturing overhead costs to its only product on the basis of
each year's production. Thus, a new fixed manufacturing overhead rate is computed each year.
Requirement 1:
Compute the unit product cost for each year under (Round fixed manufacturing overhead cost
per unit and final answers to the nearest whole dollar. Omit the "$" sign in your response.)
Unit product cost
Year 1
Year 2
a. Absorption costing

b. Variable costing

Requirement 2:
Prepare a contribution format variable costing income statement for each year. (Input all
amounts as positive values. Omit the "$" sign in your response.)
Year 1
(Click to select)

Year 2
$

Variable expenses:
(Click to select)
(Click to select)
(Click to select)

Fixed expenses:
(Click to select)
(Click to select)
(Click to select)

Requirement 3:
Reconcile the variable costing and absorption costing net operating income figures for each
year. (Leave no cells blank - be certain to enter "0" wherever required. Round fixed
21

manufacturing overhead cost per unit and final answers to the nearest whole dollar. Omit
the "$" sign in your response.)

Variable costing net operating income

(Click to select)

Year 1

Year 2

: Fixed manufacturing overhead cost deferred

in
inventory under absorption costing
Absorption costing net operating income

Requirement 4:
The net operating income for Year 2 was higher than for Year 1 under absorption costing,
although the same number of units was sold in each year. This is because by increasing
production and building up inventory, profits increased without any increase in sales or
reduction in costs. Is the above reason true or false?
(Click to select)

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The following is Alsatia Corporation's contribution format income statement for last month:
Sales
Variable
expenses

943,400

Contribution
margin
Fixed
expenses
Net
operating
income

1,547,600

604,200
302,100

302,100

The company has no beginning or ending inventories and produced and sold 10,600 units during
the month.
Required:
What is the company's contribution margin ratio? (Round your answer to 3 decimal
a.
places.)
Contribution margin
ratio
23

b. What is the company's break-even in units?

Break-even

units

c. If sales increase by 140 units, by how much should net operating income increase? (Omit the
"$" sign in your response.)
Increase in net operating
income

d. How many units would the company have to sell to attain target profits of $330,600?
Sales to attain target
profit

units

e. What is the companys margin of safety in dollars? (Omit the "$" sign in your response.)
Margin of safety in
dollars
f.

What is the company's degree of operating leverage? (Round your answer to 1 decimal
place.)
Degree of operating
leverage

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