Solution manual accounting 25th edition warren chapter 21

The high-low method uses the highest and lowest activity levels and their related costs to estimate the variable cost per unit and the fixed cost.. Dividing this difference by the diffe

CHAPTER 21 COST BEHAVIOR AND COST-VOLUME-PROFIT ANALYSIS

DISCUSSION QUESTIONS

1 Total variable costs change in proportion to changes in the level of activity Unit variable

costs remain the same regardless of the level of activity

2 a Variable costs

b Variable costs

3 Total fixed cost remains the same regardless of changes in the level of activity Fixed cost per unit

decreases as the activity level increases and increases as the activity level decreases

4 Mixed costs are costs that have characteristics of both a variable and a fixed cost The high-low

method uses the highest and lowest activity levels and their related costs to estimate the variable cost per unit and the fixed cost The total fixed cost does not change with changes in activity level Thus, the difference in the total cost between the highest and lowest levels of activity is the change

in the total variable cost Dividing this difference by the difference in activity level is an estimate

of the variable cost per unit The fixed cost is then estimated by subtracting the total variable costs from the total costs for the level of activity

5 a No impact on the contribution margin.

b Income from operations would decrease.

6 A high contribution margin ratio, coupled with idle capacity, indicates a potential for increased

income from operations if additional sales can be made A large percentage of each additional sales dollar would be available, after providing for variable costs, to cover promotion efforts and to increase income from operations Thus, a substantial sales promotion campaign should

be considered in order to expand sales to maximum capacity and to take advantage of the low ratio of variable costs to sales

7 Decreases in unit variable costs, such as a decrease in the unit cost of direct materials, will

decrease the break-even point

8 Austin Company had lower fixed costs and a higher percentage of variable costs to sales than

did Hill Company Such a situation resulted in a lower break-even point for Austin Company

9 The individual products are treated as components of one overall enterprise product These

components are weighted by the sales mix percentages when determining the contribution

margin Therefore, the sales mix affects the contribution margin and thus the break-even

point

10 Operating leverage measures the relationship between a company’s contribution margin

and income from operations The difference between contribution margin and income from operations is fixed costs Thus, companies with high fixed costs will normally have a high

operating leverage Low operating leverage is normal for companies that are labor intensive, such as professional service companies, which have low fixed costs

Income from operations……… $ 92,000

CHAPTER 21 Cost Behavior and Cost-Volume-Profit Analysis

Unit selling price of E: [($150 × 0.70) + ($100 × 0.30)] = $135.00

Unit variable cost of E: [($100 × 0.70) + ($75 × 0.30)] = 92.50

Break-Even Sales (units) = 12,000 units = $510,000 ÷ $42.50

Break-Even Sales (units) for AA = 12,000 units of E × 70% = 8,400 units of Product AA Break-Even Sales (units) for BB = 12,000 units of E × 30% = 3,600 units of Product BB

PE 21–5B

Unit selling price of E: [($50 × 0.40) + ($60 × 0.60)] = $56.00

Unit variable cost of E: [($35 × 0.40) + ($30 × 0.60)] = 32.00

Break-Even Sales (units) = 4,375 units = $105,000 ÷ $24.00

Break-Even Sales (units) for QQ = 4,375 units of E × 40% = 1,750 units of Product QQ Break-Even Sales (units) for ZZ = 4,375 units of E × 60% = 2,625 units of Product ZZ

PE 21–6A

Operating Leverage =

Contribution Margin

= $160,000 = 2 Income from Operations $80,000

PE 21–6B

Operating Leverage =

Contribution Margin

= $450,000 = 1.5 Income from Operations $300,000

PE 21–7A

Margin of Safety = Sales – Sales at Break-Even Point

Sales Margin of Safety = ($1,200,000 – $960,000) ÷ $1,200,000 = 20%

PE 21–7B

Margin of Safety = Sales – Sales at Break-Even Point

Sales Margin of Safety = ($550,000 – $385,000) ÷ $550,000 = 30%

c Cost Graph One

Ex 21–6

Total costs:

Total fixed costs……… 240,000 (e) 240,000 (k) 240,000

Cost per unit:

