Solution manual accounting 25th edition warren chapter 21

CHAPTER 21
COST BEHAVIOR AND COST-VOLUME-PROFIT ANALYSIS
DISCUSSION QUESTIONS
1.

Total variable costs change in proportion to changes in the level of activity. Unit variable
costs remain the same regardless of the level of activity.

2.

a.
b.

3.

Total fixed cost remains the same regardless of changes in the level of activity. Fixed cost per unit
decreases as the activity level increases and increases as the activity level decreases.

4.

Mixed costs are costs that have characteristics of both a variable and a fixed cost. The high-low
method uses the highest and lowest activity levels and their related costs to estimate the variable
cost per unit and the fixed cost. The total fixed cost does not change with changes in activity level.
Thus, the difference in the total cost between the highest and lowest levels of activity is the change
in the total variable cost. Dividing this difference by the difference in activity level is an estimate
of the variable cost per unit. The fixed cost is then estimated by subtracting the total variable costs
from the total costs for the level of activity.

5.

a.

No impact on the contribution margin.

b.

Income from operations would decrease.

Variable costs
Variable costs

6.

A high contribution margin ratio, coupled with idle capacity, indicates a potential for increased
income from operations if additional sales can be made. A large percentage of each additional
sales dollar would be available, after providing for variable costs, to cover promotion efforts
and to increase income from operations. Thus, a substantial sales promotion campaign should
be considered in order to expand sales to maximum capacity and to take advantage of the low
ratio of variable costs to sales.

7.

Decreases in unit variable costs, such as a decrease in the unit cost of direct materials, will
decrease the break-even point.

8.

Austin Company had lower fixed costs and a higher percentage of variable costs to sales than
did Hill Company. Such a situation resulted in a lower break-even point for Austin Company.

9.

The individual products are treated as components of one overall enterprise product. These
components are weighted by the sales mix percentages when determining the contribution
margin. Therefore, the sales mix affects the contribution margin and thus the break-even
point.

10.

Operating leverage measures the relationship between a company’s contribution margin
and income from operations. The difference between contribution margin and income from
operations is fixed costs. Thus, companies with high fixed costs will normally have a high
operating leverage. Low operating leverage is normal for companies that are labor intensive,
such as professional service companies, which have low fixed costs.
It is computed as follows:
Operating Leverage =

Contribution Margin
Income from Operations

21-1
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CHAPTER 21

Cost Behavior and Cost-Volume-Profit Analysis

PRACTICE EXERCISES
PE 21–1A
a.

$23 per unit = ($700,000 – $240,000) ÷ (30,000 units – 10,000 units)

b.

$10,000 = $700,000 – ($23 × 30,000 units), or $240,000 – ($23 × 10,000 units)

PE 21–1B
a.

$50 per unit = ($440,000 – $300,000) ÷ (5,500 units – 2,700 units)

b.

$165,000 = $440,000 – ($50 × 5,500 units), or $300,000 – ($50 × 2,700 units)

PE 21–2A
a.

37.5% = ($80 – $50) ÷ $80, or ($480,000 – $300,000) ÷ $480,000

b.

$30 per unit = $80 – $50

c.

Sales…………………………………
Variable costs………………………
Contribution margin………………

Fixed costs…………………………
Income from operations…………

$480,000
300,000
$180,000
50,000

(6,000 units × $80 per unit)
(6,000 units × $50 per unit)
(6,000 units × $30 per unit)

$130,000

PE 21–2B
a.

20% = ($30 – $24) ÷ $30, or ($660,000 – $528,000) ÷ $660,000

b.

$6 per unit = $30 – $24

c.

Sales………………………………………
Variable costs……………………………
Contribution margin……………………
Fixed costs………………………………
Income from operations………………

$660,000
528,000
$132,000
40,000
$ 92,000

(22,000 units × $30 per unit)
(22,000 units × $24 per unit)
(22,000 units × $6 per unit)


PE 21–3A
a.

