Week 2 Chapte3 Cost-Volume Relationship
Managerial Accounting for Managers 3rd Edition, Noreen, Brewer,Garrison
Problem 3-22 Marlin Company Sales Mix; Multiproduct Break-Even Analysis (LO
3-9)
1. Marlin Company, a wholesale distributor, has been operating for only a few months. The
company sells three products – sinks, mirrors, vanities. Budgeted sales by product and
in total for the coming month are shown below:
Product
Sinks
Mirrors
Vanities
Total
Percentage of sales………
48%
20%
32%
Sales……………………………. $ 240,000 100% $100, 000 10% $160, 000 100% $500,
000 100%
Variable expenses……….
72,000 30%
80, 000 80%
88, 000 55% 240, 000
48%
Contribution Margin….. $ 168,000 70% $ 20,000 20% $ 72,000 45% 260, 000
52%
Fixed expenses……………
223, 600
Net operating income….
$ 36,
400
Dollar sales to break-even =
Fixed Expenses =
CM ration
$223,600 = $430,000
0.52
As shown by these data, net operating income is budgeted at $36,400 for the month, and
break-even at $430,000.
Assume that actual sales for month total $ 500,000 as planned. Actual sales by products are:
Sink, $160,000; Mirror, $200,000; and vanities, $140,000
Required:
1. Prepare a contribution format income statement for the month based on actual sales
data
Present the income statement in the format shown above.
2. Compute the Break-Even Point in sales dollars for the month, based on your actual data.
3. Considering the fact that the company met its $500,000 sales budget for the month, the
president is shocked at the results shown on your income statement in (1) above.
Prepare a brief memo for the president explaining why both the operating results and the
Break-Even-Point in sales dollars are different from what was budgeted.
Problem : 3 – 25 Break-Even Analysis: Pricing ( LO 3-1, LO 3-4, LO 3-6)
Demer holdings AG of Zurich, Switzerland has just introduced a new fashion watch for which
The company is trying to find an optional selling price. Marketing studies suggest that the
company can increase sales by 5,000 units for each SFr 2 per unit reduction in the selling
price. (SFr2 denotes 2 Swiss Francs). The company ‘s present selling price is SFr90 per unit,
and variable expenses are SFr60 per unit. Fixed expenses are SFr840,000 per year. The
present annual sales volume (at the SFr90 selling price) is 25,000 units.
Required:
1. What is present yearly net operating income or loss?
2. What is the present Break – Even –Point in units and in Swiss Francs sales?
3. Assuming that the marketing studies are correct, what is the maximum profit that the
company can earn yearly? At how many units, and at what selling price per unit would
the company generate this profit?
4. What would be the Break-Even-Point in units and in Swiss Francs sales using the
selling price you determined in (3) above (i.e., the selling price at the level of maximum
profits) ?
Why is this Break-Even-Point different from the Break-Event-Point you computed in (2)
above?
Problem 3 – 26 Changes in cost Structure; Break-Even Analysis; Operating
Leverage; Margin of Safety ( LO 3 -4, LO 3 -6, LO 3 – 7, LO 3 -8)
Frieden Company’s contribution format income statement for the most recent month is
given below:
Sales (40,000 units) ……………………………………….. $ 800, 000
Variable expenses …………………………………………..
560, 000
Contribution margin ……………………………………….. 240, 000
Fixed expenses ……………………………………………….
192, 000
Net operating income …………………………………….. $ 48, 000
The industry in which Frieden Company operates is quite sensitive to cyclical
movements in the economy. Thus profits vary considerable from year to year according
to general economic conditions. The company has a large amount of unused capacity
and is studying ways of improving profits.
REQUIRED:
1. New equipment has come on the market that would allow Frieden Company to
automate a portion of its operations. Variable expenses would be reduced by $6 per
unit. However, fixed expenses would increase to a total of $432,000 each month.
Prepare two contribution format income statements, one showing present operations
and one showing how operations would appear if the new equipment is purchased.
Show an amount column, a Per Unit column, and a Percent Column on each
statement. Do not show percentages for the fixed expenses.
2. Refer to the income statements in (1) above. For both present operations and the
proposed new operations, compute (a) the degree of operating leverage. (b) the
Break-Even Point in dollars, and (c) the margin of safety in both dollars and
percentage terms.
3. Refer again, to the data in (1) above. As a manager, what factor would be paramount
in your mind in deciding whether to purchase the new equipment? (Assume that
ample funds are available to make the purchase).
4. Refer to the original data. Rather than purchase new equipment, the marketing
manager argues that the company’s marketing strategy should be changed. Instead
of paying sales commissions, which are included in variable expenses, the marketing
manager suggests that salespersons be paid fixed salaries and that the company
invest heavily in advertising. The marketing manager claims that this new approach
would increase unit sales by 50% without any change in selling price; the company’s
new monthly fixed expenses would be $240,000; and its net operating income would
increase by 25%.
