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

Question 1

Traditional Income Statement using Absorption Costing

Particulars	Amount	Amount
Sales Revenue		67,500
Less: Cost of Goods Sold		(24,000)
Gross Profit		43,500
Les: Selling and Administrative Expenses
Variable Selling and Administrative Expenses	14,250
Fixed Selling and Administrative Expenses	13,000
Total Selling and Administrative Expenses		(27,250)
Net Operating Income / (Loss)		16,250

Cost of Goods Sold = Variable Manufacturing Costs + (Fixed Manufacturing Cost per Unit * Number of Units Sold)

Variable Manufacturing Cost = $ 15,000

Fixed Manufacturing Cost = 12,000 / 2000 Units

=$ 6 per Unit

Cost of Goods Sold = 15,000 + (6 * 1500)

Cost of Goods Sold = $ 24,000

Question 2

Income Statement using Contribution Margin Format for October

Particulars	Amount	Amount
Sales Revenue		427,500
Less: Variable Costs
Variable Manufacturing Cost	99,750
Variable Selling and Administrative Expenses	99,750
Total Variable Costs		(199,500)
Contribution Margin		228,000
Less: Fixed Costs
Fixed Manufacturing Cost	15,000
Fixed Selling and Administrative Expenses	13,000
Total Fixed Costs		(28,000)
Net Operating Income / (Loss)		200,000

Notes

Sales Revenue = 9500 Units * $ 45 per Unit = $ 427,500

Sales Price per Unit = 67,500 / 1,500 Units = $ 45 per Unit

Variable Manufacturing Cost per Unit = 15,000 / 1,500 Units Sold = $ 10 per Unit

For October Variable Manufacturing Costs = 10 + 0.5 (Increase in Variable Costs by 5%) = $ 10.5 per Unit

Variable Manufacturing Cost for October = 9,500 * $ 10.5

= $ 99,750

Variable Selling and Administrative Costs per Unit = 14,250 / 1,500 Units Sold = $ 9.5 per Unit

For October Variable Selling and Administrative Costs per Unit = 9.5 + Increase of $ 1 per Unit = $ 10.5 per Unit

Variable Selling and Administrative Costs for October = 9,50 Units * $ 10.5 Per Unit = $ 99,750

Fixed Manufacturing Cost = $ 12,000 + $ 3,000 (Increase in Fixed Costs)

= $ 15,000

Question 3

For September

Break Even Point in Units = Fixed Costs / Contribution Margin per Unit

Fixed Costs = $ 25,000

Contribution Margin per Unit = Sales Price per Unit - Variable Costs per Unit

Sales Price per Unit = $ 45

Variable Costs per Unit = Total Variable Costs for September / 1,500 Units Sold

= 29,250 / 1,500

= $ 19.5 per Unit

Contribution Margin per Unit = 45 - 19.5 = $ 25.5 per Unit

Break Even Point in Units = 25,000 / 25.5

Break Even Pointin Units = 980.39 Units

Question 4

For October

Fixed Costs = $ 28,000

Contribution Margin per Unit = Sales Price per Unit - Variable Costs per Unit

Sales Price per Unit = $ 45

Variable Costs per Unit = Total Variable Costs for September / 1,500 Units Sold

= 199,500 / 9,500

= $ 21 per Unit

Contribution Margin per Unit = 45 - 21 = $ 24 per Unit

Break Even Point in Units = 28,000 / 24

Break Even Point in Units = 1167 Units