1,500 units = $45,000 ÷ ($90 – $60)

b.

900 units = $45,000 ÷ ($110 – $60)

PE 21–3B
a.

1,600 units = $48,000 ÷ ($75 – $45)

b.

960 units = $48,000 ÷ ($95 – $45)

PE 21–4A
a.

1,000 units = $25,000 ÷ ($80 – $55)

b.

1,800 units = ($25,000 + $20,000) ÷ ($80 – $55)

PE 21–4B
a.

5,000 units = $200,000 ÷ ($150 – $110)

b.

6,250 units = ($200,000 + $50,000) ÷ ($150 – $110)

PE 21–5A
Unit selling price of E: [($150 × 0.70) + ($100 × 0.30)] =
Unit variable cost of E: [($100 × 0.70) + ($75 × 0.30)] =
Unit contribution margin of E:

$135.00
92.50
$ 42.50

Break-Even Sales (units) = 12,000 units = $510,000 ÷ $42.50
Break-Even Sales (units) for AA = 12,000 units of E × 70% = 8,400 units of Product AA
Break-Even Sales (units) for BB = 12,000 units of E × 30% = 3,600 units of Product BB

PE 21–5B
Unit selling price of E: [($50 × 0.40) + ($60 × 0.60)]
Unit variable cost of E: [($35 × 0.40) + ($30 × 0.60)]
Unit contribution margin of E:

=
=

$56.00
32.00
$24.00

Break-Even Sales (units) = 4,375 units = $105,000 ÷ $24.00
Break-Even Sales (units) for QQ = 4,375 units of E × 40% = 1,750 units of Product QQ
Break-Even Sales (units) for ZZ = 4,375 units of E × 60% = 2,625 units of Product ZZ


PE 21–6A

Contribution Margin

Operating Leverage

=

=

Income from Operations

PE 21–6B

Contribution Margin

Operating Leverage

=
Income from Operations

PE 21–7A
Margin of Safety
Margin of Safety

$160,000
$80,000

=

$450,000
$300,000

Sales – Sales at Break-Even Point
Sales
= ($1,200,000 – $960,000) ÷ $1,200,000 = 20%

=

PE 21–7B

= 2

Sales – Sales at Break-Even Point
Sales

Margin of Safety

=

Margin of Safety

= ($550,000 – $385,000) ÷ $550,000 = 30%

= 1.5


EXERCISES
Ex. 21–1
1.
2.
3.
4.
5.
6.
7.
8.

Fixed
Fixed
Variable
Variable

Fixed
Variable
Variable
Variable

9.
10.
11.
12.
13.
14.
15.

Fixed
Variable
Variable
Mixed
Variable
Variable
Mixed

Ex. 21–2
a.
b.
c.

Cost Graph Three
Cost Graph Four
Cost Graph One

d.
e.

Cost Graph Two
Cost Graph Two

Ex. 21–3
1.
2.
3.

e
b
c

4. f
5. d
6. a

Ex. 21–4
1.
2.
3.

e
f
c

For 3. (c) is better than (b) because the administrative costs would be the same for
expensive and inexpensive cars.

Ex. 21–5
a.
b.
c.
d.
e.
f.

Fixed
Fixed
Variable
Fixed
Fixed*
Variable

g.
h.
i.
j.
k.

Variable
Variable
Fixed
Variable
Variable

* The developer salaries are fixed because they are more variable to the number of titles or

releases, rather than the number of units sold. For example, a title could sell one copy or a
million copies, and the salaries of the developers would not be affected.

Ex. 21–6
Components produced……………

400,000

Total costs:
Total variable costs…………
Total fixed costs………………
Total costs………………………

$160,000
240,000
$400,000

480,000
(d)
(e)
(f)

$192,000
240,000

(g)
(h)
(i)

$

0.40
0.50

$

0.90

$432,000

600,000
(j)
(k)
(l)

$240,000
240,000

(m)
(n)
(o)

$

0.40
0.40

$

0.80

$480,000

Cost per unit:
Variable cost per unit…………(a)
Fixed cost per unit…………… (b)
Total cost per unit………………(c)

$

0.40
0.60

$

1.00

Supporting calculations:
a.

