Test bank accounting 25th editon warren chapter 21 cost behavior and cost volume profit analysis

Chapter 21 Cost Behavior and Cost-Volume-Profit Analysis Student: _ Cost behavior refers to the methods used to estimate costs for use in managerial decision making True False Cost behavior refers to the manner in which a cost changes as the related activity changes True False The fixed cost per unit varies with changes in the level of activity True False A production supervisor's salary that does not vary with the number of units produced is an example of a fixed cost True False Direct materials cost that varies with the number of units produced is an example of a fixed cost of production True False In order to choose the proper activity base for a cost, managerial accountants must be familiar with the operations of the entity True False The relevant range is useful for analyzing cost behavior for management decision-making purposes True False The relevant activity base for a cost depends upon which base is most closely associated with the cost and the decision-making needs of management True False The range of activity over which changes in cost are of interest to management is called the relevant range True False 10 Total fixed costs change as the level of activity changes True False 11 Because variable costs are assumed to change in direct proportion to changes in the activity level, the graph of the variable costs when plotted against the activity level appears as a circle True False 12 Variable costs are costs that remain constant in total dollar amount as the level of activity changes True False 13 Variable costs are costs that remain constant on a per-unit basis as the level of activity changes True False 14 Variable costs are costs that vary in total in direct proportion to changes in the activity level True False 15 Variable costs are costs that vary on a per-unit basis with changes in the activity level True False 16 Direct materials and direct labor costs are examples of variable costs of production True False 17 Total variable costs change as the level of activity changes True False 18 Unit variable cost does not change as the number of units of activity changes True False 19 A mixed cost has characteristics of both a variable and a fixed cost True False 20 Rental charges of $40,000 per year plus $3 for each machine hour over 18,000 hours is an example of a fixed cost True False 21 A rental cost of $20,000 plus $.70 per machine hour of use is an example of a mixed cost True False 22 For purposes of analysis, mixed costs can generally be separated into their variable and fixed components True False 23 The contribution margin ratio is the same as the profit-volume ratio True False 24 Variable costs as a percentage of sales are equal to 100% minus the contribution margin ratio True False 25 The dollars available from each unit of sales to cover fixed cost and profit is the unit variable cost True False 26 The ratio that indicates the percentage of each sales dollar available to cover the fixed costs and to provide operating income is termed the contribution margin ratio True False 27 If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution margin ratio is 60% True False 28 If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution margin ratio is 40% True False 29 The data required for determining the break-even point for a business are the total estimated fixed costs for a period, stated as a percentage of net sales True False 30 If fixed costs are $500,000 and variable costs are 60% of break-even sales, profit is zero when sales revenue is $930,000 True False 31 If fixed costs are $850,000 and the unit contribution margin is $50, profit is zero when 15,000 units are sold True False 32 The point in operations at which revenues and expired costs are exactly equal is called the break-even point True False 33 Break-even analysis is one type of cost-volume-profit analysis True False 34 If the property tax rates are increased, this change in fixed costs will result in a decrease in the break-even point True False 35 If yearly insurance premiums are increased, this change in fixed costs will result in an increase in the break-even point True False 36 If employees accept a wage contract that increases the unit contribution margin, the break-even point will decrease True False 37 If employees accept a