Managerial Accounting 12th Edition Warren Solutions Manual 1

Managerial Accounting 12th Edition
Warren Solutions Manual

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CHAPTER 20 (FIN MAN); CHAPTER 5 (MAN)

VARIABLE COSTING FOR MANAGEMENT
ANALYSIS
DISCUSSION QUESTIONS
1. a. Under absorption costing, both variable and fixed manufacturing costs are included
as a part of the cost of the product manufactured.
b. Under variable costing, only the variable manufacturing costs are included as a part
of the cost of the product manufactured. The fixed manufacturing costs are treated
as an expense of the period in which they are incurred.
2. Fixed factory overhead.
3. Included as part of the cost of product manufactured: (b), (d), (g).
4. In the variable costing income statement, the fixed manufacturing costs and the fixed
selling and administrative expenses are reported in a special section for fixed costs and
are deducted from the contribution margin.
5. All costs are controllable by someone within the business but not necessarily by the
same level of management. For a specific level of management, noncontrollable costs
are costs for which another level of management is responsible.
6. In the short run, income from operations is maximized if the revenue from the sale of the
product exceeds the variable cost of making and selling the product. Under variable
costing, these relevant costs are readily available.
7. Product profitability analysis can be used by management to set product prices, to
emphasize promotional activity toward more profitable products or away from less
20-1
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profitable products, and to make decisions about keeping products or eliminating
products from the product line.
8. Rewarding sales personnel on the basis of total sales will normally motivate the sales staff
to expend their efforts promoting high-volume products, which will produce a large total
amount of sales dollars. In some cases, more profit may be earned by promoting specialty
products with lower sales volume but which have higher profit margins on each product
sold. For example, grocery stores must generate a large volume of sales to earn the same
profit as
a jewelry store, because the profit margin for the grocery industry is low, while the profit
margin for the jewelry industry is high. A better measure of sales performance is the
total dollar contribution margin of each salesperson (total sales less variable cost of
goods sold and variable selling expenses) to overall company profit.
9. A change in contribution margin can be attributed to a change in the following factors
as they affect sales and/or variable costs: (1) quantity factor—the effect of a difference
in the number of units sold, assuming no change in unit sales price or unit cost, and (2)
unit price
or unit cost factor—the effect of a difference in unit sales price or unit cost on the
number of units sold.
10. The quantity factor for sales is computed as the difference between the actual quantity
sold and the planned quantity sold, multiplied by the planned unit sales price.
11. The unit cost factor for variable cost of goods sold is computed as the difference between
the planned unit cost and the actual unit cost, multiplied by the actual quantity sold.
20-2
CHAPTER Variable Costing for Management
20 Analysis
PRACTICE EXERCISES
PE 20–1A (FIN MAN); PE 5–1A (MAN)
a. $345,600 = $540,000 –
$194,400 b. $302,400 = $345,600
– $43,200
c. $140,400 = $302,400 – $129,600 – $32,400
PE 20–1B (FIN MAN); PE 5–1B (MAN)

a. $364,800 = $760,000 –
$395,200 b. $167,200 = $364,800
– $197,600
c. $53,200 = $167,200 – $68,400 – $45,600

a. Variable costing income from operations is less than absorption
costing income from operations because the units manufactured are
greater than the units sold.
b. $2,688,000 ($70 per unit × 38,400 units)

a. Variable costing income from operations is less than absorption
greater than the units sold.
b. $739,200 ($44 per unit × 16,800 units)

a. Variable costing income from operations is greater than absorption
less than the units sold.
b. $201,600 ($21.00 per unit × 9,600 units)

a. Variable costing income from operations is greater than absorption
less than the units sold.
b. $776,160 ($14.70 per unit × 52,800 units)
20-2
20 Analysis
a. $15,000 greater in producing 15,000 units. 12,000 units × (6.25* –
5.00**), or [3,000 units × ($75,000 ÷ 15,000 units)].
b. There would be no difference in variable costing income from operations.
* $75,000 ÷ 12,000 units
** $75,000 ÷ 15,000 units

a. $52,500 greater in producing 15,000 units. 10,000 units × (15.75* –
10.50**), or [5,000 units × ($157,500 ÷ 15,000 units)].
b. There would be no difference in variable costing income from operations.
* $157,500 ÷ 10,000 units
** $157,500 ÷ 15,000 units

a. $28,232,000 = [50,000 units × ($480 – $248)] + [(66,000 units × ($500 – $248)]
b. $45,200,000 = [50,000 units × ($480 – $248)] + [(112,000 units × ($560 – $260)]

a. $40,080,000 = [60,000 units × ($728 – $360)] + [(50,000 units × ($720 – $360)]
b. $30,312,000 = [38,000 units × ($660 – $336)] + [(50,000 units × ($720 – $360)]

a. $500,000 decrease in sales = 20,000 units × $25 per
unit b. $1,230,000 increase in sales = ($28 – $25) ×
410,000 units