$0.40 ($160,000 ÷ 400,000 units)

b.

$0.60 ($240,000 ÷ 400,000 units)

d.

$192,000 ($0.40 × 480,000)

e.

$240,000 (fixed costs do not change with volume)

g.

$0.40 ($192,000 ÷ 480,000 units; variable costs per unit do not change with
changes in volume)

h.

$0.50 ($240,000 ÷ 480,000 units)

j.

$240,000 ($0.40 × 600,000 units)

k.

$240,000 (fixed costs do not change with volume)

m. $0.40 ($240,000 ÷ 600,000 units; variable costs per unit do not change with
changes in volume)
n.

$0.40 ($240,000 ÷ 600,000 units)


Ex. 21–7
a.

Variable Cost per Unit

=

Difference in Total Costs
Difference in Units Produced

Variable Cost per Unit

=

$690,000 – $525,000
18,100 units – 8,100 units

Variable Cost per Unit

=

$165,000
10,000 units

= $16.50 per unit

The fixed cost can be determined by subtracting the estimated total variable
cost from the total cost at either the highest or lowest level of production, as
follows:
Total Cost = (Variable Cost per Unit × Units Produced) + Fixed Costs
Highest level:
$690,000 = ($16.50 × 18,100 units) + Fixed Costs

$690,000 = $298,650 + Fixed Costs
$391,350 = Fixed Costs
Lowest level:
$525,000 = ($16.50 × 8,100 units) + Fixed Costs
$525,000 = $133,650 + Fixed Costs
$391,350 = Fixed Costs
b.

Total Cost = (Variable Cost per Unit × Units Produced) + Fixed Costs
Total cost for 12,000 units:
Variable cost:
Units………………………………………………
Variable cost per unit…………………………
Total variable cost……………………………
Fixed costs………………………………………
Total cost………………………………………

12,000
× $16.50
$198,000
391,350
$589,350


Ex. 21–8
Variable Cost per

Difference in Total Costs
=

Gross-Ton Mile

Difference in Gross-Ton Miles

Variable Cost per
=
Gross-Ton Mile
Variable Cost per
=
Gross-Ton Mile

$1,750,000 – $1,255,000
750,000 gross-ton miles – 475,000 gross-ton miles
$495,000
275,000 gross-ton miles

= $1.80 per gross-ton mile

The fixed costs can be determined by subtracting the estimated total variable
cost from the total cost at either the highest or lowest level of gross-ton mile,
as follows:
Total Cost = (Variable Cost per Gross-Ton Mile × Gross-Ton Miles) + Fixed Costs
Highest level:
$1,750,000 = ($1.80 × 750,000 gross-ton miles) + Fixed Costs
$1,750,000 = $1,350,000 + Fixed Costs
$400,000 = Fixed Costs
Lowest level:
$1,255,000 = ($1.80 × 475,000 gross-ton miles) + Fixed Costs
$1,255,000 = $855,000 + Fixed Costs
$400,000 = Fixed Costs

Ex. 21–9
a.

Sales………………………… $2,750,000
Variable costs…………… 1,760,000
Contribution margin…… $ 990,000
Contribution
=
Margin Ratio
Contribution
Margin Ratio

b.

=

Sales – Variable Costs
Sales
$990,000
$2,750,000

= 36%

Sales……………………………………………………
Contribution margin ratio…………………………… ×

$1,450,000
40%

Contribution margin…………………………………
Less fixed costs………………………………………
Income from operations……………………………

$ 580,000
356,000
$ 224,000


CHAPTER 21

Cost Behavior and Cost-Volume-Profit Analysis

Ex. 21–10
$16,233

a. Sales (in millions)……………………………………………………………………

b.

