22.

a. False. The statement refers to an expense. For example, R&D costs are
incurred in expectation of future benefits.
b. True. Each unit of a product has the same amount of direct material (same cost
per unit), but producing more units requires more material (and more cost).
c. False. Variable costs can be direct (direct materials) or indirect (lubricating oil
for machines that produce multiple products.)

23. Basic Concepts.

Fixed (F) Period (P)

Cost Item Variable (V) Product (M)

a. Depreciation on buildings for administrative staff offices...... F P

b. Bonuses of top executives in the company........................... F P
c. Overtime pay for assembly workers...................................... V M
d. Transportation-in costs on materials purchased................... V M
e. Assembly line workers’ wages.............................................. V M
f. Sales commissions for sales personnel................................ V P
g. Administrative support for sales supervisors......................... F P
h. Controller’s office rental......................................................... F P
i. Cafeteria costs for the factory............................................... F M
j. Energy to run machines producing units of output in the
factory…................................................................................ V M

24. ) Basic Concepts.

a. Property taxes on the factory......................................................................... C

b. Direct materials used in production process.................................................. P
c. Transportation-in costs on materials purchased............................................ P
d. Lubricating oil for plant machines.................................................................. C
e. Assembly line worker’s salary........................................................................ B

25. (.) Basic Concepts.

Concept Definition
9 Period cost.........................Cost that can more easily be attributed to
time intervals.
 6 Indirect cost........................Cost that cannot be directly related to a
cost object.
10 Fixed cost...........................Cost that does not vary with the volume of
activity.
2 Opportunity cost.................Lost benefit from the best forgone
alternative.
11 Outlay cost.........................Past, present, or near-future cash flow.
8 Direct cost..........................Cost that can be directly related to a cost
object.
5 Expense.............................Cost charged against revenue in a
particular accounting period.
3 Cost....................................Sacrifice of resources.
1 Variable cost......................Cost that varies with the volume of activity.
4 Full absorption cost............Cost used to compute inventory value
according to GAAP.
7 Product cost.......................Cost that is part of inventory.

26. (.) Basic Concepts.

Fixed (F) Period (P)

Cost Item Variable (V) Product (M)

a. Depreciation on pollution control equipment in the plant. . F M

b. Chief financial officer’s salary............................................ F P
c. Power to operate factory equipment.................................. V M
d. Commissions paid to sales personnel............................... V P
e. Office supplies for the human resources manager........... F P

27. (.) Basic Concepts.

a. Variable production cost per unit: ($240 + $40 + $10 + $20)........................ $310
b. Variable cost per unit: ($310 + $30)...............................................................
$340
c. Full cost per unit: [$340 + ($100,000 ÷ 1,000 units)]..................................... $440
d. Full absorption cost per unit: [$310 + ($60,000 ÷ 1,000)].............................. $370
e. Prime cost per unit. (materials + labor + outsource)...................................... $290
f. Conversion cost per unit: (labor + overhead + outsource)............................ $360
g. Contribution margin per unit: ($600 – $340)................................................ $260
h. Gross margin per unit: ($600 – full absorption cost of $370)....................... $230
i. Suppose the number of units decreases to 800 units per month, c, d, f
 which is within the relevant range. Which parts of (a) through (h) will and h
change? For each amount that will change, give the new amount will
for a volume of 800 units. change,
as
c. Full cost = $340 + ($100,000 ÷ 800) = $465 follows
d. Full absorption cost = $310 + ($60,000 ÷ 800) = $385
f. Conversion costs = $240 + $20 + ($60,000 ÷ 800) + $40 = $375
h. Gross margin = $600 – $385 = $215

28. (.) Basic Concepts: Terracotta, Inc.

a. Prime cost per unit: (materials + labor)..........................................................$10

b. Contribution margin per unit: ($25 – $18)....................................................$7
c. Gross margin per unit: ($25 – full absorption cost of $18.50)...................... $6.50
d. Conversion cost per unit: (labor + overhead)................................................ $12.50
e. Variable cost per unit: ($15 + $3)...................................................................$18
f. Full absorption cost per unit: [$15 + ($1,050,000 ÷ 300,000)]....................... $18.50
g. Variable production cost per unit: ($4 + $6 + $5)..........................................$15
h. Full cost per unit. [$18 + ($1,350,000 ÷ 300,000 units)]................................ $22.50
i. Suppose the number of units increases to 400,000 units per month, c, d, f
which is within the relevant range. Which parts of (a) through (h) will and h
change? For each amount that will change, give the new amount will
for a volume of 400,000 units. change,
as
c. Gross margin = $25.00 – $17.63 = $7.37 follows
d. Conversion costs = $4 + $5 + ($1,050,000 ÷ 400,000) = $11.63
f. Full absorption cost = $15 + ($1,050,000 ÷ 400,000) = $17.63
h. Full cost = $18 + ($1,350,000 ÷ 400,000) = $21.38