Fixed cost per unit……… (b) 0.60 (h) 0.50 (n) 0.40 Total cost per unit………(c) $ 1.00 (i) $ 0.90 (o) $ 0.80 Supporting calculations:

a $0.40 ($160,000 ÷ 400,000 units)

b $0.60 ($240,000 ÷ 400,000 units)

d $192,000 ($0.40 × 480,000)

e $240,000 (fixed costs do not change with volume)

g $0.40 ($192,000 ÷ 480,000 units; variable costs per unit do not change with changes in volume)

h $0.50 ($240,000 ÷ 480,000 units)

j $240,000 ($0.40 × 600,000 units)

k $240,000 (fixed costs do not change with volume)

m $0.40 ($240,000 ÷ 600,000 units; variable costs per unit do not change with changes in volume)

n $0.40 ($240,000 ÷ 600,000 units)

Ex 21–7

a Variable Cost per Unit =

Variable Cost per Unit =

Difference in Total Costs Difference in Units Produced

$690,000 – $525,000 18,100 units – 8,100 units

Variable Cost per Unit = $165,000

10,000 units

= $16.50 per unit

The fixed cost can be determined by subtracting the estimated total variable cost from the total cost at either the highest or lowest level of production, as follows:

Total Cost = (Variable Cost per Unit × Units Produced) + Fixed Costs

b Total Cost = (Variable Cost per Unit × Units Produced) + Fixed Costs

Total cost for 12,000 units:

Variable cost:

Ex 21–8

Variable Cost per

=

Difference in Total Costs

Gross-Ton Mile Difference in Gross-Ton Miles

Variable Cost per

Gross-Ton Mile = 750,000 gross-ton miles – 475,000 gross-ton miles $1,750,000 – $1,255,000 Variable Cost per

Gross-Ton Mile = 275,000 gross-ton miles $495,000

= $1.80 per gross-ton mile

The fixed costs can be determined by subtracting the estimated total variable cost from the total cost at either the highest or lowest level of gross-ton mile,

Less fixed costs……… 356,000

Income from operations……… $ 224,000

a Sales (in millions)……… $16,233 Variable costs (in millions):

General, selling, and administrative expenses (40% × $2,334)……… 934

b Contribution Margin Ratio = Sales – Variable Costs

Note to instructors: Part (c) emphasizes “same-store sales” because of the

assumption of no change in fixed costs McDonald’s will also increase sales

from opening new stores However, the impact on income from operations for

these additional store sales would need to include an increase in fixed costs into

the calculation.

Ex 21–11

a Break-Even Sales (units) = Unit Contribution Margin Fixed Costs

Break-Even Sales (units) = $900,000

$120 – $75

= 20,000 units

Unit Contribution Margin

Ex 21–12

Total Cost Variable Cost Variable Cost (in millions) Percentage (in millions)

Total Cost Variable Cost Fixed Cost (in millions) (in millions) (in millions)

Number of

(in millions) (in millions) Per Unit Amount

general and administrative…………

a Break-Even Sales (units) =

Break-Even Sales (units) =

Fixed Costs Unit Contribution Margin

$10,394,700,000 1

$120.99 2 – $37.69 3 – $12.33 4

= 146,466,112 barrels The variable costs per unit are determined by multiplying the total amount of each cost by the variable cost percentage (70% for cost of goods sold and 40% for selling, general and

administrative costs), then dividing by the number of barrels.

Fixed Costs Unit Contribution Margin Break-Even Sales (units) =

Break-Even Sales (units) =

Ex 21–14

Break-Even Sales (units) = Unit Contribution Margin Fixed Costs

Break-Even Sales (units) = $4,000

$18 – $X

= 2,000 units

Variable cost per unit: $4,000 = 2,000 × ($18 – $X)

Variable cost per unit: $4,000

2,000 units

= $18 – $X

Variable cost per unit:

Variable cost per unit:

Revenue: (12 mos – 2 free mos.) × $10/mo = $100 per new account

Variable cost: 12 mos × $6.25/mo = $75 per new account

Note: The variable cost is for 12 months since the costs are incurred, even during

the free months.