Variable costs (in millions):
Food and packaging………………………………………………………………
Payroll………………………………………………………………………………
General, selling, and administrative expenses (40% × $2,334)……………
Total variable costs……………………………………………………………

$ 5,300
4,121
934
$10,355

Contribution margin (in millions)…………………………………………………

$ 5,878

Contribution Margin Ratio =

Contribution Margin Ratio =

Sales – Variable Costs
Sales
$5,878 million = 36.2%
$16,233 million

c. Same-store sales increase (in millions)……………………………………
Contribution margin ratio (in millions) [from part (b)]……………………
Increase in income from operations (in millions)………………………

$811 million
×
36.2%
$294 million

Note to instructors: Part (c) emphasizes “same-store sales” because of the
assumption of no change in fixed costs. McDonald’s will also increase sales
from opening new stores. However, the impact on income from operations for
these additional store sales would need to include an increase in fixed costs into
the calculation.

Ex. 21–11

a.

Break-Even Sales (units) =
Break-Even Sales (units) =

b.

Sales (units) =

Fixed Costs
Unit Contribution Margin
$900,000
$120 – $75

=

20,000 units

Fixed Costs + Target Profit
Unit Contribution Margin
22,500 units

$900,000 + $112,500
Sales (units) =

=
$120 – $75


CHAPTER 21

Cost Behavior and Cost-Volume-Profit Analysis

Ex. 21–12

Cost of goods sold………………………
Selling, general and administrative…

Cost of goods sold………………………
Selling, general and administrative…
Total fixed cost………………………

Net sales……………………………………
Variable cost of goods sold……………
Variable selling,
general and administrative…………
a.

Break-Even Sales (units)

Total Cost
(in millions)
$16,151.0
9,249.0

Variable Cost
Percentage
×
70%
=

×
40%
=

Variable Cost
(in millions)
$11,305.7
3,699.6

Total Cost
(in millions)
$16,151.0
9,249.0

Variable Cost
(in millions)
–
$11,305.7
=
–
3,699.6
=

Fixed Cost
(in millions)
$ 4,845.3
5,549.4
$10,394.7

Total Amount

(in millions)
$36,297.0
11,305.7
3,699.6

Number of
Barrels
(in millions)
300
300
300

÷
÷
÷

Per Unit Amount
=
$120.99
=
37.69
=
12.33

Fixed Costs
Unit Contribution Margin

=

1

Break-Even Sales (units)

$10,394,700,000
3
$120.99 2 – $37.69 – $12.33 4

=
=

146,466,112 barrels

The variable costs per unit are determined by multiplying the total amount of each cost by the
variable cost percentage (70% for cost of goods sold and 40% for selling, general and
administrative costs), then dividing by the number of barrels.
1
2
3
4

b.

($16,151,000,000 × 30%) + ($9,249,000,000) × 60%

$36,297,000,000 ÷ 300,000,000
($16,151,000,000 × 70%) ÷ 300,000,000

($9,249,000,000 × 40%) ÷ 300,000,000

Break-Even Sales (units) =

=

$10,394,700,000 + $350,000,000
$120.99 – $37.69 – $12.33
151,397,774 barrels

Ex. 21–13
a.

b.

Break-Even Sales (units) =

Fixed Costs
Unit Contribution Margin
$460,000
= 23,000 units
$125 – $105

Break-Even Sales (units) =

Fixed Costs
Unit Contribution Margin

Break-Even Sales (units) =

Break-Even Sales (units) =

$460,000
$130 – $105

= 18,400 units


Ex. 21–14

Fixed Costs
Unit Contribution Margin

Break-Even Sales (units) =
Break-Even Sales (units) =

Variable cost per unit:

$4,000
$18 – $X

= 2,000 units

$4,000 = 2,000 × ($18 – $X)

