ACC3154-1 -S2022 – Class Exercises – Chapter 1 Problems with Solutions – 07292022

Practice Exercises

1. (LO 2) Fredricks Company reports the following costs and expenses in May.

Determine the total amount of various types of costs.

 
Factory utilities $ 15,600 Direct labor $89,100
 
Depreciation on  
12,650 Sales salaries 46,400
factory equipment  
Depreciation on  Property taxes on
8,800 2,500
delivery trucks  factory building
Indirect factory  Repairs to office
48,900 2,300
labor  equipment
 
Indirect materials 80,800 Factory repairs 2,000
 
Direct materials  
137,600 Advertising 18,000
used  
Factory manager's  Office supplies
13,000 5,640
salary  used

Instructions

From the information, determine the total amount of:

 a. Manufacturing overhead.
 b. Product costs.
 c. Period costs.

Solution

 1. a.

Factory utilities $ 15,600

Depreciation on factory
12,650
equipment
Indirect factory labor 48,900
Indirect materials 80,800
Factory manager's salary 13,000
Property taxes on factory 2,500
 building
Factory repairs    2,000
Manufacturing overhead $175,450

  b.

Direct materials $137,600

Direct labor 89,100
Manufacturing overhead  175,450
Product costs $402,150

  c.

Depreciation on delivery
$  8,800
trucks
Sales salaries 46,400
Repairs to office equipment 2,300
Advertising 18,000
Office supplies used    5,640
Period costs $ 81,140

2 (LO 3) Tommi Corporation incurred the following costs while manufacturing its product.

Compute cost of goods manufactured and sold.

Materials used in  
$120,000 Advertising expense $45,000
production  
 Property taxes on
Depreciation on plant 60,000 19,000
 plant
 
Property taxes on store 7,500 Delivery expense 21,000
 
Labor costs of assembly-  
110,000 Sales commissions 35,000
line workers  
 Salaries paid to sales
Factory supplies used 25,000 50,000
 clerks

Work-in-process inventory was $10,000 at January 1 and $14,000 at December 31. Finished
goods inventory was $60,500 at January 1 and $50,600 at December 31. (Assume all materials
were direct.)

Instructions
  a. Compute cost of goods manufactured.
 b. Compute cost of goods sold.

Solution

 2. a.

Work-in-process,
$ 10,000
1/1
Direct materials
$120,000
used
Direct labor 110,000
Manufacturing
overhead
    Depreciation on
$60,000
plant
    Factory supplies
25,000
used
    Property taxes
 19,000
on plant
Total
manufacturing 104,000
overhead
Total
manufacturing  334,000
costs
Total cost of work-
344,000
in-process
Less: Ending
   14,000
work-in-process
Cost of goods
$330,000
manufactured

 b.

Finished goods, 1/1 $ 60,500

Cost of goods manufactured 330,000
Cost of goods available for sale 390,500
Less: Finished goods, 12/31  50,600
Cost of goods sold $339,900

Practice Problem
(LO 3) Superior Company has the following cost and expense data for the year ending December
31, 2020.

Prepare a cost of goods manufactured schedule, an income statement, and a partial balance
sheet.

Raw
Property taxes,
materials, $ 30,000 00 $    6,000
factory building
1/1/20
Raw
 
materials, 20,000 Sales revenue 1,500,000
 
12/31/20
Raw
  Delivery
materials 205,000 100,000
  expenses
purchases
Work in
  Sales
process, 80,000 150,000
  commissions
1/1/20
Work in
 
process, 50,000 Indirect labor 105,000
 
12/31/20
Finished   Factory
110,000 40,000
goods, 1/1/20   machinery rent
Finished
 
goods, 120,000 Factory utilities 65,000
 
12/31/20
  Depreciation,
Direct labor 350,000 24,000
  factory building
Factory
  Administrative
manager's 35,000 300,000
  expenses
salary
Insurance,  
14,000
factory  

Instructions

 a. Prepare a cost of goods manufactured schedule for Superior Company for 2020.
(Assume that all raw materials used were direct materials.)
 b. Prepare an income statement for Superior Company for 2020.
 c. Assume that Superior Company's accounting records show the balances of the
following current asset accounts: Cash $17,000, Accounts Receivable (net) $120,000,
 Prepaid Expenses $13,000, and Short-Term Investments $26,000. Prepare the current
assets section of the balance sheet for Superior Company as of December 31, 2020.