wage contract that decreases the unit contribution margin, the break-even point will decrease True False 38 If direct materials cost per unit increases, the break-even point will decrease True False 39 If direct materials cost per unit increases, the break-even point will increase True False 40 If direct materials cost per unit decreases, the amount of sales necessary to earn a desired amount of profit will decrease True False 41 If fixed costs are $450,000 and the unit contribution margin is $50, the sales necessary to earn an operating income of $50,000 are 10,000 units True False 42 If fixed costs are $650,000 and the unit contribution margin is $30, the sales necessary to earn an operating income of $30,000 are 14,000 units True False 43 Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the profit-volume chart True False 44 Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the cost-volume-profit chart True False 45 Cost-volume-profit analysis can be presented in both equation form and graphic form True False 46 If a business sells two products, it is not possible to estimate the break-even point True False 47 If a business sells four products, it is not possible to estimate the break-even point True False 48 Even if a business sells six products, it is possible to estimate the break-even point True False 49 If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety is 11,500 units True False 50 If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety is 14,500 units True False 51 If the volume of sales is $6,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 25% True False 52 If the volume of sales is $7,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 45.8% True False 53 Companies with large amounts of fixed costs will generally have a high operating leverage True False 54 A low operating leverage is normal for highly automated industries True False 55 Garmo Co has an operating leverage of Next year's sales are expected to increase by 10% The company's operating income will increase by 50% True False 56 The reliability of cost-volume-profit analysis does NOT depend on the assumption that costs can be accurately divided into fixed and variable components True False 57 Absorption costing is required for financial reporting under generally accepted accounting principles True False 58 The adoption of variable costing for managerial decision making is based on the premise that fixed factory overhead costs are related to productive capacity of the manufacturing plant and are normally not affected by the number of units produced True False 59 In an absorption costing income statement, the manufacturing margin is the excess of sales over the variable cost of goods sold True False 60 Assuming no other changes, operating income will be the same under both the variable and absorption costing methods when the number of units manufactured equals the number of units sold True False 61 Cost behavior refers to the manner in which: A a cost changes as the related activity changes B a cost is allocated to products C a cost is used in setting selling prices D a cost is estimated 62 The three most common cost behavior classifications are: A variable costs, product costs, and sunk costs B fixed costs, variable costs, and mixed costs C variable costs, period costs, and differential costs D variable costs, sunk costs, and opportunity costs 63 Costs that remain constant in total dollar amount as the level of activity changes are called: A fixed costs B mixed costs C product costs D variable costs 64 Which of the graphs in Figure 20-1 illustrates the behavior of a total fixed cost? A Graph B Graph C Graph D Graph 65 Which of the graphs in Figure 20-1 illustrates the behavior of a total variable cost? A Graph B Graph C Graph D Graph 66 Which of the graphs in Figure 20-1 illustrates the nature of a mixed cost? A Graph B Graph C Graph D Graph 67 Which of the following costs is an example of a cost that remains the same in total as the number of units produced changes? A Direct labor B Salary of a factory supervisor C Units of production depreciation on factory equipment D Direct materials 68 Which of the following describes the behavior of the fixed cost per unit? A Decreases with increasing production B Decreases with decreasing production C Remains constant with changes in production D Increases with increasing