Variable cost per unit:

$4,000
2,000 units

Variable cost per unit:

$2 = $18 – $X

Variable cost per unit:

$16

= $18 – $X

Ex. 21–15
The cost of the promotional campaign is the fixed cost in this analysis, since
we’re trying to determine the break-even adoption rate of the campaign.
The contribution margin earned per new subscriber is essentially the revenue
earned less the variable cost over the 12-month subscription period.
Revenue: (12 mos. – 2 free mos.) × $10/mo. = $100 per new account
Variable cost: 12 mos. × $6.25/mo. = $75 per new account
Note: The variable cost is for 12 months since the costs are incurred, even during
the free months.
The break-even number of subscribers necessary to cover the fixed cost of the
promotion would be computed as follows:
Break-Even =

Break-Even =

Fixed Costs
Contribution Margin per Unit
$2,500,000
$100 – $75

= 100,000 accounts

Therefore, if ESPN.com yielded more than 100,000 new subscribers out of the
promotional campaign, the costs of the campaign would be covered.

Ex. 21–16
a.

Break-Even

=

Fixed Costs
Revenue per Account – Variable Cost per Account
3

1

$16,510.5 million
$977.9 1 – $464.7 2

Break-Even

=

Break-Even

= 32.2 million (rounded) accounts

Revenue per account (in millions):
$32,563 million ÷ 33.3 million = $977.9 (rounded)

2

Variable cost per account (in millions, except variable cost per account):
Cost of revenue………………………………………………

$17,492

×

Selling, general, and administrative expenses…………

9,418

×

Total variable cost……………………………………………

$15,473.5
33.3
÷
$ 464.7

Divided by number of accounts……………………………
Variable cost per account (rounded)………………………
3

Fixed costs (in millions):
Cost of revenue………………………………………………

$17,492

×

25% = $ 4,373.0

Selling, general, and administrative expenses…………

9,418

×

75% =

Depreciation……………………………………………………

5,074

× 100% =

Total fixed costs………………………………………………

b.

75% = $13,119.0
2,354.5
25% =

Break-Even

=

7,063.5
5,074.0
$16,510.5

Fixed Cost
Revenue per Account – Variable Cost per Account

33.3 million accounts =

$16,510.5 million
X – $464.7

33.3X – $15,474.5 = $16,510.5 million
33.3X = $31,985.0
X = $960.5 (rounded)
Note to Instructors: The rate charged per minute and the number of average
minutes of digital service influence the revenue per account. An interesting
question is whether the costs are variable to the number of minutes or
number of accounts. If we assume that the costs are variable to the number
of minutes, then the break-even analysis revolves around the number of
minutes. More likely, the costs are more variable to the number of accounts
for this business (mostly customer acquisition and service costs), while the
variable cost per minute is likely to be small.


Ex. 21–17
a.
Total Sales Line

Operating

Profit Area

BreakEven Point

$2,500,000

$2,000,000
Sa
es
an $1,500,000
d
Co
sts

Total
Costs

$1,000,000
$600,000
$500,000

Operating
Loss Area
$0
0

4,000

8,000

12,000

16,000

20,000

Units of Sales

b.

$1,500,000 (the intersection of the total sales line and the total costs line)

c.

The graphic format permits the user (management) to visually determine the
break-even point and the operating profit or loss for any given level of sales.


Ex. 21–18
a.

$600,000 (total fixed costs)

b.

Sales (20,000 units × $125)………………………………
Fixed costs…………………………………………………
Variable costs (20,000 units × $75)……………………
Income from operations……………………………………

$2,500,000 *
$ 600,000
1,500,000

$ 400,000

* 20,000 units = $2,500,000 maximum sales/$125 unit selling price

c.