Solution

Superior Company
Cost of Goods Manufactured
a. Schedule
For the Year Ended December
31, 2020
Work in process, 1/1 $   80,000
Direct materials
    Raw materials
$ 30,000
inventory, 1/1
    Raw materials   
purchases 205,000
    Total raw materials
235,000
available for use
    Less: Raw materials    
inventory, 12/31 20,000
    Direct materials used $215,000
Direct labor 350,000
Manufacturing
overhead
    Indirect labor $105,000
    Factory utilities 65,000
    Factory machinery
40,000
rent
    Factory manager's
35,000
salary
    Depreciation, factory
24,000
building
    Insurance, factory 14,000
    Property taxes,     
factory building 6,000
    Total manufacturing
 289,000
overhead
Total manufacturing
   854,000
costs
Total cost of work in
934,000
process
Less: Work in process,
    50,000
12/31
Cost of goods $  884,000
 Superior Company
Cost of Goods Manufactured
a. Schedule
For the Year Ended December
31, 2020
manufactured
00 00 00 00
Superior Company
Income Statement
b.
For the Year Ended December
31, 2020
Sales revenue $1,500,000
Cost of goods sold
  Finished goods
$110,000
inventory, January 1
  Cost of goods
 884,000
manufactured
  Cost of goods
994,000
available for sale
  Less: Finished goods
inventory, December  120,000
31 000100
  Cost of goods sold    874,000
Gross profit 626,000
Operating expenses
  Administrative
300,000
expenses
  Sales commissions 150,000
  Delivery expenses  100,000
  Total operating
   550,000
expenses
Net income $   76,000
00 00 00 00
Superior Company
c. Balance Sheet (partial)
December 31, 2020
  Current assets
      Cash $ 17,000
      Short-term
26,000
investments
      Accounts
120,000
receivable (net)
      Inventory
      Finished $120,000
 Superior Company
Cost of Goods Manufactured
a. Schedule
For the Year Ended December
31, 2020
goods
      Work in
50,000
process
      Raw
  20,000 190,000
materials
      Prepaid
   13,000
expenses
  Total current
$366,000
assets
ACC3154-1 S2022 Finance & Accounting – Chapter 2 - Practice Problems -
07292022

Practice Exercises

1. (LO 1, 2, 3, 4) A job order cost sheet for Michaels Company is shown below.

Analyze a job cost sheet and prepare entries for manufacturing costs.

 Job No. 92 For 2,000 Units 

Direct Direct Manufacturing
Date Materials Labor Overhead
Beg. bal. Jan. 1 3,925  6,000  4,200 

8 6,000 

12 8,500  6,375 

25 2,000 
 
27 3,000 
4,000 
18,500
11,925  13,575 
 
Cost of completed job:
 Job No. 92 For 2,000 Units 
 Direct materials $11,925 

 Direct labor 18,500 

 Manufacturing overhead 0.13,575 

Total cost .$44,000 

Unit cost ($44,000 ÷ 2,000) .$ 22.00 

Instructions

a. Answer the following questions.

 1. What was the balance in Work in Process Inventory on January 1 if this was the only
unfinished job?
 2. If manufacturing overhead is applied on the basis of direct labor cost, what over-head
rate was used in each year?

b. Prepare summary entries at January 31 to record the current year's transactions pertaining to
Job No. 92.

Solution

1.

 a.
o 1. $14,125, or ($3,925 + $6,000 + $4,200).
o 2. Last year 70%, or ($4,200 ÷ $6,000); this year 75% (either $6,375 ÷ $8,500 or
$3,000 ÷ $4,000).
 b.