a. $326,400 increase in variable cost of goods sold = (2,400 units × $136 per unit)
b. $56,000 decrease in contribution margin = ($136 – $140) × 14,000 units
20-3
20 Analysis
EXERCISES
Ex. 20–1 (FIN MAN); Ex. 5–1 (MAN)
a. The inventory valuation under the absorption costing concept would
include the fixed factory overhead cost, as follows:
11,250 units × $139.00 = $1,563,750
Direct materials………………………………………………………………………… $
78.00
Direct labor…………………………………………………………………………… 38.00
Fixed factory 12.00
overhead………………………………………………………………
Variable factory 11.00
overhead……………………………………………………………
Total…………………………………………………………………………………… $139.00
…
b. The inventory valuation under the variable costing concept would not
include the fixed factory overhead cost, as follows:
11,250 units × $127.00 = $1,428,750
Direct materials………………………………………………………………………… $
78.00
Direct 38.00
labor………………………………………………………………………………
Variable factory 11.00
overhead……………………………………………………………
Total…………………………………………………………………………………… $127.00
…
All of the fixed factory overhead cost would be expensed in the variable costing
income statement as a period cost. Thus, the absorption costing income
statement would have a higher net income than would the variable costing
income statement.
20-4
20 Analysis
Ex. 20–2 (FIN MAN); Ex. 5–2 (MAN)
a. BEACH MOTORS INC. Absorption
Costing Income Statement For the
Month Ended July 31, 2014
Sales $9,000,000
Cost of goods sold (30,000 units × $210.00*) 6,300,000
Gross profit $2,700,000
Selling and administrative expenses ($1,260,000 + $225,000) 1,485,000
Income from operations $1,215,000
* Production costs per unit:

Direct materials per unit ($4,495,500 ÷ 40,500 units)…………………… $111.00
Direct labor per unit ($2,187,000 ÷ 40,500 units)……………………… 54.00
Variable factory overhead per unit ($1,093,500 ÷ 40,500 units)…… 27.00
Fixed factory overhead per unit ($729,000 ÷ 40,500 units)…………… 18.00
Total production costs per unit…………………………………………… $210.00
b. BEACH MOTORS INC. Variable

Costing Income Statement For the
Month Ended July 31, 2014
Sales $9,000,000
Variable cost of goods sold
(30,000 units × $192* per unit) 5,760,000
Manufacturing margin $3,240,000
Variable selling and administrative expenses 1,260,000
Contribution margin $1,980,000
Fixed costs:
Fixed factory overhead costs $729,000
Fixed selling and administrative expenses 225,000 954,000
* $111 + $54 + $27 = $192
20-5
20 Analysis
Ex. 20–2 (FIN MAN); Ex. 5–2 (MAN) (Concluded)
c. The difference between the absorption and variable costing income from
operations of $189,000 ($1,215,000 – $1,026,000) can be explained as follows:
Increase in inventory…………………………………………………………………
10,500
× Fixed factory overhead per unit………………………………………………… $
18.00
Difference in income from operations……………………………………………
$189,000
Under the absorption costing method, the fixed factory overhead cost included
in the cost of goods sold is matched with the revenues. As a result, 10,500 units
that were produced but unsold (inventory) include fixed factory overhead cost,
which is not included in the cost of goods sold.
Under variable costing, all of the fixed factory overhead cost is deducted in the
period in which it is incurred, regardless of the amount of inventory change.
Thus, when inventory increases, the absorption costing income statement will
have a higher income from operations than will the variable costing income
statement.
20-6
20 Analysis
Ex. 20–3 (FIN MAN); Ex. 5–3 (MAN)
a. EKIN INC.
Absorption Costing Income
Statement
Sales For the Month Ended February 28, $24,750,000
2014
Cost of goods sold:
Beginning inventory (9,000 × $120.00) $ 1,080,000
Cost of goods manufactured
(90,000 × $122.00) 10,980,000
Cost of goods sold 12,060,000
Selling and administrative expenses 5,539,500
Income from operations $ 7,150,500
b. EKIN INC.
Variable Costing Income
Statement
Sales For the Month Ended February 28, $24,750,000
2014
Variable cost of goods sold
(99,000 units × $100.00 per unit) 9,900,000
Fixed costs:
Fixed manufacturing costs $1,980,000
Fixed selling and administrative expenses 787,500 2,767,500
Income from operations $ 7,330,500
c. The difference between the absorption and variable costing income from
operations of −$180,000 ($7,150,500 − $7,330,500) can be explained as follows:
Reduction in (9,000)
inventory……………………………………………………………
× Fixed manufacturing cost per unit (at 100% capacity)………………… $20.00
Difference in income from operations……………………………………… $(180,000
)
Under the absorption costing method, the fixed manufacturing cost included in
the cost of goods sold is matched with the revenues. As a result, 9,000 units that
were produced but unsold in January (beginning inventory for February) include
fixed manufacturing cost, which is included in the cost of goods sold for
February. Under variable costing, all of the fixed manufacturing cost is deducted
in the period in which it is incurred, regardless of the amount of inventory
change. Thus, when inventory decreases, the absorption costing income
statement will have a lower income from operations than will the variable costing
income statement.
20-7
20 Analysis
Ex. 20–4 (FIN MAN); Ex. 5–4 (MAN)
a. Variable cost of goods Variable cost of goods
manufactured per unit manufactured
=
Number of units
produced
Variable cost of $20,736,000