$400,000
Profit Line

$300,000

Op $200,000
er $100,000
ati
$0
ng
Pr ($100,000)
ofit
(L ($200,000)
os
s) ($300,000)

Break-Even
Point

Operating

Profit Area

Operating
Loss Area

($400,000)
($500,000)
($600,000)

0

5,000

10,000 12,000

15,000

20,000

Units of Sales
d.

12,000 units (the intersection of the profit line and the horizontal axis)

Ex. 21–19
Cost-volume-profit chart
a.
b.
c.

break-even point
operating loss area
total fixed costs

d.
e.
f.

2,100,000

total costs line
operating profit area
total sales line


CHAPTER 21

Cost Behavior and Cost-Volume-Profit Analysis

Ex. 21–20
Profit-volume chart
a.
b.
c.
d.
e.
f.

break-even point
total fixed costs

operating loss area
maximum operating profit
profit line
operating profit area

Ex. 21–21
a.

Unit Selling Price of E
Unit Selling Price of E
Unit Variable Cost of E
Unit Variable Cost of E
Unit Contribution Margin of E

=
=
=
=
=

Break-Even Sales (units) =

Break-Even Sales (units) =

b.

($90 × 40%) + ($105 × 60%)
$36 + $63 = $99
($50 × 40%) + ($65 × 60%)
$20 + $39 = $59

$99 – $59 = $40
Fixed Costs
Unit Contribution Margin
$620,000
$40

= 15,500 units

6,200 units of baseball bats (15,500 units × 40%)
9,300 units of baseball gloves (15,500 units × 60%)


CHAPTER 21

Cost Behavior and Cost-Volume-Profit Analysis

Ex. 21–22
a.

Unit contribution margin of overall product (E):
Unit selling price of E [(20% × $1,000) + (80% × $200)]………………………… $360
80
Unit variable cost of E [(20% × $100) + (80% × $75)]……………………………
Unit contribution margin of E……………………………………………………… $280
Fixed costs of the New York City to George Town, Grand Cayman round-trip flight:
Fuel………………………………………………
Flight crew salaries……………………………
Depreciation………………………………………

$10,400

4,300
10,500

Total fixed costs…………………………………

$25,200

Break-even sales (units) of overall product:

b.

Break-Even Sales (units)

=

Break-Even Sales (units)

=

Fixed Costs
Unit Contribution Margin
$25,200
$280 per seat

= 90 seats (tickets)

Business class break-even (90 seats × 20%)…………………………… … 18 seats
72 seats
Economy class break-even (90 seats × 80%)……………………………
90 seats

Total break-even………………………………………………………………

Ex. 21–23
a.

(1)

Margin of Safety (dollars) = Sales – Sales at Break-Even Point

(2)

Margin of Safety (dollars) = $880,000 – $660,000 = $220,000
Sales – Sales at Break-Even Point
Margin of Safety (percentage) =
Sales
Margin of Safety (percentage) = $220,000 ÷ $880,000 = 25%

b.

The break-even point (S) is determined as follows:
Break-Even Sales (dollars) = Total Fixed Costs + Total Variable Costs (at Break-Even)
Break-Even Sales (dollars) = Total Fixed Costs + 60% Break-Even Sales (dollars)
Break-Even Sales (dollars) = $2,325,000 + 60% Break-Even Sales (dollars)
Break-Even Sales (dollars) – 60% Break-Even Sales (dollars) = $2,325,000
40% Break-Even Sales (dollars) = $2,325,000
Break-Even Sales (dollars) = $5,812,500
If the margin of safety is 25%, the actual sales are determined as follows:
Sales = Break-Even Sales (dollars) + (Sales × Margin of Safety)
Sales (dollars) = $5,812,500 + 25% Sales
Sales – 25% Sales = $5,812,500

75% Sales = $5,812,500


CHAPTER 21

Ex. 21–22
Sales = $7,750,000

Cost Behavior and Cost-Volume-Profit Analysis


CHAPTER 21

Cost Behavior and Cost-Volume-Profit Analysis

Ex. 21–24
If 420,000 units are sold and sales at the break-even point are 472,500 units,
there is no margin of safety.

