Question

32. A.

1. If fixed costs are $1,323,000, the unit selling price is $233, and the unit variable costs are $104, what is the amount of sales required to realize an operating income of $205,000?

   a. 11,845 units

   b. 5,678 units

   c. 1,971 units

   d. 12,721 units

32. B.   

1. Given the following cost and activity observations for Bounty Company's utilities, use the high-low method to calculate Bounty' variable utilities costs per machine hour. Round your answer to the nearest cent.

   	Cost	Machine Hours
   March	$3,123	15,350
   April	2,673	9,900
   May	2,870	12,009
   June	3,625	17,781

   a. $0.68

   b. $0.12

   c. $0.72

   d. $1.45

32. C.   

1. The level of inventory of a manufactured product has increased by 9,044 units during a period. The following data are also available:

   	Variable	Fixed
   Unit manufacturing costs of the period	$12	$6
   Unit operating expenses of the period	$4	$4

   What would be the effect on income from operations if absorption costing is used rather than variable costing?

   a. $90,440 decrease

   b. $54,264 decrease

   c. $54,264 increase

   d. $90,440 increase

Answer 1

Answer-32-A)- The amount of sales required to realize an operating income of $205000 is = 11845 units.

Explanation- No. of units to be sold to achieve desired operating income = (Fixed costs+ Desired operating income)/ Contribution margin per unit

= ($1323000+$205000)/$129 per unit

= $1528000/$129 per unit

= 11845 units

Where- Contribution margin per unit = Selling price per unit- Variable cost per unit

= $233 per unit- $104 per unit

= $129 per unit

Answer- 32-B)-Variable Utilities Cost per machine hour = $0.12 per machine hour.

Explanation:-High-Low Method:-

Variable Cost per Unit

Variable cost per unit (b) is calculated using the following formula:

Variable cost per unit = (Y2-Y1)/(X2-X1)

Where,
y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units/miles/ labor ,machine hours etc. at highest level of activity; and
x1 are the number of units/miles/ labor, machine hours etc. at lowest level of activity

The variable cost per unit is equal to the slope of the cost volume line (i.e. change in total cost ÷ change in number of machine hours).

Total Fixed Cost

Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:

Total Fixed Cost = (y2 – b)*x2 = (y1 – b*x1)

We have,
at highest activity: x2 = 17781 machine hour; y2 = $3625
at lowest activity: x1 =   9900 machine hour; y1 = $2673

Variable Cost per machine hour= ($3625-$2673) /(17781 hours- 9900 hours)  

= $950/7882 machine hours

= $0.12 per machine hour

Answer-32-C)- The effect on income from operations if absorption costing is used rather than variable costing would be = $54264 increase.

Explanation- Effect on income from operations under absorption costing = Number of units in inventory increased * Fixed Unit manufacturing costs of the period

= 9044 units*$6 per unit

= $54264