J
a 8,0
n. Work in Process Inventory 00
3  
1
8,0
 Raw Materials Inventory 00
 
  ($6,000 + $2,000)
3 Work in Process Inventory 12,
1 50
 0 
 Factory LaborACC3154-1-S2022 -
Chapter 4 - Practice Exercises with
Solutions - 08032022

1. (LO 1, 2) Domestic Fabrics has

budgeted overhead costs of $955,000. It
has assigned overhead on a plantwide basis
to its two products (wool and cotton) using
direct labor hours which are estimated to
be 477,500 for the current year. The
company has decided to experiment with
activity-based costing and has created two
activity cost pools and related activity cost
drivers. These two cost pools are Cutting
(cost driver is machine hours) and Design
(cost driver is number of setups). Overhead
allocated to the Cutting cost pool is
$400,000, and $555,000 is allocated to the
Design cost pool. Additional information
related to these pools is as follows.

12,
50
Assign overhead using traditional costing 0 
and ABC.

Wool Cotton
Machine hours 100,000 100,000
             
Number of setups 1,000 500
Instructions

a. Determine the amount of overhead

assigned to the wool product line and the
cotton product line using activity-based
costing.

b. What is the difference between the

allocation of overhead to the wool and
cotton product lines using activity-based
costing versus the traditional approach,
assuming direct labor hours were incurred
evenly between the wool and cotton?
Solution

1.

 a.

Activity Estimate
00 00
Cost Cost d
00 00
Pools Drivers Overhead
00 Machin 00
Cutting $400,000
00 e hours 00
Number
00 00
Design of  555,000
00 00
setups
 Activity-based overhead rates:

0
0
0
Cutting 0 Design
$400,000200
,000=$2 per $555,0001,50
machine 0 0=$370 per
0
hour$400,00 0 setup$555,00
0200,000=$2 0 01,500=$370 
per machine per setup
hour
00 00 Cotto
00 Wool 00 n
Activity-
00 00
based
00 00
costing
 Cutting 0000 0000
  
00 $200, 00 00
100,000 ×
00 000 00 00
$2
  
00 00 $200, 00
100,000 ×
00 00 000 00
$2
00 00 00
 Design
00 00 00
 00 00 Cotto
00 Wool 00 n
  1,000 00 370,0 00 00
× $370 00 00 00 00
    500 00 $185, 00 $185, 00
× $370 00 000 00 000 00
Total cost 00 $570, 00 $385, 00
assigned 00 000 00 000 00
 b. Estimated overheadDirect
labors
hours=$955,000477,500=$2 p
er direct labor hourEstimated
overheadDirect labors
hours=$955,000477,500=$2 p
er direct labor hour

Cotto
Wool n
Traditional
0000 0000
costing
         $477,      
238,750* × $2   500  
    $477,
238,750 × $2 500
* 477,500 ÷ 2
 The wool product line is assigned
$92,500 ($570,000 − $477,500)
more overhead cost when an
activity-based costing system is
used. As a result, the cotton product
line is assigned $92,500 ($477,500
− $385,000) less.

2. (LO 1, 2, 3) Organic Products, Inc., uses

a traditional product costing system to
assign overhead costs uniformly to all
products. To meet Food and Drug
Administration (FDA) requirements and to
assure its customers of safe, sanitary, and
nutritious food, Organic engages in a high
level of quality control. Organic assigns its
quality-control overhead costs to all
products at a rate of 20% of direct labor
costs. Its direct labor cost for the month of
June for its low-calorie dessert line is
$55,000. In response to repeated requests
from its financial vice president, Organic
management agrees to adopt activity-based
costing. Data relating to the low-calorie
dessert line for the month of June are as
follows.

Assign overhead using traditional costing

and ABC; classify activities as value- or
non–value-added.

Overhead
Activity Cost Pools Cost Drivers Rate
Inspections of Number of $ 0.70 per
material received pounds pound
In-process Number of $ 0.35 per
             
inspections servings serving
Customer $13.00 per
FDA certification
orders order
Instructions

a. Compute the quality-control overhead

cost to be assigned to the low-calorie
dessert product line for the month of June
using (1) the traditional product costing
system (direct labor cost is the cost driver),
and (2) activity-based costing.

b. By what amount does the traditional

product costing system undercost or
overcost the low-calorie dessert line?

c. Classify each of the activities as value-

added or non–value-added.