31. Prepare Statements for a Manufacturing Company: Hill Components.

Hill Components
Cost of Goods Sold Statement
For the Year Ended December 31
Beginning work in process inventory............... $67,730 
Manufacturing costs:
 Direct materials:
  Beginning inventory.................................. $48,100
  Purchases................................................. 55,900 (a)*
   Materials available................................$104,000
  Less ending inventory.............................. 44,200
   Direct materials used............................ $59,800
  Other manufacturing costs....................... 15,470 **
.................
   Total manufacturing costs..................... 75,270 (c)
  Total costs of work in process.................. $143,000
   Less ending work in process................ 71,500
    Cost of goods manufactured............. $ 71,500 (b)
Beginning finished goods inventory................. 15,600
Finished goods available for sale.................... $ 87,100
Ending finished goods inventory...................... 18,200
Cost of goods sold........................................... $68,900

* Letters (a), (b), and (c) refer to amounts found in solutions to requirements a, b, and c.
** Difference between total manufacturing costs of $75,270 and direct materials used of
$59,800.
32. Prepare Statements for a Service Company: Chuck’s Brokerage Service.
Chapter 3

22.   Basic Decision Analysis Using CVP: Anu’s Amusement Center.

a. $1,600,000  100,000 tickets = $16.00 per ticket
b. $900,000  100,000 tickets = $9.00 per ticket
c. ($16.00 – $9.00) = $7.00 per ticket
d. Profit = ($16.00 – $9.00)X – $437,500
Let Profit = 0
0 = ($16.00 – $9.00)X – $437,500

$437,50
X= 0
$7.00
X = 62,500 tickets

e. Let Profit = $43,750

$43,750 = ($16.00 – $9.00)X – $437,500

$437,500 + $43,750
X=
$7.00
X = 68,750 tickets

23.   Basic CVP Analysis: Kima’s Food Mart.

a. Break-even point is sales dollars = Fixed costs ÷ Contribution margin ratio
= $900,000 ÷ 0.40 = $2,250,000

b. Break-even point is sales dollars = Fixed costs ÷ Contribution margin ratio

= $900,000 ÷ 0.25 = $3,600,000

c. Sales dollars required = (Fixed costs + Desired profit) ÷ Contribution margin ratio
= ($900,000 + $200,000) ÷ 0.40 = $2,750,000
 25 Basic Decision Analysis Using CVP: Cambridge, Inc.
a.

Profit = (P – V)X – F
$0 = ($27 – $15)X – $30,000
$12X = $30,000

$30,000
X=
$12
X = 2,500 units

b.
Profit = (P – V)X – F
$18,000 = ($27 – $15)X – $30,000
$12X = $48,000

$48,000
X=
$12
X= 4,000
units
26 Basic Decision Analysis Using CVP: Cambridge, Inc.

a. Profit = ($27 – $15)  7,000 – $30,000

= $54,000

b. 10% price decrease. Now P = $24.30

Profit = ($24.30 – $15.00) x 7,000 – $30,000
= $35,100 Profit decreases by $18,900

20% price increase. Now P = $32.40

Profit = ($32.40 – $15.00) x 7,000 – $30,000
= $91,800   Profit increases by $37,800

c. 10% variable cost decrease. Now V = $13.50

Profit = ($27 – $13.50) x 7,000 – $30,000
= $64,500   Profit increases by $10,500
20% variable cost increase. Now V = $18
Profit = ($27 – $18) x 7,000 – $30,000
= $33,000   Profit decreases by $21,000

d. Profit = ($27 – $16.50) x 7,000 – $27,000

= $46,500   Profit decreases by $7,500
27 Basic Decision Analysis Using CVP: Balance, Inc.
a.

Profit = (P – V)X – F
$0 = ($1.00 – $0.20)X – $400,000
$0.80X = $400,000

$400,000
X=
$0.80
X = 500,000 units

b.
Profit = (P – V)X – F
$100,000 = ($1.00 – $0.20)X – $400,000
$0.80X = $500,000

$500,000
X=
$0.80
X= 625,000 units

28 Basic Decision Analysis Using CVP: Balance, Inc.

a. Profit = ($1.00 – $0.20)  600,000 – $400,000

= $80,000

b. 10% price decrease. Now P = $0.90

Profit = ($0.90 – $0.20) x 600,000 – $400,000
= $20,000 Profit decreases by $60,000

20% price increase. Now P = $1.20

Profit = ($1.20 – $0.20) x 600,000 – $400,000
= $200,000   Profit increases by $120,000

c. 10% variable cost decrease. Now V = $0.18

Profit = ($1.00 – $0.18) x 600,000 – $400,000
 = $92,000   Profit increases by $12,000
20% variable cost increase. Now V = $0.24
Profit = ($1.00 – $0.24) x 600,000 – $400,000
= $56,000   Profit decreases by $24,000

d. Profit = ($1.00 – $0.22) x 600,000 – $360,000

= $108,000   Profit increases by $28,000

29 Basic CVP Analysis: LM Enterprises.

$7 per unit.

