Additional exercise:

Absorption costing approach

Number of units produced & sold 12,500 units
Unit product cost $30
Annual SA expense $60,000
Estimated investment required $500,000
Desired ROI 18%

Cost base /unit = product cost/u = $30/u

Markup percentage
Non −production cost a year+ Desired Profit a year $ 60,000+18 %∗$ 500,000
¿ = =40 %
Production cost a year (¿ cost base a year ) $ 30 /u∗12,500 u

2. Price quotation sheet

Cost base/u $30/u
Markup/u $30/u*40% = $12/u
Sales price/u $42/u

Contribution costing approach

Number of units produced & sold 12,500 units
Variable product cost per unit $20
Variable SA expense per unit $4
Estimated investment required $500,000
Desired ROI 18%
Cost base/unit = VC/u = $20/u + $4/u = $24/u
Fixed production cost (year) = ($30/u -$20/u)*12,500u = $125,000
Fixed non-production cost (year) = $60,000 – 12,500u*$4/u = $10,000
Markup percentage
¿ cost per year + Desired Profit a year [125,000+10,000]+18 %∗$ 500,000
¿ =¿ =75 %
Variable cost a year (¿ cost base a year ) $ 2 4 /u∗12,500

2. Price quotation sheet

Cost base/u $24/u
Markup/u $24/u*75% = $18
Sales price/u $42/u
EXERCISE A-2
Number of units produced = Number of units 12,500 units
sold
Unit product cost $30
Annual SA expense $60,000
Estimated investment required $500,000
Desired ROI 18%
1. Markup (a year) = Non-production cost a year + Desired Profit a year
= $60,000 + 18%*$500,000 = $150,000
2. Target selling price per unit = Cost base (per unit) + Markup (per unit)
= $30 + $150,000/12,500 = $42

EXERCISE A-3
Number of units sold 50,000 units
Market price $65
Estimated investment required $2,500,000
Desired ROI 20%
Target cost per unit = Market price - Target profit per unit
$ 2,500,000∗20 %
= $ 65− =$ 55
50,000
EXERCISE 12-4
Normal oders
Product cost $143+$86+$35=$264
Direct materials $143
Direct labor $86
POH $35
Fixed POH $35-$7 = $28
Variable POH $7
Normal selling price $389.95
Contribution income statement (per unit)
Sales $389.95
VC $143+$86+$7 = $236
CM $389.95-$236 = $153.95
FC $28
NOI $153.95-$28 = $125.95
NOI for normal orders > 0  CM of normal orders already covers FC
Special order: 10 bracelets
Product cost $149+$86+$53.5=$288.5
Direct materials $143+$6 = $149
Direct labor $86
POH $46.5+$7=$53.5
Fixed POH $465/10=$46.5
Variable POH $7
Special selling price $349.95
Contribution income statement (per unit)
Sales $349.95
VC $149+$86+$7 = $242
CM $349.95-$242 = $107.95
FC $46.5
NOI $107.95-$46.5 = $61.45
NOI for special order > 0  Total NOI increases  Accept the special order
EXERCISE 12-14
Normal oders
Normal number of unit sold a month 8,000
Direct materials $2.5
Direct labor $3
Variable POH $0.5
Fixed POH $4.25
Variable SA expense $1.5
Fixed SA expense $2
Selling price per unit $15
Contribution income statement (per unit)
Sales $15
VC $2.5 + $3 + $0.5 + $1.5 = $7.5
CM $15 - $7.5 = $7.5
FC $4.25 + $2 = $6.25
NOI $7.5 - $6.25 = $1.25
NOI for normal orders > 0  CM of normal orders already covers FC