Solution
2.

 a.
o 1. Traditional product
costing system:

$55,000 × .20 = $11,000.

Quality-control overhead
costs assigned in June to the
low-calorie dessert line are
$11,000.

o 2. Activity-based costing
system:

Cost
Activity Drive
Cost rs
Pools Used ×
Inspectio
ns of 6,000
material   
received
In-
process 10,00
inspection 0  
s                  
FDA
450 
certificati
 
on
 Total
assigned
cost for
June
 b. As compared to ABC, the
traditional costing system
undercosts the quality-control
overhead cost assigned to the low-
calorie dessert product line by
$2,550 ($13,550 − $11,000) in the
month of June. That is a 23.2%
($2,550 ÷ $11,000) understatement.
 c. All three activities, as quality-
 control related activities, are non–
value-added activities.

Practice Problem

Assign overhead and compute unit costs.

(LO 2) Spreadwell Paint Company

manufactures two high-quality base paints:
an oil-based paint and a latex paint. Both
are housepaints and are manufactured only
in a neutral white color. Spreadwell sells
the white base paints to franchised retail
paint and decorating stores where pigments
are added to tint (color) the paint as the
customer desires. The oil-based paint is
made with organic solvents (petroleum
products) such as mineral spirits or
turpentine. The latex paint is made with
water; synthetic resin particles are
suspended in the water, and dry and harden
when exposed to air.

Spreadwell uses the same processing

equipment to produce both paints in
different production runs. Between batches,
the vats and other processing equipment
must be washed and cleaned.

After analyzing the company's entire

operations, Spreadwell's accountants and
production managers have identified
activity cost pools and accumulated annual
budgeted overhead costs by pool as
follows.

Activity Cost Pools

Purchasing
Processing (weighing and mixing, grinding, thinning
and drying, straining)
Packaging (quarts, gallons, and 5-gallons)
 Activity Cost Pools
Testing
Storage and inventory control
Washing and cleaning equipment
Total annual budgeted overhead
  ($8,500 + $4,000)
9,3
3
Work in Process Inventory 75
1
 
9,3
 Manufacturing Overhead 75
 
  ($6,375 + $3,000)
44,
3
Finished Goods Inventory 00
1
0 
44,
 Work in Process Inventory 00
0 

2. (LO 3, 5) Kwik Kopy Company applies operating overhead to photocopying jobs on the basis
of machine hours used. Overhead costs are estimated to total $290,000 for the year, and machine
usage is estimated at 125,000 hours.

For the year, $295,000 of overhead costs are incurred and 130,000 hours are used.

Compute the overhead rate and under- or overapplied overhead.

Instructions

 a. Compute the service overhead rate for the year.

 b. What is the amount of under- or overapplied overhead at December 31?
 c. Assuming the under- or overapplied overhead for the year is not allocated to inventory
accounts, prepare the adjusting entry to assign the amount to cost of jobs finished.

Solution

2.
  a. $2.32 per machine hour ($290,000 ÷ 125,000).
 b. ($295,000) − ($2.32 × 130,000 machine hours)

   $295,000 − $301,600 = $6,600 overapplied

c. Operating Overhe  6,60
ad 0
   Cost of Goods Sol  6,60
d 0

Practice Problem

(LO 3, 5) Cardella Company applies overhead on the basis of direct labor costs. The company
estimates annual overhead costs will be $760,000 and annual direct labor costs will be $950,000.
During February, Cardella works on two jobs: A16 and B17. Summary data concerning these
jobs are as follows.

Compute predetermined overhead rate, apply overhead, and calculate under- or overapplied
overhead.

Manufacturing Costs Incurred

Purchased $54,000 of raw materials on account.

Factory labor $76,000, plus $4,000 employer payroll taxes.

Manufacturing overhead incurred exclusive of indirect materials and indirect labor $59,800.

Assignment of Costs

Direct Job A16 $27,000, Job

materials: B17 $21,000
Indirect
$3,000
materials:
Job A16 $52,000, Job
Direct labor:
B17 $26,000
Indirect labor: $2,000

The company completed Job A16 and sold it on account for $150,000. Job B17 was only
partially completed.
Instructions

a. Compute the predetermined overhead rate.

b. Journalize the February transactions in the sequence followed in the chapter.

c. What was the amount of under- or overapplied manufacturing overhead?

