Problems 18-1A, 18-4A, 18-5A Answer key
Financial & Managerial Accounting, Information for Decisions, 4th ed., John J. Wild, Ken W. Shaw and Barbara Chiappetta
Problem 18-1A The following costs result from the production and sale of 4,ooo drum sets manufactured by Vince Drum Company for the year ended December 31, 2011. The drum sets sell for $250 each. The company has a 25% income tax rate.
Variable production costs Plastic for casing……………………………………..$68,000 Wages of assembly workers………………………….328,000 Drum stands………………………………………….104,000 Variable sellings costs Sales commissions…………………………………….60,000 Fixed manufacturing costs Taxes on factory………………………………………10,000 Factory maintenance…………………………………..20,000 Factory machinery depreciation . 80,000. Fixed selling administrative costs Lease of equipment for sales staff…………………… 20,000 Accounting staff salaries……………………………….70,000 Administrative management salaries………………….150,000
1. Prepare a contribution margin income statement for the company.
2. Compute its contribution margin and contribution margin ratio.
3. Interpret the contribution margin ratio from part 2.
Problem 18-4A Jetson Company sold 20,000 units of its only product and incurred a $50,000 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2012’s activities, the production manager notes that the variable costs can be reduced by 50% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $150,000.
The maximum output capacity of the company is 40,000 units per year. Jetson Company Contribution Margin Income Statement For Year Ended December 31, 2011.
Sales……………………………………………$750,000 Variable Costs……………………………………………600,000 Contribution margin………………………………………150,000 Fixed Costs………………………………………………..200,000 Net loss……………………………………………………(50,000) Required
1. Compute the break-even point dollar sales for year 2011.
2. Compute the predicted break-even point in dollar sales for year 2012 assuming the machine is installed and there is no change in the unit sales price.
3. Prepare a forecasted contribution margin income statement for 2012 that shows the expected results with the machine installed. Assume that the unit sales price and the number of units sold will not change, and no income tax will be due.
4. Compute the sales level required in both dollars and units to earn $140,000 of after tax income in 2012 with the machine installed and no change in the unit sales price. Assume that the income tax rate is 30% (Hint: Use the procedures in exhibits 18.21 and 18.23).
5. Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume an income tax rate of 30%.
Problem 18-5A Letter Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 50,000 units of each product. Sales and costs for each product follow.
Product T Product O Sales $800,000 $800,000 Variable Costs 560,000 100,000 Contribution margin 240,000 700,000 Fixed Costs 100,000 560,000 Income before taxes 140,000 140,000 Income taxes (32% rate) 44,800 44,800 Net Income $95,200 $95,200
1. Compute the break-even point in dollar sales for each product.
2. Assume that the company expects sales of each product to decline to 33,000 units next year with no change in unit sales price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as just shown with columns for each of the two products (assume a 32% tax rate). Also, assume that any loss before taxes yields a 32% tax savings.
3. Assume that the company expects sales of each product to increase to 64,000 units next year with no change in unit sales price. Prepare forecasted financial results for next year following the format of the contribution margin income statement shown with columns for each of the two products (assume a 32% income tax rate).
4. If sales greatly decrease, which product would experience a greater loss?
5. Describe some factors that might have created the different cost structures for these two products.