production 182 The Tom Company reports the following data Sales Variable costs Fixed costs $600,000 $400,000 $100,000 Determine Tom Company’s operating leverage 2.0 = ($600,000 - $400,000) / ($600,000 - $400,000 - $100,000) 183 The Dean Company has sales of $500,000, and the break-even point in sales dollars of $300,000 Determine the company’s margin of safety percentage 40% = ($500,000 - $300,000)/$500,000 184 The Grant Company has sales of $300,000, and the break-even point in sales dollars if $225,000 Determine the company’s margin of safety percentage 25% = ($300,000 - $225,000)/$300,000 185 Blane Company has the following data: Total Sales Total Variable Costs Fixed Costs Units sold $800,000 $300,000 $200,000 50,000 units What will operating income be if units sold double to 100,000 units? Total Sales Total Variable Costs Contribution Margin Fixed Costs Operating Income $1,600,000 $ 600,000 $1,000,000 $ 200,000 $ 800,000 186 Douglas Company has a contribution margin ratio of 30% If Douglas has $336,420 in fixed costs, what amount of sales will need to be generated in order for the company to break even? $336,420 / 0.30 = $1,121,400 187 Racer Industries has fixed costs of $900,000 Selling price per unit is $250 and variable cost per unit is $130 Required: a How many units must Racer sell in order to break even? b How many units must Racer sell in order to earn a profit of $480,000? c A new employee suggests that Racer Industries sponsor a company 10-K as a form of advertising The cost to sponsor the event is $7,200 How many more units must be sold to cover this cost? a b c $900,000 / ($250 – 130) = 7,500 units ($900,000 + 480,000) / ($250 – 130) = 11,500 units $7,200 / ($250 – 130) = 60 units 188 Global Publishers has collected the following data for recent months: Month Issues published March 20,500 $20,960 April 21,800 22,464 May 17,750 18,495 June 21,200 21,395 Total cost Required: a Using the high-low method, find variable cost per unit, total fixed costs, and the total cost equation b a What is the estimated cost for a month in which 19,000 issues are published? Variable cost per unit = ($22,464 – $18,495) / (21,800 – 17,750) = $0.98 per unit Total fixed costs = $18,495 – (17,750 x $0.98) = $1,100 Total cost = $1,100 + ($0.98 x number of issues published) b Total cost = $1,100 + ($0.98 x 19,000) = $19,720 189 Trail Bikes, Inc sells three Deluxe bikes for every seven Standard bikes The Deluxe bike sells for $1,800 and has variable costs of $1,200 The Standard bike sells for $600 and has variable costs of $200 Required: A If Trail Bikes has fixed costs that total $1,702,000, how many bikes must be sold in order for the company to break even? B How many of these bikes will be Deluxe bikes and how many will be the Standard bikes? Weighted average contribution margin = (3 x ($1,800 - $1,200) + x ($600 – $200)) / 10 = $460 Break even point = $1,702,000/460 = 3,700 bikes 30% Deluxe = 1,110 70% Standard = 2,590 190 If a business had a capacity of $10,000,000 of sales, actual sales of $6,000,000, break-even sales of $4,200,000, fixed costs of $1,800,000, and variable costs of 60% of sales, what is the margin of safety expressed as a percentage of sales? Margin of Safety = (Sales - Sales at Breakeven) / Sales ($6,000,000 - $4,200,000) / $6,000,000 = 30% 191 Safari Co sells two products, Orks and Zins Last year Safari sold 21,000 units of Orks and 14,000 units of Zins Related data are: Product Orks Zins Unit Selling Price $120 80 Unit Variable Cost $80 60 Unit Contribution Margin $40 20 Calculate the following: a Safari Co.’s sales mix b Safari Co.’s weighted average unit selling price c Safari Co’s weighted average unit contribution margin d Safari Co’s break-even point assuming that last year’s fixed costs were $160,000 a Orks: 21,000 / (21,000 + 14,000) = 60% Zins: 14,000 / (21,000 + 14,000) = 40% b $120 x 60% + $80 x 40% = $104 c ($120 - $80) x 60% + ($80 - $60) x 40% = $32 d $160,000 / $32 = 5,000 units 192 Given the following information: Variable cost per unit = $5.00 July fixed cost per unit = $7.00 Units sold and produced in July 25,000 What is total estimated cost for August if 30,000 units are projected to be produced and sold? Total Fixed costs = $7.00 ´ 25,000 = $175,000 Total cost at 30,000 units = $175,000 + ($5.00 x 30,000 units) = $325,000 193 Carrolton, Inc currently sells widgets for $80 