Solution

 a. Estimated annual overhead costs÷ Estimated annual operating

activity=Predetermined overhead rate$760,000÷$950,000=80%Estimated
annual overhead costs÷ Estimated annual operating activity=Predetermined
overhead rate$760,000÷$950,000=80%
 b.

(1)  

Feb. 28 Raw Materials Inventory 54,000  

 Accounts Payable  54,000

  (Purchase of raw materials
 
on account)
(2)  

28 Factory Labor 80,000  

 Factory Wages Payable  76,000

 Employer Payroll Taxes
 4,000
Payable
  (To record factory labor
 
costs)
(3)  

28 Manufacturing Overhead 59,800  

 Accounts Payable,
 
Accumulated
 Depreciation, and Prepaid
 59,800
Insurance
  (To record overhead costs)  

(4)  

28 Work in Process Inventory 48,000  

  Manufacturing Overhead 3,000  

  Raw Materials Inventory  51,000

   (To assign raw materials to
 
production)
(5)  

28 Work in Process Inventory 78,000  

 Manufacturing Overhead 2,000  

  Factory Labor  80,000

   (To assign factory labor to
 
production)
(6)  

28 Work in Process Inventory 62,400  

 Manufacturing Overhead  62,400

  (To assign overhead to jobs
 
—80% × $78,000)
(7)  

28 Finished Goods Inventory 120,600  

 Work in Process Inventory  120,600

  (To record completion of
Job A16: direct materials
$27,000, direct labor $52,000,  
and manufacturing overhead
$41,600)
(8)  

28 Accounts Receivable 150,000  

 Sales Revenue  150,000

  (To record sale of Job A16)  

28 Cost of Goods Sold 120,600  

 Finished Goods Inventory  120,600

  (To record cost of sale for
 
Job A16)
 c. Manufacturing Overhead has a debit balance of $2,400 as shown below.

Manufacturing Overhead
5
6
9
 2
,
(,
(3) 8
64
0
)0
0
0
 
3
,
0
(4)
0
0
 
2
,
0
(5)
0
0
 
2
,
4
Bal.
0
0
 

ACC3154-6 Chapter 5
Problems – 06172021

Practice Exercises

1. (LO 1, 2) The
controller of Teton
Industries has collected
the following monthly
expense data for use in
analyzing the cost
behavior of maintenance
costs.

Total
Month Maintenance Costs
Manufacturing Overhead
January $2,900
February  3,000
March  3,600
      
April  4,300
May  3,200
June  4,500
Instructions

a. Determine the fixed-

cost and variable-cost
components using the
high-low method.

b. Prepare a graph
showing the behavior of
maintenance costs, and
identify the fixed-cost
and variable-cost
elements. Use 200 unit
increments and $1,000
cost increments.

Determine fixed and

variable costs using the
high-low method and
prepare graph.

Solution

1.

 a. Maintenance
Costs:

    $4,500−
$2,900800−30
0=$1,600500=
$3.20 variable
cost per
Manufacturing Overhead

machine hour

Total costs
Less: Variable costs

800 × $3.20
300 × $3.20
Total fixed costs
Thus,
maintenance
costs are $1,940
per month plus
$3.20 per
machine hour.

 b.

2. (LO 3, 4, 5) Zion
Seating Co., a
manufacturer of chairs,
had the following data
for 2020:

Sales 2,400 units

Sales price $40 per unit
      
Variable costs $15 per unit
Fixed costs $19,500
Instructions

 a. What is the
contribution
margin ratio?
 b. What is the
break-even point
in dollars?
 c. What is the
margin of safety
in dollars and
the margin of
safety ratio?
Manufacturing Overhead
 d. If the
company wishes
to increase its
total dollar
contribution
margin by 40%
in 2021, by how
much will it
need to increase
its sales if all
other factors
remain constant?

(CGA adapted)

Determine contribution
margin ratio, break-
even point in dollars,
and margin of safety.

