Question

ABC Firm uses variable costing for internal decision making purposes. In the month of September, the firm produced 2,000 units and sold 1,500. There was no beginning inventory. The income statement follows:

Sales (1,500 units)    $67,500

Variable Costs:               

                                 Manufacturing                           15,000

                                 Selling and Administrative         14,250 29,250

Contribution Margin $38,250

Fixed Costs:

                                 Manufacturing                           12,000

Selling and Administrative   13,000   25,000

                                           Net Income $13,250

1. Prepare a traditional income statement assuming absorption costing.

1. For the month of October, the firm made a few changes. Sales people were offered an incentive of $1 per unit for every unit they sold. The product was redesigned to be more visually attractive. This increased variable manufacturing costs per unit by 5% and added $3,000 to fixed costs. During October, the firm produced 10,000 units and sold 9,500. Prepare the contribution format income statement for October. For purposes of this problem, you may ignore beginning inventory--do the computation as if there were no units in beginning inventory.

1. What was the firm’s break even point in September? You may provide your response either in units or sales dollars.

1. What was the firm’s break even point in October? Use the same measure of break even as you used in part c.

Answer 1

1. In absorption costing

Cost of goods sold include variable and fixed manufacturing cost

Variable manufacturing cost of 1,500 units= 15,000

Variable manufacturing cost of 1 unit= Total variable manufacurig cost / units= 15,000 /1500= 10 per unit

Total Fixed Manufacturing cost=12,000 for producing 2,000 units

Fixed Manufacturing cost allocated to one unit= Fixed Manufacturing cost during the periode / units produced= 12,000 / 2,000=6 per unit

Total Manufacturing cost of one unit= Variable manufacturing cost of 1 unit +Fixed Manufacturing cost allocated to one unit= 10 +6= 16

Cost of goods sold in september using absorption costing= No.of units sold * Manufacturing cost of one unit= 1500 * 16= 24,000

Sales (1,500) units	67,500
Cost of goods sold	(24,000)
Gross profit		43,500
Variable selling and administrative expensse	(14,250)
Fixed selling and administrative expensse	(13,000)
Net income		16,250

2.

• Current unit manufacturing variable cost= 10 per unit

New variable manufacturing cost, 5 % increase= 10 + 5% of 10= 10 + (0.05 * 10)=10 + 0.5= 10.5 per unit

variable manufacturing cost in october= variable manufacturing cost per unit * sales units= 9,500 * 10.5= 99,750

• Current variable selling and administrave cost= 14,250 for 1500 units

Current variable selling and administrave cost per unit= 14,250 / 1500= 9.5

variable selling and administrave cost in october= variable selling and administrave cost per unit * sales units= 9.5 * 9,500= 90,250

• Incentive to sales peoples = 1 per units sold

Total incentives to sales people in october= Incentive to sales peoples in one unit * sales units= 1 * 9500= 9500

• Fixed manufacturing cost increased by 3,000

Fixed manufacturing cost in october= Current fixed manufacturing cost + 3000 incresed= 12,000 + 3,000= 15,000

• Total sales in september= 67,500 for 1500 units
• unit sales price= 67,500 / 1500= 45
• Sales in october= unit sales price * total units sold= 45 * 9500=427,500
• No change in fixed selling and administrative cost 13,000

Sales (9,500)		427, 500
Variable costs
Variable manufacturing cost	(99,750)
Variable selling and administrative cost	(90,250)
Incentives to sales peoples	(9,500)
Contribution margin		228,000
Fixed costs
Fixed manufacturing cost	(15,000)
selling and administrative	(13,000)
net income		200,000

3. Break even point in units = Fixed cost / Contribution per unit

Break even point in dollars = Fixed cost / Contribution margin ratio

For september

Total fixed cost= fixed manufacturing cost + fixed selling and administrative cost= 12,000 + 13,000=25,000

Sales price =total sales in dollar / sales in units= 67,500 / 1500= 45

Variable manufacturing cost per unit= 10

Variable selling and administrative cost per unit= total Variable selling and administrative cost / unts sold= 14,250/1500= 9.5

Total variable cost per unit=Variable manufacturing cost per unit+Variable selling and administrative cost per unit=10+9.5=19.5

Contribution per unit = sales price - variable cost= 45- 19.5= 25.5

Contribution margin ratio= Contribution per unit / sales price= 25.5 /45=0.567

• Break even pont in units= fixed cost / contribution per unit= 25,000 / 25.5= 980.4 units
• Break even point in dollar= fixed cost / contribution margin ratio=25,000/0.567=44,091.7

4. In october

Sales price= 45

Unit Variable costs

variable manufacturing cost= 10.5 { see answer 2}

Variable selling and administrative cost= 9.5 { see answer 2}

incentives= 1 { see answer 2}

Total unit variable cost= 10.5 + 9.5 + 1 = 21 per unit

Contribution per unit= sales price- variable cost= 45-21= 24

Contribution margin ratio= 24/ 45=0.53333

fixed manufacturing cost = 15,000 { see answer 2}

Fixed selling and admin cost= 13,000

total fixed cost= 15000 + 13,000= 28,000

• Break even point in units= fixed cost/ contribution per unit= 28,000 / 24=1,166.6667
• Breakeven point in dollar=fixed cost / contribution margin ratio= 28,000 / 0.53333=52,500