per unit The variable cost is $30 per unit and total fixed costs equal $240,000 per year Sales are currently 20,000 units annually The company is considering a 20% drop in selling price that they believe will raise units sold by 20% Assuming all costs stay the same, what is the impact on income if they make this change? Current Scenario: SP VC CM $80 $30 $50 x 20,000 units = $1,000,000 total contribution margin Proposed Change: SP $80 ´ 80% = $64 VC $30 CM $34 ´ (20,000 ´ 1.2) = $816,000 total contribution margin Total CM (and income) drops by $184,000 ($1,000,000 - $816,000) 194 Given the following: Variable cost as a percentage of sales = 60% Unit Variable cost = $30 Fixed costs = $200,000 What is the break-even point in units? $30/60% = $50 selling price If VC as a percentage of sales is 60%, then Contribution Margin ratio is 40% Unit CM = 40% ´ $50 = $20 Breakeven in units = $200,000 / $20 = 10,000 units 195 A business had a margin of safety ratio of 20%, variable costs of 75% of sales, fixed costs of $240,000, a break-even point of $960,000, and operating income of $60,000 for the current year Calculate the current year's sales $960,000/.8 = $1,200,000 196 For the current year ending January 31, Harp Company expects fixed costs of $188,500 and a unit variable cost of $51.50 For the coming year, a new wage contract will increase the unit variable cost to $55.50 The selling price of $70.00 per unit is expected to remain the same (a) (b) Compute the break-even sales (units) for the current year Compute the anticipated break-even sales (units) for the coming year, assuming the new wage contract is signed Round your answer to the nearest whole number (a) $188,500/($70.00 - $51.50) = 10,189 units (b) $188,500/($70.00 - $55.50) = 13,000 units 197 (a) (b) If Swannanoa Company's budgeted sales are $1,000,000, fixed costs are $350,000, and variable costs are $600,000, what is the budgeted contribution margin ratio? If the contribution margin ratio is 30%, sales are $900,000 and fixed costs are $200,000, what is the operating profit? (a) Contribution margin = $1,000,000 - $600,000 = $400,000 $400,000 / $1,000,000 = 40% (b) $900,000 x 30% = $270,000 total contribution margin $270,000 - $200,000 = $70,000 operating income 198 Louis Company sells a single product at a price of $65 per unit Variable costs per unit are $45 and total fixed costs are $625,500 Louis is considering the purchase of a new piece of equipment that would increase the fixed costs to $800,000, but decrease the variable costs per unit to $42 Required: If Louis Company expects to sell 44,000 units next year, should they purchase this new equipment? Under the current system, Louis’ profit when 44,000 units are sold is (($65 - $45) x 44,000) - $625,500 = $254,500 If the new equipment is purchased, Louis’ profit when 44,000 units are sold is (($65 - $42) x 44,000) - $800,000 = $212,000 Louis is better off not buying the new equipment 199 Cordell, Inc has an operating leverage of Sales are expected to increase by 9% next year What is the expected change in operating income next year? If sales increase 9% and the operating leverage is 3, operating income is expected to increase by 27% (9% x 3) 200 Explain how variable costing net income will be different than absorption costing net income under the following situations: (1) A company had no beginning or ending inventory During the year they produced and sold 10,000 units (2) A company had no beginning inventory During the year they produced 10,000 units and sold 8,000 units (3) A company had 2,000 units in beginning inventory During the year they produced 10,000 units and sold 12,000 units (1) When there are no inventories (everything that is produced is sold) then variable costing income = absorption costing income (2) When the units produced > units sold, variable costing income < absorption costing income (3) When the units produced < units sold, variable costing income > absorption costing income 201 Match the following terms with their definitions The excess of sales revenues over variable costs Where a business’s revenues exactly equal costs Vary in proportion to changes in activity levels A specific activity range over which the cost changes are of interest Remain the same in total dollar amount as the level of activity changes Variable costs Fixed costs Break-even point Relevant range Contribution