Solution

 2.
1. a.
Contribut
ion
margin
ratio =
Unit
contributi
on
margin ÷
Unit
selling
price
($40 −
$15) ÷
$40 =
62.5%
2. b. Break-
even in
Manufacturing Overhead
dollars:
$19,500
÷ 62.5%
=
$31,200
3. c. Margin
of safety
in dollars
= (2,400
× $40) −
$31,200
=
$64,800

Margin
of safety
ratio =
$64,800
÷ (2,400
× $40) =
67.5%

4. d.
Current
contributi
on
margin is
$40 −
$15 =
$25

Total
contributi
on
margin is
$25 ×
2,400 =
$60,000

40%
increase
in
contributi
on
margin is
Manufacturing Overhead

$60,000
× 40% =
$24,000

Total
increase
in sales
required
is
$24,000
÷ 62.5%
=
$38,400

Practice Problem

(LO 4, 5) Mabo
Company makes
calculators that sell for
$20 each. For the
coming year,
management expects
fixed costs to total
$220,000 and variable
costs to be $9 per unit.

Compute break-even
point, contribution
margin ratio, margin of
safety, and sales for
target net income.

Instructions

1. a. Compute
break-even point
in units using the
mathematical
equation.
2. b. Compute
Manufacturing Overhead
break-even point
in dollars using
the contribution
margin (CM)
ratio.
3. c. Compute the
margin of safety
percentage
assuming actual
sales are
$500,000.
4. d. Compute the
sales required in
dollars to earn
net income of
$165,000.

Solution

1. a.
Sales−Variabl
e costs−Fixed
costs=Net
income;
$20Q−$9Q−
$220,000=$0;
$11Q=$220,0
00Q=20,000 u
nits;
2. b. Unit
contribution
margin=Unit
selling
price−Unit
variable costs;
$11=$20−$9;
Contribution
margin
ratio=Unit
contribution
margin÷Unit
Manufacturing Overhead
selling price;
55%=$11÷$2
0; Break-even
point in
dollars=Fixed
costs÷Contrib
ution margin
ratio=$220,00
0÷55%=$400,
000
3. c. Margin of
safety=Actual
sales−Break-
even sales;
Actual
sales=$500,00
0−
$400,000=20
%
4. d.
Sales−Variabl
e costs−Fixed
costs=Net
income;
$20Q−$9Q−
$220,000=$16
5,000;
$11Q=$385,0
00Q=35,000 
5. 35,000 units ×
$20 = $700,000
required sales
OR(Fixed costs
+ Target net
income) ÷
Contribution
margin ratio =
Sales in dollars
($220,000 +
$165,000) ÷ .55
Manufacturing Overhead
= $700,000

(Weygandt 5-29-5-30)

Weygandt, Jerry J., Paul

Kimmel, Donald
Kieso.
Managerial
Accounting:
Tools for
Business
Decision
Making, 8th
Edition. Wiley,
2017-11-01.
VitalBook file.

The citation provided is

a guideline. Please
check each citation for
accuracy before use.

CHAPTER 5
SOLUTIONS TO
PROBLEMS: SET
B

PROBLEM 5-1B

(a) Variable costs (per haircut)

Manufacturing Overhead

Barbers’ commission
Rent
Barber supplies
Total variable

(b) $10X - $4X = $9,000

 $6X = $9,000
   X = 1,500 haircuts

$18
(c)

15
DOLLARS (000)

12

 9

 6

 3

300
Manufacturing Overhead
(d) Opearting?
income = $18,000
– [($4.00 X 1,800)
+ $9,000] = $1,800

PROBLEM 5-2B

(a)
COMPANY

Statement
(Estimated)

Ending
December 31,
2020

Sales

$2,500,000
Variable
expenses
Cost of
goods sold
$1,080,000
(1)
Selling
expenses  
 80,000

Administrative
expenses
40,000

Total
variable
Manufacturing Overhead
expenses

1,200,000
Contribution
margin
  1,300,000
Fixed
expenses
Cost of
goods sold
   380,000
Selling
expenses  
  250,000

Administrative
expenses
150,000

Total fixed
expenses

780,000
Operating?
income
$  520,000

(1) Direct
materials
$360,000
+ direct
labor
$450,000
+
variable
manufa
cturing
overhea
Manufacturing Overhead
d
$270,000
.