Using the profit equation:

Profit = (P – V) x X – F
= ($12 – V) x 540,000 – $1,700,000
V = $3,780,000 ÷ 540,000
V = $7 per unit.

Using an income statement format (based on 540,000 units):

Amount Unit
Sales ....................................... $6,480,000 (a) $12
Variable cost..................................... 3,780,000 7 (c)
Contribution margin .......................... $2,700,000 (b) $5
Fixed costs 1,700,000
Operating profit before taxes............ $1,000,000

(a) $12 x 540,000 units = $6,480,000 (Sales)

(b) $1,000,000 + $1,700,000 = $2,700,000 (Contribution margin)
(c) $6,480,000 - $2,700,000 = $3,780,000 / 540,000 units = $7 (Unit variable cost)

30 Analysis of Cost Structure: The Dollar Store vs. One-Mart.

a. Dollar Store One-Mart

 Amount Percentage Amount Percentag
e
Sales $500,000 100% $500,000 100%
Variable cost........................ 350,000 70 100,000 20
Contribution margin .............$150,000 30% $400,000 80%
Fixed costs 30,000 6 280,000 56
Operating profit....................$120,000 24% $120,000 24%

b. Dollar Store’s profits increase by $22,500 [= .30 x ($500,000 x .15)] and One Mart’s
profits increase by $60,000 [= .80 x ($500,000 x .15)].
 Chapter 4

32 Special Orders: Maria’s Food Service.

a.
Status Quo Alternative
3,000 Units 3,300 Units Difference
Sales revenue........ $ 18,000 $19,050 $1,050 (higher)
Variable costs:
 Mealsa 9,000 9,900 900 (higher)
 Administrativeb... 1,500 1,500 0
Contribution margin $ 7,500 $7,650 $ 150 (higher)
Fixed costs 5,100 5,100 0
Operating profit...... $ 2,400 $ 2,550 $ 150 (higher)

a Variable costs per meal = ($13,500 – $4,500) ÷ 3,000 units

= $3.00 per unit.
Alternatively, variable costs per meal:
$4.50  [($13,500 – $4,500) ÷ $13,500] = $3.00 per unit.
$3.00 per unit x 300 = $900 additional cost.

b No additional administrative costs according to the exercise.

Alternative presentation.
Per Unit 300 Meals
Sales revenue................................................................ $3.50 $1,050
Variable costs:
Meal costs:
$4.50  [($13,500 – $4,500) ÷ $13,500] = 3.00 900
Contribution to operating profit...................................... $0.50 $150

Accepting this order would increase operating profits by $150.

b. The difference is relatively small, so Maria might want to consider how confident she
is in the estimates. In addition, she should consider whether accepting this order will
lead to regular customers asking for special prices.
 33 Special Orders: Carlsbad Enterprises.
Carlsbad should accept the offer; profit is higher by $160,000.
a.
(All costs in $000)
Status Quo Alternative
320,000 Units 340,000 Units Difference
Sales revenue........................ $ 25,600 $26,600 $1,000 (higher)
Variable costs:
 Manufacturing..................... 10,240 10,880 640 (higher)
 Selling and administrative. . 5,120 5,320 200 (higher)

Contribution margin............... $ 10,240 $10,400 $ 160 (higher)

Fixed costsa........................... 3,840 3,840 0

Operating profit..................... $ 6,400 $ 6,560 $ 160 (higher)

a $3,840,000 = 320,000 units x ($8 fixed manufacturing + $4 fixed selling).

