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Chapter 21: Q8SE (page 1168)

Computing variable costing contribution margin

Refer to your answers to Short Exercise S21-6. Product X sells for \(175 per unit. Assume no beginning inventories. Calculate the contribution margin using variable costing when Adamson:

  1. Produces and sells 2,000 units.
  2. Produces 2,500 units and sells 2,000 units
  3. Produces 5,000 units and sells 2,000 units.

S21-6 Direct materials \) 41 per unit Direct labor 57 per unit Variable manufacturing overhead 7 per unit Fixed manufacturing overhead 20,000 per year

Short Answer

Expert verified

Answer

  1. Contribution margin =$140,000
  2. Contribution margin =$140,000
  3. Contribution margin =$140,000

Step by step solution

01

Calculation of unit product cost using variable costing

Units Produced

2,000 Units

2,500 Units

5,000 Units

Direct material

$41

$41

$41

Direct labor

$57

$57

$57

Variable manufacturing overhead

$7

$7

$7

Total unit product cost

$105

$105

$105

02

Calculation of contribution margin (a, b, c) :

Particulars

Produce and sell 2,000 units

Produce 2,500 and sell 2,000 units

Produce 5,000 and sell 2,000 units

Net sales revenue

2,000*$175

=$350,000

2,000*$175

=$350,000

2,000*$175

=$350,000

Less: Variable costs

2,000*$105

=$210,000

2,000*$105

=$210,000

2,000*$105

=$210,000

Contribution margin

$140,000

$140,000

$140,000

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Most popular questions from this chapter

Sampson Company operates a manufacturing facility where several products are made. Each product is considered a business segment, and the product managers have the opportunity to receive a bonus based on the profit of the segment. Franco Hopper is the manager for the scissors product line. Production and sales data for the scissors product line for the past three years are shown below:

Year 1 Year 2 Year 3 Units produced 100,000 units 125,000 units 160,000 units Units sold 100,000 units 100,000 units 100,000 units Sales price per unit \( 12.00 per unit \) 12.00 per unit $ 12.00 per unit Variable manufacturing cost per unit 5.00 per unit 5.00 per unit 5.00 per unit Total fixed manufacturing costs 200,000 per year 200,000 per year 200,000 per year

Hopper’s bonus is 0.5% of the gross profit of the scissors product line, based on absorption costing. Upper management is discussing changing the bonus system so that bonuses are based on operating income using variable costing. Hopper is opposed to this change and has been trying to convince the other product managers to join him in voicing their opposition. There are no beginning inventories in Year 1.

Requirements:

  1. Calculate the fixed cost per unit produced for each year.
  2. Prepare income statements for the three years using absorption costing.
  3. Calculate Hopper’s bonus based on the current plan.
  4. Prepare income statements for the three years using variable costing.
  5. Calculate Hopper’s bonus based on the proposed plan.
  6. Give possible reasons why Hopper is opposed to the proposed bonus plan. Do you think Hopper’s actions have been ethical the past three years? Why or why not?

How can variable costing be used in service companies?

Analyzing profitabilityFather Furniture Company manufactures and sells oak tables and chairs. Price and cost data for the furniture follow:

Tables Chairs Sales Price \( 800 \) 70 Variable manufacturing costs 60025Sales commission (10%) 807Relative Furniture has three sales representatives: Adam, Ben, and Caleb. Adam sold 100 tables with 6 chairs each. Ben sold 110 tables with 4 chairs each. Caleb sold 80 tables with 8 chairs each.

Requirements

1. Calculate the total contribution margin and the contribution margin ratio for each sales representative (round to two decimal places).

2. Which sales representative has the highest contribution margin ratio? Explain why.

Using variable costing, service company Henry’s Helpers provides locksmith services. One type of service call is to evaluate private residences for security concerns and make recommendations for a safety plan. Use the data below to determine the company’s total contribution margin, contribution margin per service call, and contribution margin ratio when 220 service calls are made in the month of June.

Service Revenue $ 170 per service call

Variable Costs 68 per service call

Fixed Costs 21,040 per month

Using variable and absorption costing, making decisions

The 2018 data that follow pertain to Mike’s Magnificent Eyewear, a manufacturer of swimming goggles. (Mike’s Magnificent Eyewear had no beginning Finished Goods Inventory in January 2018.)

Number of goggles produced 245,000

Number of goggles sold 230,000

Sales price per unit \( 28

Variable manufacturing cost per unit 10

Sales commission cost per unit 2

Fixed manufacturing overhead 1,960,000

Fixed selling and administrative costs 260,000

Requirements:

  1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for Mike’s Magnificent Eyewear for the year ended December 31, 2018.
  2. Which statement shows the higher operating income? Why?
  3. Mike’s Magnificent Eyewear’s marketing vice president believes a new sales promotion that costs \)40,000 would increase sales to 235,000 goggles. Should the company go ahead with the promotion? Give your reasoning.
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