Compute the Break-Event-Point in dollar sales for the company under the new
marketing strategy.
Do you agree with the marketing manager’s proposal?
Problem 4-17 Applying Overhead; Under applied or Over applied Overhead;
Income Statement (LO 4-2, LO 4-4, LO 4-5)
Durnham Company uses a job-order costing system. The following transactions took
place last year:
a. Raw materials requisitioned for use in production, $40,000 (80% direct and 20%
indirect).
b. Factory utility costs incurred, $14,600.
c. Depreciation recorded on plant and equipment, $28,000. Three-fourths of the
depreciation relates to factory equipment, and the remsinder relates to selling
and administrative equipment.
d. Costs for salaries and wages incurred as follows:
Direct labor……………. $ 40,000
Indirect labor………..
18,000
Sales commissions…
10,000
Administrative salaries 25,000
e. Insurance costs incurred, $3,000 (80% relates to factory operations, and 20%
relates to selling and administrative activities).
f. Miscellaneous selling and administrative expenses incurred, $18,000.
g. Manufacturing overhead was applied to production. The company applies
overhead on the basis of 150% of direct labor cost.
h. Goods that cost $130,000 to manufacture according to their job cost sheets were
transferred to the finished goods warehouse.
i. Goods that had cost $120,000 to manufacture according to their job cost sheets
were sold for $200,000.
REQUIRED:
1. Determine the underapplied or overapplied overhead for the year.
2. Prepare an income statement for the year. (HINT: No calculkations are required
to determine the cost of goods sold before any adjustment for underapplied or
overapplied overhead).
Problem 4-18 Applying Overhead in a Service Company (LO 4-2, LO 4-4, LO 4-5 )
Heritage Gardens provides complete garden designs and landscaping services. The company
uses a job-order costing system to track the costs of its landscaping projects.
The table below provides data concerning the three landscaping projects that were in progress
during May. There was no work in process at the beginning of May.
Williams
Designer Hours……………
200
Direct Materials…………….. $ 4,800
Direct labor……………………. $ 2,400
Project
Chandler
80
$ 1,800
$ 1,000
Nguyen
120
$3,600
1,500
Actual overhead costs were $16,000 for May. Overhead costs are applied to projects on the
basis of designer-hours became most of the overhead is related to the costs of the garden
design s studio. The predetermined overhead rate is $45 per designer-hour. The William and
Chandler projects were completed in May.
REQUIRED:
1. Compute the amount of overhead cost that would have been applied to each project
during Ma.
2. Determine the cost of goods manufactured for May.
3. What is the accumulated cost of the work in process at the end of the month?
4. Determine the underapplied or Overapplied Overhead for May.
Problem 4-22 Multiple Departments; Overhead Rates; Underapplied or
Overapplied
(LO 4-1, LO 4-2, LO 4-3, LO 4-4)
Winkle, Kotter, and Zale is a small law firm that contains 10 partners and 10 support
persons. The firm employs a job-order costing system to accumulate costs chargeable
to each client, and it is organized into two departments – the Research and Documents
Department and the Litigation Department. The firm uses predetermined overhead rates
to charge the costs of these departments to its clients. At the beginning of the current
year, the firm’s management made the following estimates for the year:
Department
Research and Documents
Research – hours……………………………………..
20,000
_
Direct attorney-hours………………………………
9,000
16,000
Materials and supplies…………………………….
$ 18,000
$5,000
Direct attorney cost…………………………………
$430,000
000
Departmental overhead cost…………………..
$700,000
000
Litigation
$800,
$320,
The predetermined overhead rate in the Research and Documents Department is based
on research-hours, and the rate in the Litigation Department is based on direct attorney
cost.
The costs charged to each client are made up of three elements: materials and su[[lies
used, direct attorney costs incurred, and an applied amount of overhead from each
department in which work is performed on the case.
Cae 618-3 was initiated on February 10 and completed on June 30. During this period,
the following costs and time on the case.
Department
Research and Documents
Litigation
Research – hours…………………………………..
Direct attorney……………………………………..
42
Materials and supplies …………………………
$30
18
9
$ 50
_
Direct attorney cost………………………………
$2,100
$410
REQUIRED:
1. Compute the predetermined overhead rates used during the year in the
Research and documents Department and Litigation Department.
2. Using the rate you computed in (1) above, compute the total overhead cost
applied to Case 618-3.
3. What would be the total cost charged to Case 618-3? Show computation by
4.
department and in total for the case.
At the end of the year, the firm’s records revealed the following actual cost and
operating data for all cases handled during the year:
Department
Research and Documents
Research – hours…………………………………..
23,000
_
Direct attorney-hours……………………………
8 ,000
15,000
Materials and supplies………………………….
$19,000
6,000
Direct attorney cost …………………………….
$400, 000
$275,000
Departmental overhead cost………………..
$770,000
$300,000
Determine the amount of underapplied or overapplied overhead cost in each
department for the year.
Litigation
$