Ex. 21–25
a.

Beck Inc.:
Operating Leverage =

Operating Leverage =

Bryant Inc.:

Contribution Margin

Income from Operations
$500,000
$100,000

= 5.0

Operating Leverage =

Contribution Margin
Income from Operations

Operating Leverage =

$750,000
$300,000

= 2.5

b.

Beck Inc.’s income from operations would increase by 100% (5.0 × 20%),
or $100,000 (100% × $100,000), and Bryant Inc.’s income from operations
would increase by 50% (2.5 × 20%), or $150,000 (50% × $300,000).

c.

The difference in the increases of income from operations is due to the
difference in the operating leverages. Beck Inc.’s higher operating leverage
means that its fixed costs are a larger percentage of contribution margin
than are Bryant Inc.’s. Thus, increases in sales increase operating profit

at a faster rate for Beck Inc. than for Bryant Inc.

Appendix Ex. 21–26
a.
b.
c.

Variable cost of goods sold
Variable selling and administrative expenses
Fixed costs


Appendix Ex. 21–27
a.
RHYS COMPANY
Income Statement—Variable Costing
For the Month Ended July 31, 2014
Sales
Variable cost of goods sold:
Variable cost of goods manufactured
Less ending inventory (24,000 units × $24.90)

$4,440,000
$2,988,000
597,600

Variable cost of goods sold

2,390,400
$2,049,600

115,200

Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses

$1,934,400
$ 132,000
172,800

Income from operations

304,800
$1,629,600

Computations:
Variable cost of goods manufactured: $3,120,000 – $132,000 = $2,988,000
Units Sold = Units Manufactured – Units in Ending Inventory
96,000 = Units Manufactured – 24,000
120,000 = Units Manufactured
Unit cost of ending inventory:
Variable cost of goods manufactured per unit:
$2,988,000 ÷ 120,000 units manufactured = $24.90
Thus, variable cost of goods sold could alternatively be calculated:
$2,390,400 = 96,000 units × $24.90/unit
Fixed selling and administrative expenses: $288,000 – $115,200 = $172,800
b.

Absorption costing income from operations…………………………………… $1,656,000
1,629,600
Variable costing income from operations………………………………………
$ 26,400
Difference……………………………………………………………….……………
Note: The difference between the two income numbers can be reconciled
as follows:
Unit change in inventory…………………………
24,000 units
Fixed manufacturing cost per unit……………… × $1.10 ($132,000 ÷ 120,000 units)
Income from operations difference……………… $26,400


Appendix Ex. 21–28
a.
TUDOR MANUFACTURING CO.
Income Statement—Absorption Costing
For the Month Ended June 30, 2014
Sales
Cost of goods sold:
Cost of goods manufactured (500,000 units × $14.32)
Less ending inventory (80,000 units × $14.32)

$7,450,000
$7,160,000
1,145,600

Cost of goods sold
Gross profit

Selling and administrative expenses ($80,000 + $75,000)

6,014,400
$1,435,600
155,000

Income from operations

$1,280,600

Computations:
Cost of goods manufactured: $7,000,000 + $160,000 = $7,160,000
Unit cost of ending inventory:
Total cost of goods manufactured:
$7,160,000 ÷ 500,000 units manufactured = $14.32
Variable costing income from operations……………………………………
Absorption costing income from operations………………………………
Difference…………………………………………………………………………
b.

$1,255,000
1,280,600
$

25,600

Note: The difference between the two income numbers can be reconciled
as follows:
Unit change in inventory…………………………
80,000 units

Fixed manufacturing cost per unit………………× $0.32 ($160,000 ÷ 500,000 units)
Income from operations difference…………… $25,600


PROBLEMS
Prob. 21–1A
Cost
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.