Special order:
Normal number of unit sold a month 2,000
Direct materials $2.5
Direct labor $3
Variable POH $0.5
Fixed POH $0
Variable SA expense $1.5
Fixed SA expense $0
Selling price per unit $12
The company’s capacity = 10,000 units per month
Contribution income statement (per unit)
Sales $12
VC $2.5 + $3 + $0.5 + $1.5 = $7.5
CM $12 - $7.5 = $4.5
FC $0
NOI $4.5
1. If the order is acceptes, monthly profit will increase: 2,000*$4.5 = $9,000
2.
Contribution income statement for the previous month: units sold = 8,000-500=7,500
Sales $15*7,500 = $112,500
 VC $7.5*7,500 = $56,250
CM $112,500 - $56,250 = $56,250
FC $3.5*8,000 = $28,000
NOI $56,250 - $28,000 = $28,250
Previous year: NOI > 0  CM already covered FC
Cost to establish minimum price for 500 products left over is variable unit cost.
Because:
Price per unit = Cost per unit + Profit per unit  Min Price per unit = Cost per unit
(Profit = 0)  Min Price = Variable selling and administrative cost (CM each year
already covers each year’ FC; Variable POH was already included in cost for 7,500
units of last period)
PROBLEM 12-21
1. The company’s capacity is 50,000 units
The company sells 40,000 pairs, doesn’t accept special order
Per pair € Total €
Sales 32 32*40,000 = 1,280,000
VC 12+3+1+4=20 20*40,000 = 800,000
Direct materials 12
Direct labor 3
Variable POH 1
Variable selling 4
expense
FC 450,000/40,000 = 11.25 250,000 + 200,000 = 450,000
F POH 250,000
Fixed selling expense 200,000
NOI 32 – 20 – 11.25 = 0.75 0.75*40,000 = 30,000

The company sells 40,000 pairs, accept special order

For 10,000 special pairs
Per pair € Total €
Sales 25 25*10,000 = 250,000
Payment for fixed fee 4
Reimbursment DM+DL+VPOH+FPOH
manufaturing cost = 12+3+1+5 = 21
VC 12+3+1=16 16*10,000 = 160,000
Direct materials 12
Direct labor 3
Variable POH 1
Variable selling expense 0
FC 0
F POH 0
Fixed selling expense 0
NOI 25 – 16 = 9 9*10,000 = 90,000
Conclusion: Income will increase €90,000 from 10,000 special pairs, particularly the
fixed cost that the army pays back, because fixed costs are already covered by CM of
40,000 general pairs (general NOI > 0)
2. Give up 10,000 general pairs for 10,000 special pairs
Produce and sell 50,000 general pairs
Per pair € Total €
Sales 32 32*50,000 = 1,600,000
VC 12+3+1+4=20 20*50,000 = 1,000,000
Direct materials 12
Direct labor 3
Variable POH 1
Variable selling 4
expense
FC 450,000/50,000 = 9 250,000 + 200,000 = 450,000
F POH 250,000
Fixed selling expense 200,000
NOI 32 – 20 – 9 = 3 3*50,000 = 150,000

Sell 40,000 general pairs and 10,000 special pairs

- For 40,000 general pairs
Per pair € Total €
Sales 32 32*40,000 = 1,280,000
VC 12+3+1+4=20 20*40,000 = 800,000
Direct materials 12
Direct labor 3
Variable POH 1
Variable selling 4
expense
FC 450,000/40,000 = 11.25 250,000 + 200,000 = 450,000
F POH 250,000
Fixed selling expense 200,000
NOI 32 – 20 – 11.25 = 0.75 0.75*40,000 = 30,000
NOI for general pairs > 0  FC are already covered by CM for general pairs
- For 10,000 special pairs
Per pair € Total €
Sales 25 25*10,000 = 250,000
Payment for fixed fee 4
Reimbursment DM+DL+VPOH+FPOH
manufaturing cost = 12+3+1+5 = 21
VC 12+3+1=16 16*10,000 = 160,000
Direct materials 12
Direct labor 3
Variable POH 1
Variable selling expense 0
 FC 0
F POH 0
Fixed selling expense 0
NOI 25 – 16 = 9 9*10,000 = 90,000
Total NOI = €30,000 + €90,000 = €120,000
Conclusion: If the company gives up 10,000 general pairs to provide for army, its total
NOI will decrease €150,000 - €120,000 = €30,000. It will decrease because:
- Number of units sold is the same (50,000 pairs)
- FC is the same
- VC for special orders is smaller than for general ones an mount equal variable
selling price (€4 per pair)
- Price set for current customers is higher than for the army (€32-€25=€7)
- But higher part of VC is smaller than lower part of price (€4<€7)
In other words, the decreamental NOI is arised from the differential between higher
part of VC and lower part of price (€7-€4=€3/pair)