margin 202 Match the following terms with their definitions The relative distribution of sales among products sold by a company Indicates the possible decrease in sales that may occur before operating loss results Focuses on costs, sales, and operating profit or loss Contribution margin divided by income from operations Focuses on profits rather than on revenues or costs Margin of safety Operating leverage Cost-volume-profit chart Profit-volume chart Sales mix 203 The following is a list of various costs of producing sweatshirts Classify each cost as either a variable, fixed, or mixed cost for units produced and sold (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) Leather used to make a handbag Warehouse rent of $8,000 per month plus $.50 per square foot of storage used Thread Electricity costs of $.038 per kilowatt-hour Janitorial costs of $4,000 per month Advertising costs of $12,000 per month Accounting salaries Color dyes for producing different colors of sweatshirts Salary of the production supervisor Straight-line depreciation on sewing machines Patterns for different designs Patterns typically last many years before being replaced Hourly wages of sewing machine operators Property taxes on factory, building, and equipment Cotton and polyester cloth Maintenance costs with sewing machine company The cost is $2,000 per year plus $.001 for each machine hour of use (a) (b) (c) (d) (e) (f) (g) (h) variable mixed variable variable fixed fixed fixed variable (i) (j) (k) (l) (m) (n) (o) fixed fixed fixed variable fixed variable mixed 204 The cost graphs in the illustration below shows various types of cost behaviors For each of the following costs, identify the cost graph that best describes its cost behavior as the number of units produced and sold increases: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (a) (b) (c) (d) (e) (f) (g) (h) Sales commissions of $6,000 plus $.05 for each item sold Rent on warehouse of $12,000 per month Insurance costs of $2,500 per month Per-unit cost of direct labor Total salaries of quality control supervisors One supervisor must be added for each additional work shift Total employer pension costs of $.35 per direct labor hour Per-unit straight-line depreciation costs Per-unit cost of direct materials Total direct materials cost Electricity costs of $5,000 per month plus $.0004 per kilowatt-hour Per-unit cost of plant superintendent's salary Salary of the night-time security guard of $3,800 per month Repairs and maintenance costs of $3,000 for each 2,000 hours of factory machine usage Total direct labor cost Straight-line depreciation on factory equipment Graph 3 (i) (j) (k) (l) (m) (n) (o) Graph 205 Copper Hill Inc manufactures laser printers within a relevant range of production of 70,000 to 100,000 printers per year The following partially completed manufacturing cost schedule has been prepared: Total costs: Total variable costs Total fixed costs Total costs Cost per unit: Variable cost per unit Fixed cost per unit Total cost per unit Number of Printers Produced 70,000 90,000 100,000 $350,000 630,000 $980,000 (d) (e) (f) (j) (k) (l) (a) (b) (c) (g) (h) (i) (m) (n) (o) Complete the preceding cost schedule, identifying each cost by the appropriate letter (a) through (o) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) $5.00 ($350,000/70,000 printers) $9.00 ($630,000/70,000 printers) $14.00 ($980,000/70,000 printers) $450,000 ($5.00 ´ 90,000 printers) $630,000 $1,080,000 ($450,000 + $630,000) $5.00 $7.00 ($630,000/90,000 printers) $12.00 ($1,080,000/90,000 printers) $500,000 ($5.00 ´ 100,000 printers) $630,000 $1,130,000 ($500,000 + $630,000) $5.00 $6.30 ($630,000/100,000 units) $11.30 ($1,130,000/100,000 units) 206 For the current year ending April 30, Hal Company expects fixed costs of $60,000, a unit variable cost of $70, and anticipated break-even of 1,715 sales units (a) (b) Compute the unit sales price Compute the sales (units) required to realize an operating profit of $8,000 Round your answer to the nearest whole number (a) $60,000 / ($X - $70) = 1,715 units X = $105 (b) ($60,000 + $8,000)/$35 = 1,943 units 207 Currently, the unit selling price is $50, the variable cost, $34, and the total fixed costs, $108,000 A proposal is being evaluated to increase the selling price to $54 (a) (b) Compute the current break-even sales (units) Compute the anticipated