(b) Variable
costs = 48%
of sales
($1,200,000
÷
$2,500,000)
or $0.24 per
bottle ($.50
X 48%).
Total fixed
costs =
$780,000.

1. $0.50X -
$0.24X = $780,000
$0.26X =
$780,000
    X =
3,000,000 units
(breakeven)

2.
3,000,000 X
$0.50 =
$1,500,000

(c) Contribution
margin ratio =
($0.50 – $0.24) ÷
$0.50

= 52%

Margin of
safety ratio
Manufacturing Overhead
= ($2,500,000 –
$1,500,000) ÷
$2,500,000

= 40%

(d) Required
sales
X=
= $2,700,000

PROBLEM 5-3B

(a) Sales were

$1,800,000
and variable
expenses
were
$1,170,000,
which means
contribution
margin was
$630,000.The
CM ratio was
35%. Fixed
expenses
were
$840,000.
Therefore,
the
breakeven
point in
dollars is:

= $2,400,000

(b) 1. The
Manufacturing Overhead
effect of
this
alternati
ve is to
increase
the
selling
price per
unit to
$37.50
($30 X
125%).
The
variable
cost per
unit is
$1,170,00
0 ÷
60,000 =
$19.50.
Total
sales
become
$2,250,00
0 (60,000
×
$37.50).
Thus,
the
contribut
ion
margin
ratio
changes
to 48%
[($2,250,
000 –
$1,170,00
0) ÷
Manufacturing Overhead
$2,250,00
0]. The
new
breakeve
n point
is:

=
$1,750,000

2. The
effects
of this
alternati
ve are to
change
total
fixed
costs to
$660,000
($840,000
–
$180,000)
and to
change
the
contribut
ion
margin
ratio to
30%
[($1,800,
000 –
$1,170,0
00 – (5%
×
$1,800,0
00) ÷
$1,800,0
Manufacturing Overhead
00]. The
new
breakeve
n point
is:

=
$2,200,000

3. The
effects
of this
alternati
ve are: 
(1)
variable
and fixed
cost of
goods
sold
become
$1,350,0
00 ÷ 2, or
$675,000
each, (2)
total
variable
costs
become
$915,000
($675,00
0 +
$125,000
+
$115,000
), and (3)
total
fixed
costs are
Manufacturing Overhead
$1,095,0
00
($675,00
0 +
$355,000
+
$65,000).
The
contribut
ion
margin
ratio is
($1,800,0
00 -
$915,000
) ÷
$1,800,0
00, or
49.17%.T
he new
breakeve
n point
is:
  X =
$1,095,000 ÷
0.4917
  

  X =
$2,2226,968
(rounded)

Alternative 1
is the
recommend
ed course of
action using
breakeven
Manufacturing Overhead
analysis
because it
has the
lowest
breakeven
point.
PROBLEM 5-4B

(a) Current
break-even point:
$30X - $12X =
$216,000

(where X = pairs
of shoes)

$18X = $216,000

   X = 12,000
pairs of shoes

New break-
even point:
$27X - $12X -
($216,000 +
$18,000) = 0

$15X = $234,000

   X = 15,600
pairs of shoes

(b) Current
margin of safety
ratio
Manufacturing Overhead
=

= 40%
New margin
of safety ratio
=

= 35%

*$30 X $90

(c)
SHOE STORE

Statement

Sales (20,000 X $30)

Variable expenses
(20,000 X $12)
Contribution margin
Fixed expenses
Operating? income

No, the
changes
should not
be made
because
income will
be lower
than the
income
currently
Manufacturing Overhead
earned. In
addition, the
break-even
point would
be higher by
3,600 units
and the
margin of
safety ratio
would
decrease
from 40% to
35%.

