Comprehensive Review Problem: Break-even point; absorption and variable cost ana
ID: 2461315 • Letter: C
Question
Comprehensive Review Problem: Break-even point; absorption and variable cost analysis similar to Self-Study Problem 1:
Mallory Manufacturing Company has a maximum productive capacity of 210,000 units per year. Normal capacity is 180,000 units per year. Standard variable manufacturing costs are $10 per unit. Fixed factory overhead is $360,000 per year. Variable selling expense is $5 per unit, and fixed selling expense is $252,000 per year. The unit sales price is $20. The operating results for the year are as follows: sales,150,000 units; production, 160,000 units; beginning inventory,10,000 units. All variances are written off as additions to (or deductions from) the standard cost of sales.
Required:
1. What is the break-even point expressed in dollar sales?
2. How many units must be sold to earn a net operating income of $100,000 per year?
3.Prepare a formal income statement for the year ended December 31, 2011 under the following:
a. Absorption costing. (Hint: Don’t forget to compute the volume variance.)
b.Variable costing.
*MAKE SURE to add a beginning inventory for both methods.
Explanation / Answer
!) Break even point(dollar sales) = Fixed expense/contribution %
Contribution % = 5/20 = 25%
=$612,000/25%
=$2,448,000
2) units to be sold = (612,000 + 100,000)/5
= 142,400 units
3)1)Standard production cost per unit = variable cost + Fixed cost
= $10 + 360,000/180,000
=$12
2) ending inventory = 10,000 +160,000 -150,000 = 20,000 units
3) unfavorurable volume variance
Normal capactiy
180,000
Actual production
160,000
Volume variance in units
20,000
Fixed overhead per unit
*2
Unfavourable volume variance
40,000
Income statement
Sales (150,000*20) $3,000,000
Less:cost of goods sold:
Beginning inventory 10,000*12 120,000
Manufactured 160,000*12 1,920,000
Less:Ending inventory20,000*12 (240,000)
Cost of goods at standard 1,800,000
Add:unfavoruable volume variance 40,000
Cost of goods sold 1,840,000
Gross margin 1,160,000
Selling expense
Variable (150,000*5) 750,000
Fixed selling 252,000 1,002,000
Net income 158,000
b) Variable costing
Sales (150,000*20) 3,000,000
Less:cost of goods sold (150,000*10) 1,500,000
Variable selling expense 750,000
Contribution margin 750,000
Less:fixed expenses
Fixed manufacturing 360,000
Fixed selling 252,000 612,000
Net income 138,000
!) Break even point(dollar sales) = Fixed expense/contribution %
Contribution % = 5/20 = 25%
=$612,000/25%
=$2,448,000
2) units to be sold = (612,000 + 100,000)/5
= 142,400 units
3)1)Standard production cost per unit = variable cost + Fixed cost
= $10 + 360,000/180,000
=$12
2) ending inventory = 10,000 +160,000 -150,000 = 20,000 units
3) unfavorurable volume variance
Normal capactiy
180,000
Actual production
160,000
Volume variance in units
20,000
Fixed overhead per unit
*2
Unfavourable volume variance
40,000
Income statement
Sales (150,000*20) $3,000,000
Less:cost of goods sold:
Beginning inventory 10,000*12 120,000
Manufactured 160,000*12 1,920,000
Less:Ending inventory20,000*12 (240,000)
Cost of goods at standard 1,800,000
Add:unfavoruable volume variance 40,000
Cost of goods sold 1,840,000
Gross margin 1,160,000
Selling expense
Variable (150,000*5) 750,000
Fixed selling 252,000 1,002,000
Net income 158,000
b) Variable costing
Sales (150,000*20) 3,000,000
Less:cost of goods sold (150,000*10) 1,500,000
Variable selling expense 750,000
Contribution margin 750,000
Less:fixed expenses
Fixed manufacturing 360,000
Fixed selling 252,000 612,000
Net income 138,000
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