break-even sales (units), assuming that the unit selling price is increased and all costs remain constant (a) $108,000/($50 - $34) = 6,750 units (b) $108,000/($54 - $34) = 5,400 units 208 For the coming year, River Company estimates fixed costs at $109,000, the unit variable cost at $21, and the unit selling price at $85 Determine (a) the break-even point in units of sales, (b) the unit sales required to realize operating income of $150,000 and (c) the probable operating income if sales total $500,000 Round units to the nearest whole number and percentage to one decimal place (a) $109,000 / ($85 - $21) = 1,703 units (b) ($109,000 + $150,000) / $64 = 4,047 units (c) CM ratio = $64/$85 = 75.3% $500,000 x 753 = $376,500 contribution margin - $109,000 fixed costs = $267,500 operating income 209 For the past year, Pedi Company had fixed costs of $70,000, unit variable costs of $32, and a unit selling price of $40 For the coming year, no changes are expected in revenues and costs, except that property taxes are expected to increase by $10,000 Determine the break-even sales (units) for (a) the past year and (b) the coming year (a) S = $70,000/$8 = 8,750 units (b) S = $80,000/$8 = 10,000 units 210 For the past year, Hornbostel Company had fixed costs of $6,552,000, a unit variable cost of $444, and a unit selling price of $600 For the coming year, no changes are expected in revenues and costs, except that a new wage contract will increase variable costs by $6 per unit Determine the break-even sales (units) for (a) the past year and (b) the coming year (a) S = $6,552,000 / $156 = 42,000 units (b) S = $6,552,000 / $150 = 43,680 units 211 Perfect Stampers makes and sells aftermarket hub caps The variable cost for each hub cap is $4.75 and the hub cap sells for $9.95 Perfect Stampers has fixed costs per month of $3,120 Compute the contribution margin per unit and break-even sales in units and in dollars for the month Contribution margin: $9.95 selling price - $4.75 variable cost = $5.20 Break even sales in units: $3,120 / $5.20 = 600 units Break even sales in dollars is $9.95 selling price ´ 600 units = $5,970 212 A company with a break-even point at $900,000 in sales revenue had fixed costs of $225,000 When actual sales were $1,000,000 variable costs were $750,000 Determine (a) the margin of safety expressed in dollars, (b) the margin of safety expressed as a percentage of sales, (c) the contribution margin ratio, and (d) the operating income (a) $1,000,000 - $900,000 = $100,000 (b) $100,000/$1,000,000 = 10% (c) Contribution margin ratio = (d) $1,000,000 - $225,000 - $750,000 = $25,000 or $100,000 ´ 25.0% = $25,000 $1,000,000 - $750,000 $1,000,000 = 25.0% 213 A company has a margin of safety of 25%, a contribution margin ratio of 30%, and sales of $1,000,000 (a) (b) (c) What is the break-even point? What is the operating income? If neither the relationship between variable costs and sales nor the amount of fixed costs is expected to change in the next year, how much additional operating income can be earned by increasing sales by $110,000? (a) Margin of safety = $1,000,000 ´ 25% = $250,000 Break-even point = $1,000,000 - $250,000 = $750,000 (b) $250,000 (margin of safety) ´ 30% (contribution margin ratio) = $75,000 (c) $110,000 ´ 30% = $33,000 214 Silver River Company sells Products S and T and has made the following estimates for the coming year: Product S T Unit Selling Price $30 70 Unit Variable Cost $24 56 Sales Mix 60% 40 Fixed costs are estimated at $202,400 Determine (a) the estimated sales in units of the overall product necessary to reach the break-even point for the coming year, (b) the estimated number of units of each product necessary to be sold to reach the break-even point for the coming year, and (c) the estimated sales in units of the overall product necessary to realize an operating income of $119,600 for the coming year (a) Unit selling price = ($30 ´ 60%) + ($70 ´ 40%) = $46.00 Unit variable cost = ($24 ´ 60%) + ($56 ´ 40%) = $36.80 Unit contribution margin = $46.00 - $36.80 = $9.20 $202,400/$9.20 = 22,000 overall units (b) S: 13,200 units (22,000 units ´ 60%) T: 8,800 units (22,000 units ´ 40%) (c) Sales = ($202,400 + $119,600)/$9.20 = 35,000 units 215 Define operating leverage Explain the relationship between a company’s operating leverage and how a change in sales is expected to impact