CHAPTER 10 SOLUTIONS
Part I
1.
2.
3.
4.
5.
T
T
F
F
T
6.
7.
8.
9.
10.
F
T
T
T
T
Part II
11.
12.
13.
14.
15.
F
T
T
F
F
1.
2.
3.
4.
5.
d
i
a
k
c
6.
7.
8.
9.
10.
h
l
b
e
j
11.
12.
13.
14.
15.
o
g
m
n
f
Part III
1. (a)
Under variable costing, it is necessary to know the variable and fixed components of all
production costs because variable manufacturing costs are treated as product costs,
whereas fixed manufacturing costs are treated as period costs for income determination
purposes.
2. (a)
Operating income (variable costing)
$50,000
Cost released in inventory decrease (5,000 units × $1) .......................
Operating income (absorption costing) ................................................
5,000
$45,000
3. (b)
Consider the following segment report by department:
Total Company
Sales
Variable costs
Contribution margin
Direct fixed costs
Segment margin
Common fixed costs
Operating income
4.
(c)
5. (d)
$1,800,000
1,480,000
320,000
110,000
210,000
190,000
$ 20,000
Stereo
Department
$1,000,000
800,000
200,000
50,000
$ 150,000
Satellite
Department
$800,000
680,000
120,000
60,000
$ 60,000
$200,000  $40,000 $240,000

= 60,000 units
$8  $4
$4
If Tradewinds sells three times as many regular bikes as deluxe bikes, the sales mix
percentages are: Regular 75% (3/4); Deluxe 25% (1/4).
The contribution margins (sales price less variable costs per unit) are: Regular $60 ($200 $140); Deluxe $80 ($300 - $220). The weighted average contribution margin is $65. It is
calculated as follows: ($60 x 75%) + ($80 x 25%)
The break-even point is the fixed costs divided by the weighted average contribution
margin or 2,100 units ($136,500 / $65).
6. (a)
S–38
The contribution margin as a percentage of sales will decrease because the variable cost
as a percentage of sales increases. If the fixed cost increases and the contribution margin
ratio decreases, both of these factors will cause the break-even point to increase.
Chapter Ten
Solutions
7. (b)
The contribution margin ratio is needed to compute target volume sales dollars, which is
obtained by dividing the sales price per unit into the contribution margin per unit (Sales
price per unit – Variable cost per unit).
8. (b)
Regular Sales
Sales ........................................
$1,500,000*
Variable costs ..........................
825,000**
Contribution margin................ $
675,000
Fixed costs ..............................
Operating income....................
Special Order
$1,350,000***
825,000**
$ 525,000
Total
$2,850,000
1,650,000
$1,200,000
495,000
$ 705,000
* 15,000 x $100
** 15,000 x $55; $990,000 / 18,000 = $55
*** 15,000 x $90
9. (a)
10. (c)
Direct materials .....................................................................
Direct labor ...........................................................................
Variable overhead (1/3 × $6) ................................................
Shipping costs .......................................................................
Minimum selling price..........................................................
$ 4
5
2
3
$14
The sales price should exceed the variable cost of making and selling the product.
Part IV
Highlands Manufacturing Company
Income Statement
For the Month Ended July 31, 20xx
Sales ($40 x 4,000) ................................................................
Cost of goods sold ($30 x 4,000); ($24 x 4,000) .....................
(Underapplied)/overapplied factory overhead* .......................
Gross margin .............................................................................
Manufacturing margin ..............................................................
Less:
Fixed factory overhead ......................................................
Selling and administrative expenses ..................................
Net income (loss) ......................................................................
Absorption
Costing
$160,000)
(120,000)
11,000)
$ 51,000)
Variable
Costing
$160,000)**
(96,000)**
$ 64,000)**
(25,000)
$ 26,000)
*Calculation of overapplied fixed factory overhead:
**Fixed factory overhead per year (50,000 × $6) .............................................
**Fixed factory overhead per month ($300,000 ÷ 12)......................................
**Fixed factory overhead applied to production (6,000 × $6) .........................
**Fixed overhead per month..............................................................................
**Fixed factory overhead overapplied ..............................................................
(25,000)**
(25,000)**
$ 14,000)**
$300,000
$ 25,000
$ 36,000
25,000
$ 11,000
S–39
Solutions
Chapter Ten
Highlands Manufacturing Company
Income Statement
For the Month Ended August 31, 20xx
Sales ($40 x 6,000) .................................................................
Cost of goods sold ($30 x 6,000); ($24 x 6,000) .....................
(Underapplied)/overapplied factory overhead* .......................
Gross margin .............................................................................
Manufacturing margin ..............................................................
Less:
Fixed factory overhead ......................................................
Selling and administrative expenses ..................................
Net income (loss) ......................................................................
Absorption
Costing
$240,000)
(180,000)
(1,000)
$ 59,000)
Variable
Costing
$240,000)
(144,000)
$ 96,000)
(25,000)
$ 34,000)
(25,000)
(25,000)
$ 46,000)
*Calculation of underapplied factory overhead:
Fixed factory overhead applied to production (4,000 × $6) ...........................
Fixed factory overhead per month ...................................................................
Fixed factory overhead underapplied ..............................................................
$24,000)
25,000)
$ (1,000)
Part V
1.
2.
$80,000 $80,000

 $133,333
$60
.60
1
$150
$80,000
 889 units
$150  $60
3. Margin of safety  1,600  889  711 units
711
Margin of safety ratio =
= 44%
1,600
4. Break-even chart on the following page
$80,000 + $10,000/1 – .3
5.
Target volume =
$150 – $60
= 1,048 units
S–40
Chapter Ten
Solutions
4.
Part VI
1. The company should not accept the special order because the proposed $8.00 sales price does
not even cover all variable manufacturing costs per unit, which are:
Direct materials ..................................................
Direct labor.........................................................
Variable factory overhead ..................................
Total .............................................................
$4.00
2.50
2.00
$8.50
2. The company would be willing to pay an outside supplier as much as the variable
manufacturing cost of $8.50 per unit plus the $.25 per unit ($2,500 ÷ 10,000) of fixed cost
that would be saved, or $8.75 per unit.
S–41