Alternative presentation.
Per Unit 20,000 Units
($000)
Sales revenue................................................................ $50 $1,000
Variable costs
Manufacturing costs.................................................... 32 640
Selling and administrative costs.................................. 10 200
Contribution to operating profit...................................... $8 $160

b. Based on incremental profits, the company should accept the offer. However, it
should consider the impact of accepting the order on its regular customers and the
possibility that the customer with the special order will expect special pricing on future
orders.
34 Pricing Decisions: Cold Rock.

a. Status Quo Alternative

20,000 gallons 20,400 gallons Difference

Sales revenue................ $96,000a $97,440b $1,440 (higher)

Less variable costs:
 Materials 36,000 36,720 720 (higher)
 Labor 12,000 12,240 240 (higher)
 Variable overhead...... 6,000 6,120 120 (higher)
  Total variable cost. . $54,000 $55,080 $ 1,080 (higher)
Contribution margin....... $42,000 $42,360 $ 360 (higher)
Less fixed costs............. 24,000 24,000 0 (higher)
Operating profit.............. $18,000 $18,360 $ 360 (higher)

Operating profits would be higher with the additional order by $360.

a. $96,000 = 20,000 gallons x $4.80 per gallon.
b. $97,440 = (20,000 gallons x $4.80 per gallon) + (400 gallons x $3.60 per gallon).

b. The lowest price the ice cream could be sold without reducing profits is $2.70 per
gallon, which would just cover the variable costs of the ice cream.
c. An important factor to consider would be the effect on the regular business once
other customers learn of the special price. It is also important for the manager to
understand that this customer will expect this price concession in the future and at
that time the company may be operating at capacity.
35 Pricing Decisions: Mother’s Bottlers.

a. Status Quo Alternative

20,000 Bottles 22,000 Bottles Difference

Sales revenue................ $100,000a $107,000b $7,000 (higher)

Less variable costs:
 Materials 30,000 33,000 3,000 (higher)
 Labor 20,000 22,000 2,000 (higher)
 Variable overhead...... 10,000 11,000 1,000 (higher)
  Total variable cost. . $60,000 $66,000 $6,000 (higher)
Contribution margin....... $40,000 $41,000 $1,000 (higher)
Less fixed costs............. 20,000 20,000 0 (higher)
Operating profit.............. $ 20,000 $ 21,000 $1,000 (higher)

Operating profits would be higher with the additional order by $1,000.

a$100,000 = 20,000 bottles x $5.00 per bottle.
b$107,000 = (20,000 bottles x $5.00 per bottle) + (2,000 bottles x $3.50 per bottle).
b. The lowest price the bottled tea could be sold without reducing profits is $3.00 per
bottle, which would just cover the variable costs of the tea.
c. An important factor to consider would be the effect on the regular business once
other customers learn of the special price. It is also important for the manager to
understand that this customer will expect this price concession in the future and at
that time the company may be operating at capacity.

38 Target Costing and Pricing: Sid’s Skins.

Profit = (Price – Costs) = 20% Costs

Price
= Highest acceptable costs
1.20
$21.00
= Highest acceptable costs
1.20
$17.50 = Highest acceptable costs

The highest acceptable manufacturing cost for which Sid would be willing to produce
the covers is $17.50.
 39 Target Costing and Pricing: Dino’s Inc.

Profit = (Price – Costs) = 25% Costs

Price
= Highest acceptable costs
1.25
$36.00
= Highest acceptable costs
1.25
$28.80 = Highest acceptable costs

The highest acceptable manufacturing cost for which Dino’s would be willing to produce
the sweatshirts is $28.80.
 40 Target Costing: Terracotta, Inc.
0.5 hours.
The target cost for Terracotta is calculated as follows:

Profit = (Price – Costs) = 30% Costs

Price
= Highest acceptable costs
1.30
$65.00
= Highest acceptable costs
1.30
$50.00 = Highest acceptable costs

The target labor cost is $14 per unit (= $50 total cost − $16 material cost − $20
overhead cost). Given a wage rate of $28 per direct labor hour, the maximum direct
labor time per unit is 0.5 hours (= $14 ÷ $28).
 41 Make-or-Buy Decisions: Mobility Partners.
The $20,000 savings could not be achieved. The cost to make is only $16,000 more
than the cost to purchase from Trailblazers.

Status Quoa Alternative Difference

Trailblazers’ offer................. $    –0– $440,000 $440,000 (higher)
Materials 100,000 100,000 (lower)
Labor 212,000 212,000 (lower)
Variable overhead............... 64,000 64,000 (lower)
Fixed overhead applied....... 188,000 b 108,000 b 80,000 (lower)
  Total costs.................... $564,000 $548,000 $ 16,000 (lower)
aBased on 2,000 units.
b$94  2,000 = $188,000; or $94 x 2,000 units – $80,000 = $108,000.

Alternative presentation.
Differential costs to make:
Direct materials................... $ 50
Direct labor 106
Variable overhead............... 32
Avoidable fixed overhead.... 40 (= $80,000 ÷ 2,000 units)
$228

This is more than the $220 purchase price from Trailblazers.

($228 – $220)  2,000 units = $16,000 lower than the cost to make, which is $4,000 less
than management’s required savings.