The break-even number of subscribers necessary to cover the fixed cost of the promotion would be computed as follows:

Contribution Margin per Unit

Ex 21–16

Fixed Costs

a Break-Even = Revenue per Account – Variable Cost per Account

$16,510.5 million 3 Break-Even = $977.9 1 – $464.7 2

Break-Even = 32.2 million (rounded) accounts

1 Revenue per account (in millions):

$32,563 million ÷ 33.3 million = $977.9 (rounded)

2 Variable cost per account (in millions, except variable cost per account):

3 Fixed costs (in millions):

Revenue per Account – Variable Cost per Account

33.3 million accounts = $16,510.5 million

X – $464.7 33.3X – $15,474.5 =

Note to Instructors: The rate charged per minute and the number of average

minutes of digital service influence the revenue per account An interesting question is whether the costs are variable to the number of minutes or number of accounts If we assume that the costs are variable to the number

of minutes, then the break-even analysis revolves around the number of minutes More likely, the costs are more variable to the number of accounts for this business (mostly customer acquisition and service costs), while the variable cost per minute is likely to be small.

Ex 21–17

a.

Total Sales Line

Operating Profit Area

Operating Loss Area

Units of Sales

b $1,500,000 (the intersection of the total sales line and the total costs line)

c The graphic format permits the user (management) to visually determine the break-even point and the operating profit or loss for any given level of sales.

Ex 21–18

a $600,000 (total fixed costs)

Variable costs (20,000 units × $75)……… 1,500,000 2,100,000

* 20,000 units = $2,500,000 maximum sales/$125 unit selling price

Profit-volume chart

a break-even point

b total fixed costs

c operating loss area

d maximum operating profit

e profit line

f operating profit area

Ex 21–21

a Unit Selling Price of E = ($90 × 40%) + ($105 × 60%)

Unit Selling Price of E = $36 + $63 = $99 Unit Variable Cost of E = ($50 × 40%) + ($65 × 60%) Unit Variable Cost of E = $20 + $39 = $59

Unit Contribution Margin of E = $99 – $59 = $40

Break-Even Sales (units) = Fixed Costs

Unit Contribution Margin

Break-Even Sales (units) = $620,000

$40

= 15,500 units

b 6,200 units of baseball bats (15,500 units × 40%)

9,300 units of baseball gloves (15,500 units × 60%)

CHAPTER 21 Cost Behavior and Cost-Volume-Profit Analysis

Ex 21–20

a Unit contribution margin of overall product (E):

Unit selling price of E [(20% × $1,000) + (80% × $200)]……… $360 Unit variable cost of E [(20% × $100) + (80% × $75)]……… 80 Unit contribution margin of E……… $280 Fixed costs of the New York City to George Town, Grand Cayman round-trip flight:

Depreciation……… 10,500

Break-even sales (units) of overall product:

Break-Even Sales (units) =

Fixed Costs Unit Contribution Margin

Break-Even Sales (units) = $25,200

a (1) Margin of Safety (dollars) = Sales – Sales at Break-Even Point

Margin of Safety (dollars) = $880,000 – $660,000 = $220,000

(2) Margin of Safety (percentage) =

Sales – Sales at Break-Even Point

Sales Margin of Safety (percentage) = $220,000 ÷ $880,000 = 25%

b The break-even point (S) is determined as follows:

Break-Even Sales (dollars) = Total Fixed Costs + Total Variable Costs (at Break-Even) Break-Even Sales (dollars) = Total Fixed Costs + 60% Break-Even Sales (dollars) Break-Even Sales (dollars) = $2,325,000 + 60% Break-Even Sales (dollars)

Break-Even Sales (dollars) – 60% Break-Even Sales (dollars) = $2,325,000

40% Break-Even Sales (dollars) = $2,325,000

Break-Even Sales (dollars) = $5,812,500

If the margin of safety is 25%, the actual sales are determined as follows:

Sales = Break-Even Sales (dollars) + (Sales × Margin of Safety)

Sales (dollars) = $5,812,500 + 25% Sales

Sales – 25% Sales = $5,812,500

75% Sales = $5,812,500

CHAPTER 21 Cost Behavior and Cost-Volume-Profit Analysis

Ex 21–22

Sales = $7,750,000

CHAPTER 21 Cost Behavior and Cost-Volume-Profit Analysis

Ex 21–22

b Beck Inc.’s income from operations would increase by 100% (5.0 × 20%),

or $100,000 (100% × $100,000), and Bryant Inc.’s income from operations would increase by 50% (2.5 × 20%), or $150,000 (50% × $300,000).

c The difference in the increases of income from operations is due to the difference in the operating leverages Beck Inc.’s higher operating leverage means that its fixed costs are a larger percentage of contribution margin than are Bryant Inc.’s Thus, increases in sales increase operating profit

at a faster rate for Beck Inc than for Bryant Inc.