profits Operating leverage is the relationship between a company’s contribution margin to income from operations Companies with a high level of fixed costs have a high operating leverage and companies with low fixed costs have a low operating leverage To calculate how a change in sales will impact profits multiply the anticipated change in sales by the operating leverage Thus, the higher a company’s operating leverage, the larger the anticipated increase in profits from a change in sales 216 The following data are available from the accounting records of Suwanee Co for the month ended May 31, 2012 17,000 units were manufactured and sold during the accounting period at a price of $60 per unit There was no beginning inventories and all units were completed (no work in process) Cost Manufacturing costs: Variable Fixed Total Selling and administrative expenses: Variable ($2 per unit sold) Fixed Total (a) (b) Total Cost Number of Units Unit Cost $442,000 170,000 $612,000 17,000 17,000 $26 10 $36 $34,000 32,000 $66,000 Prepare a variable costing income statement Prepare an absorption costing income statement (a) Suwanee Co Variable Costing Income Statement For the Month Ended May 31, 2012 Sales (17,000 ´ $60) Variable cost of goods sold (17,000 ´ $26) Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs: Fixed manufacturing costs Fixed selling and administrative expenses Income from operations $1,020,000 442,000 $ 578,000 34,000 $ 544,000 $170,000 32,000 (b) Suwanee Co Absorption Costing Income Statement For the Month Ended May 31, 2012 Sales (17,000 ´ $60) Cost of goods sold Gross profit Selling and administrative expenses Income from operations 202,000 $ 342,000 $1,020,000 612,000 $ 408,000 66,000 $ 342,000 217 Kissimmee Paint Co reported the following data for the month of July There were no beginning inventories and all units were completed (no work in process) Manufacturing costs: Variable Fixed Total Total Cost Number of Units Unit Cost $465,000 210,000 $675,000 30,000 30,000 $15.50 7.00 $22.50 Selling and administrative expenses: Variable Fixed $2 per unit sold $39,000 In the month of July, 28,000 of the 30,000 units manufactured were sold at a price of $80 per unit (a) (b) (c) Prepare a variable costing income statement Prepare an absorption costing income statement Briefly explain why there is a difference in income from operations between the two methods (a) Kissimmee Co Variable Costing Income Statement For the Month Ended July 31, 20-Sales (28,000 ´ $80) Variable cost of goods sold: Variable cost of goods manufactured (30,000 ´ 15.50) Less ending inventory (2,000 ´ $15.50) Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs: Fixed manufacturing costs Fixed selling and administrative expenses Income from operations (b) Kissimmee Co Absorption Costing Income Statement For the Month Ended July 31, 20-Sales (28,000 ´ $80) Cost of goods sold: Cost of goods manufactured (30,000 ´ $22.50) Less ending inventory (2,000 ´ $22.50) Cost of goods sold Gross profit Selling and administrative expenses (28,000 ´ $2 + $39,000) Income from operations $2,240,000 $465,000 31,000 434,000 $1,806,000 56,000 $1,750,000 $210,000 39,000 249,000 $1,501,000 $2,240,000 $675,000 45,000 630,000 $1,610,000 95,000 $1,515,000 (c) The difference of $14,000 in the amount of income from operations is due to the different treatment of fixed manufacturing expenses The entire amount of the fixed manufacturing costs is included as an expense of the period in the variable costing statement The ending inventory in the absorption costing statement includes $14,000 (2,000 ´ $7) of fixed manufacturing costs This $14,000, by being included in inventory, is thus excluded from the current cost of goods sold and deferred to another period ... prices, volume of sales and production, costs, and profits is termed: A contribution margin analysis B cost- volume- profit analysis C budgetary analysis D gross profit analysis 94 In cost- volume- profit. .. costs, and sunk costs B fixed costs, variable costs, and mixed costs C variable costs, period costs, and differential costs D variable costs, sunk costs, and opportunity costs 63 Costs that remain... cost- volume- profit analysis, all costs are classified into the following two categories: A mixed costs and variable costs B sunk costs and fixed costs C discretionary costs and sunk costs D variable costs and