Chapter 7 Demonstration Problem Solutions Page 1 Please send comments and corrections to me at [email protected] Demo 7-1 ANSWER A B C D Total Sales: $1,000 $2,000 $1,000 $1,000 Variable Costs -660 -1,200 -800 -400 Contribution Margin $340 $800 $200 $600 Direct Fixed Costs -120 -240 -120 -120 Division Profit: $220 $560 $80 $480 $1340 Common Fixed Costs: $900 Operating Profit $440 Each division has a positive Operating Profit. No division should be dropped. If you drop Division C in the first year: A B D Total Sales: $1,000 $2,000 $1,000 Variable Costs: -660 -1,200 -400 Fixed Costs: -345 -690 -345 Operating Profit: -$5 $110 $255 $360 If you drop Division A in the second year: B D Total Sales: $2,000 $1,000 Variable Costs: -1,200 -400 Fixed Costs: -840 -420 Operating Profit: -$40 $180 $140 If you drop Division B in the third year: D Total Sales: $1,000 Variable Costs: -400 Fixed Costs: -1,020 Operating Profit: -$420 -$420 If you drop Division D in the fourth year, then there is no fifth year.Chapter 7 Demonstration Problem Solutions Page 2 Please send comments and corrections to me at [email protected] Demo 7-2 ANSWER 1. When you produce more inventory than you are selling, then fix costs are being treated as assets and not being expensed. 2. 1995 1996 1997 Sales $30,000 $32,000 $34,000 Less Var. COGS: -15,000 (100x150K) -16,800 (105x160K) -18,700 (110x170K) Contrib. Margin $15,000 $15,200 $15,300 Less Fixed Costs: Fixed Manufacturing OH: -15,000 -15,000 -15,000 Fixed S&A Expense: 3,000 -3,600 -3,800 Operating Profit: -$3,000 -$3,400 -$3,500 3. The difference in income between full-absorption costing method and the variable costing method is due to the different treatment of the fixed factory overhead attributable to unsold units. 1995 = $75 x 50,000 = $3,750 1996 = $60 x 90,000 = $5,400 1997 = $50 x 130,000 = $6,500 4. On the balance sheet check the % of inventory to sales. Demo 7-3 ANSWER 1. a. Absorption manufacturing cost per unit: Direct Materials: $ 4.00 (2 lbs. @ $2) Direct Labor: 10.50 (1.5 hrs @ $7) Variable Manufacturing Overhead: 3.00 (1.5 hrs @ $2) Fixed Manufacturing Overhead: 4.50 (1.5 hrs @ $3) Total: $22.00 b. Variable manufacturing cost per unit: Direct Materials: $ 4.00 (2 lbs. @ $2) Direct Labor: 10.50 (1.5 hrs @ $7) Variable Manufacturing Overhead: 3.00 (1.5 hrs @ $2) Total: $17.50Chapter 7 Demonstration Problem Solutions Page 3 Please send comments and corrections to me at [email protected] 2. Absorption Costing Income Statement: Revenue: $800,000 (20,000 x $40) Less Cost of Goods Sold: -455,000 ((20,000 x $22) + 10,000 + 5000) Gross Margin: $345,000 Less Selling & Administrative Expenses: -280,000 [200,000 + (.1 x 800,000)] Operating Profit: $65,000 3. Variable Costing Income Statement: Revenue $800,000 (20,000 x $40) Less Variable Costs: Variable Cost of Goods Sold -355,000 [(20,000 x 17.50) + 5,000] Variable Selling and Administrative Expenses -80,000 (800,000 x .1) Contribution Margin: $365,000 Less Fixed Costs: Fixed Selling and Administrative Expenses: -200,000 Fixed Manufacturing Overhead: -122,500 [(25,000 x 4.5) + 10,000] Operating Profit: $42,500 4. Unsold Units x Fixed Manufacturing Overhead per Unit: 5,000 x (4.5) = $22,500 Demo 7-4 ANSWER A B C Sales $1,500 $2,800 $1,050 Less Variable Costs: -1,000 -2,200 -1,550 Contribution Margin $500 $600 -$500 Less Fixed Costs: -100 -500 -150 Operating Profit: $400 $100 -$650 Product C has a negative contribution margin, so the firm should drop C.Chapter 7 Demonstration Problem Solutions Page 4 Please send comments and corrections to me at [email protected] If D replaces C, then 15,000 units of D would be produced and sold: D Sales $1,050 Less Variable Costs: -450 Contrib. Margin $600 Less Fixed Costs: -640 Product Margin: -$40 D has a positive contribution margin, however, the fixed costs are higher than the contribution margin. These are direct fixed costs, and the firm can save the $640 if it doesn't make product D. It would be better just to drop C. If product D replaced product B, then D would sell more units, and can cover its direct fixed costs: D Sales $1,400 Less Variable Costs: -600 Contrib. Margin $800 Less Fixed Costs: -640 Product Margin: $160 Product D could make $60 more than product B. So the firm would be best to drop C and replace B with
View Full Document
Unlocking...