Fixed
Cost

Variable
Cost

Mixed
Cost

X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X


Prob. 21–2A

Variable
Cost Percentage

1.
Total Cost
Cost of goods sold…………………
Selling expenses……………………
Administrative expenses…………

$6,200,000 ×
3,400,000 ×
1,550,000 ×

$6,200,000 –
3,400,000 –
1,550,000 –

$3,720,000
2,550,000
930,000

Variable costs………………………
Contribution margin………………

$ 9,600,000

÷
÷

Number

of Units
120,000
120,000

$3,720,000
2,550,000
930,000
Fixed
Cost

=
=
=

$2,480,000
850,000
620,000
$3,950,000

$7,200,000
Total
Amount
$16,800,000
7,200,000

Net sales……………………………

=
=
=

Variable
Cost

Total Cost
Cost of goods sold…………………
Selling expenses……………………
Administrative expenses…………
Total cost……………………………

60%
75%
60%

Variable
Cost

=
=

Per Unit
$140.00
60.00
$ 80.00

2. a. $60 ($7,200,000 ÷ 120,000 units)
b. $80 ($140 – $60)
3.

4.

5.

Break-Even
=
Sales (units)

Fixed Costs
Unit Contribution Margin

Break-Even
=
Sales (units)

$3,950,000 = 49,375 units
$80 per unit

Break-Even
=
Sales (units)

Fixed Costs
Unit Contribution Margin

Break-Even
=
Sales (units)

$3,950,000 + $1,250,000
$80 per unit

Sales (units) =

Fixed Costs + Target Profit
Unit Contribution Margin

Sales (units) =

$5,200,000 + $5,650,000
$80 per unit

= 65,000 units

= 135,625 units

6. Sales ($16,800,000 + $2,800,000)…………………………
Less: Fixed costs
Variable costs (140,000* units × $60)…………
Income from operations……………………………………

$19,600,000
$5,200,000
8,400,000

13,600,000
$ 6,000,000

* ($2,800,000 ÷ $140) + 120,000
7. Present operating income…………………………………
Less additional fixed costs………………………………

$5,650,000
1,250,000


Income from operations……………………………………

$4,400,000


CHAPTER 21

Cost Behavior and Cost-Volume-Profit Analysis

Prob. 21–2A (Concluded)
8.

In favor of the proposal is the possibility of increasing income from operations
from $5,650,000 to $6,000,000. However, there are many points against the
proposal, including:
a.

The break-even point increases by 15,625 units (from 49,375 to 65,000).

b.

The sales necessary to maintain the current income from operations of
$5,650,000 would be 135,625 units, or $2,187,500 (15,625 units × $140) in excess
of 2014 sales.

c.

If future sales remain at the 2014 level, the income from operations of
$5,650,000 will decline to $4,400,000.

The company should determine the sales potential if the additional product
is produced and then evaluate the advantages and the disadvantages
enumerated above, in light of these sales possibilities.


CHAPTER 21

Total Fixed Costs

Prob. 21–3A
1.

Break-Even Sales (units) =

Break-Even Sales (units) =

=

Unit Contribution Margin

Cost Behavior and Cost-Volume-Profit Analysis

Total Fixed Costs
Unit Selling Price – Unit Variable Cost

= 12,000 units

$480,000
$40*

*$100 unit selling price – $60 unit variable cost

2.

Sales (units) =

Sales (units) =

Fixed Costs + Target Profit
Unit Contribution Margin
$480,000 + $240,000
$40

$720,000

=

= 18,000 units

$40

3.

Operating Profit Area
$2,000,000

Break-Even Point

Sa
les
an
d
Co
sts

$1,500,000
Sales
Total Costs
$1,200,000

$1,000,000

$500,000

Operating Loss
Area
$0
0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Units of Sales

4.

Sales (16,000 × $100)……………………………
Total fixed costs…………………………………
Total variable costs (16,000 × $60)……………
Income from operations…………………………

$480,000
960,000

$1,600,000
1,440,000

$ 160,000