Appendix Ex 21–26

a Variable cost of goods sold

b Variable selling and administrative expenses

c Fixed costs

CHAPTER 21 Cost Behavior and Cost-Volume-Profit Analysis

Appendix Ex 21–27

a.

RHYS COMPANY Income Statement—Variable Costing For the Month Ended July 31, 2014

Variable cost of goods sold:

Fixed costs:

Computations:

Variable cost of goods manufactured: $3,120,000 – $132,000 = $2,988,000

Units Sold = Units Manufactured – Units in Ending Inventory

96,000 = Units Manufactured – 24,000

120,000 = Units Manufactured

Unit cost of ending inventory:

Variable cost of goods manufactured per unit:

$2,988,000 ÷ 120,000 units manufactured = $24.90

Thus, variable cost of goods sold could alternatively be calculated:

$2,390,400 = 96,000 units × $24.90/unit

Fixed selling and administrative expenses: $288,000 – $115,200 = $172,800

b Absorption costing income from operations……… $1,656,000 Variable costing income from operations……… 1,629,600

Note: The difference between the two income numbers can be reconciled

as follows:

Unit change in inventory……… 24,000 units

Fixed manufacturing cost per unit……… × $1.10 ($132,000 ÷ 120,000 units) Income from operations difference……… $26,400

Appendix Ex 21–28

a.

TUDOR MANUFACTURING CO

Income Statement—Absorption Costing For the Month Ended June 30, 2014

Cost of goods sold:

Cost of goods manufactured (500,000 units × $14.32) $7,160,000

Less ending inventory (80,000 units × $14.32) 1,145,600

Computations:

Cost of goods manufactured: $7,000,000 + $160,000 = $7,160,000

Unit cost of ending inventory:

Total cost of goods manufactured:

$7,160,000 ÷ 500,000 units manufactured = $14.32

Absorption costing income from operations……… 1,280,600

b Note: The difference between the two income numbers can be reconciled

as follows:

Unit change in inventory……… 80,000 units

Fixed manufacturing cost per unit………× $0.32 ($160,000 ÷ 500,000 units) Income from operations difference……… $25,600

Prob 21–1A

Cost

Fixed Cost

Variable Cost

Mixed Cost

Prob 21–2A

Total Cost

Variable Cost

Fixed Cost

= 65,000 units

Sales (units) = $5,200,000 + $5,650,000 = 135,625 units

$80 per unit

6 Sales ($16,800,000 + $2,800,000)………

Variable costs (140,000* units × $60)………… 8,400,000

Income from operations………

* ($2,800,000 ÷ $140) + 120,000

$19,600,000 13,600,000

$ 6,000,000

Income from operations……… $4,400,000

Prob 21–2A (Concluded)

8 In favor of the proposal is the possibility of increasing income from operations from $5,650,000 to $6,000,000 However, there are many points against the

proposal, including:

a The break-even point increases by 15,625 units (from 49,375 to 65,000).

b The sales necessary to maintain the current income from operations of

$5,650,000 would be 135,625 units, or $2,187,500 (15,625 units × $140) in excess

of 2014 sales.

c If future sales remain at the 2014 level, the income from operations of

$5,650,000 will decline to $4,400,000.

The company should determine the sales potential if the additional product

is produced and then evaluate the advantages and the disadvantages

enumerated above, in light of these sales possibilities.

CHAPTER 21 Cost Behavior and Cost-Volume-Profit Analysis

CHAPTER 21 Cost Behavior and Cost-Volume-Profit Analysis

Prob 21–3A

Total Fixed Costs

= Unit Contribution Margin

Total Fixed Costs Unit Selling Price – Unit Variable Cost

$40*

= 12,000 units

*$100 unit selling price – $60 unit variable cost

Unit Contribution Margin Sales (units) =

$1,000,000

$500,000

Operating Loss Area

$0

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000

Units of Sales

Total fixed costs………

Total variable costs (16,000 × $60)………

$480,000 960,000

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