PROBLEM 5-5B

(a) (1)

Sales

Variable costs
Direct materials
Direct labor
Manufacturing overhead
($480,000 × 0.40)
Selling expenses ($400,000 ×
0.30)
Administrative expenses
($484,000 × 0.50)
Total variable costs
Contribution margin
Manufacturing Overhead
Sales

Variable costs
Direct materials
Direct labor
Manufacturing
overhead
Selling
expenses
Administrative
expenses
Total
variable costs
Contribution
margin

(2)
Fixed Costs
Manufacturing overhead ($480,000 ×
0.60)
Selling expenses ($400,000 × 0.70)
Administrative expenses ($484,000 ×
0.50)
Total fixed costs

PROBLEM 5-5B
(Continued)

(b) Unit selling

price =
$1,800,000 ÷
100,000 = $18.00
Unit variable
cost = $1,260,000
÷ 100,000 =
$12.60
Manufacturing Overhead
Unit
contribution
margin = $18.00 –
$12.60 = $5.40
Contribution
margin ratio =
$5.40 ÷ $18.00 =
0.30

Break-even point
in units
150,000 units

Break-even point in
dollars
$2,700,000

(c) Sales dollars

required for =
target net income
$3,410,000 =

(d) Margin of safety

ratio
20.82*%
*(Rounded)

(e) (1)
Manufacturing Overhead
Sales

Variable costs
Direct materials
Direct labor ($250,000 – $100,000)
Manufacturing overhead
($480,000 × 0.10)
Selling expenses ($400,000 ×
0.80)
Administrative expenses
($484,000 × 0.50)
Total variable costs
Contribution margin

PROBLEM 5-5B
(Continued)

(1)Contributi
on
margin
ratio =
$584,000
÷
$1,800,00
0=
32.44%
(Rounde
d)

(2)Break-even
point in
dollars =
$754,000
÷ 0.3244 =
$2,324,29
1
Manufacturing Overhead
Fixed costs
Manufacturing overhead
($480,000 × 0.90)
Selling expenses ($400,000 ×
0.20)
Administrative expenses
($484,000 × 0.50)
Total fixed costs

The break-
even point in
dollars
declined
from
$2,700,000 to
$2,324,291.
This means
that overall
the
company’s
risk has
declined
because it
doesn’t have
to generate
as much in
sales to
break-even.
The two
changes
actually had
opposing
effects on
the break-
even point.
By changing
to a more
commission-
based
Manufacturing Overhead
approach to
compensate
its sales
staff, the
company
reduced its
fixed costs,
and
therefore
reduced its
break-even
point. In
contrast, the
purchase of
the new
equipment
increased
the
company’s
fixed costs
(by
increasing
its
equipment
depreciation)
and reduced
its variable
direct labor
cost, both of
which
increase the
break-even
point.

PROBLEM 5-6B
Manufacturing Overhead
(a) 1. Let
variable
selling
and
administ
rative
expense
s = VSA
Sales –
Variable
cost of
goods
sold –
VSA =
Contribu
tion
Margin

$2,000,0
00 –
($600,00
0 +
$700,000
+
$200,000
+ VSA) =
$150,000
VSA =
$350,000

2. Let fixed
manufac
turing
overhea
d = FMO
Sales –
Variable
Manufacturing Overhead
cost of
goods
sold –
FMO =
Gross
profit

$2,000,0
00 –
($600,00
0 +
$700,000
+
$200,000
+ FMO) =
$400,000
FMO =
$100,000

3. Let fixed
selling
and
administ
rative
expense
s = FSA

Contribu
tion
margin
ratio =
$150,000
÷
$2,000,0
00 =
Manufacturing Overhead
7.50%

Contribu
tion
margin
at break-
even =
$2,400,0
00 X
7.50% =
$180,000

At break-
even,
Contribu
tion
margin =
Fixed
costs
(FSA +
FMO)
$180,000
= FSA +
$100,000
FSA =
$80,000

(b) Incremental
sales =
$2,000,0
00 X 15%
=
$300,000
Incremental
contribution
margin =
Manufacturing Overhead
$300,000 X
7.50% =
$22,500

The
maximum
increased
advertising
expenditure
would be
equal to
the
incremental
contribution
margin
earned on
the
increased
sales, which
is $22,500.
The other
fixed costs
are irrelevant
to this
decision,
because they
would be
incurred
whether or
not the
advertising
expenditure
is increased.