=
goods manufactured 10,800 units
per unit
$1,920
Variable cost of
goods
=
manufactured per unit
Total cost of goods
b. Absorption cost of manufactured
goods manufactured = (variable + fixed)
per unit Number of units
produced
Absorption cost of goods ($20,736,000 +

manufactured per unit
= $9,504,000)
10,800 units
Absorption cost of goods

manufactured per unit $2,800
=
Ex. 20–5 (FIN MAN); Ex. 5–5 (MAN)

HAMAN
COMPANY
Statement
Sales (14,400 units) $1,209,600
For the Month Ended June 30,
Variable cost of goods sold: 2015
Variable cost of goods manufactured* $932,400
Less inventory, June 30 (2,400 units)** 133,200
Variable cost of goods sold 799,200
Manufacturing margin $ 410,400
Variable selling and administrative expenses 68,400
Contribution margin $ 342,000
Fixed costs:
Fixed manufacturing costs $ 75,600
Income from operations $ 211,680
* $1,008,000 – $75,600 (total manufacturing cost less fixed manufacturing cost)

** ($932,400 ÷ $1,008,000) × $144,000 (the ratio of variable to total manufacturing costs times the value of
the ending inventory under absorption costing); or $932,400 ÷ 16,800 units manufactured = $55.50;
20-8
20 Analysis
$55.50 × $2,400 units = $133,200.
20-9
20 Analysis
Ex. 20–6 (FIN MAN); Ex. 5–6 (MAN)
COVELLI EQUIPMENT COMPANY
Statement For the Month Ended July
Sales (45,000 units) 31, 2014 $6,750,000
Cost of goods sold:
Cost of goods manufactured* $3,915,000
Less inventory, May 31 (9,000 units)** 652,500
Selling and administrative expenses 2,250,000
* $3,240,000 + $675,000 (total variable plus fixed manufacturing cost)

** ($3,915,000 ÷ $3,240,000) × $540,000 (the ratio of total to variable manufacturing cost times the ending
inventory valuation under variable costing); or $3,915,000 ÷ 54,000 units manufactured = $72.50/unit;
$72.50 × 9,000 units = $652,500.
Ex. 20–7 (FIN MAN); Ex. 5–7 (MAN)

a. PROCTER & GAMBLE COMPANY Variable
Costing Income Statement (assumed) (in
millions)
Net sales $82,559
Variable cost of products sold 22,830
Manufacturing margin $59,729
Variable marketing, administrative, and other
expenses 10,400
Contribution margin $49,329
Fixed costs:
Fixed manufacturing costs $17,938
Fixed marketing, administrative, and other
expenses 15,573 33,511
Income from operations $15,818
b. If Procter & Gamble Company reduced its inventories during the period, then the
cost of products sold would include fixed costs allocated to the beginning
inventories. These would not be fixed costs of the current period. Thus, the total
fixed costs of products sold on the absorption costing income statement would be
higher, and the income from operations would be lower.
20-10
20 Analysis
Ex. 20–8 (FIN MAN); Ex. 5–8 (MAN)
a. 1.
MUZENSKI INDUSTRIES INC.
Statement For the Month Ending
July 31, 2014
28,800 Units 36,000 Units
Sales $2,160,000
Manufactured $2,160,000
Manufactured
Cost of goods sold:
Cost of goods manufactured:
28,800 units × $69.50* $2,001,600
36,000 units × $68** $2,448,000
Less inventory, July 31 (7,200 units × $68) 489,600
Cost of goods sold $2,001,600 $1,958,400
Gross profit $ 158,400 $ 201,600
Selling and administrative expenses 64,900 64,900
Income from operations $ 93,500 $ 136,700
* Unit cost of goods manufactured:

Direct materials ($1,324,800 ÷ 28,800)……………………………… $46.00
Direct labor ($316,800 ÷ 28,800)…………………………………… 11.00
Variable factory overhead cost ($144,000 ÷ 28,800)…………… 5.00
Fixed factory overhead cost ($216,000 ÷ 28,800)………………… 7.50
Total unit cost………………………………………………………… $69.50
** Unit cost of goods manufactured:

Direct materials……………………………………………………… $46.00
Direct labor……………………………………………………………… 11.00
Variable factory overhead cost……………………………………… 5.00
Fixed factory overhead cost ($216,000 ÷ 36,000)……………… 6.00
Total unit cost………………………………………………………… $68.00
20-11
20 Analysis
2.
MUZENSKI INDUSTRIES INC.
Statement For the Month Ending
July 31, 2014 28,800 Units 36,000 Units
Manufactured Manufactured
Sales $2,160,000 $2,160,000
Variable cost of goods sold:
Variable cost of goods manufactured:
28,800 units × $62.00* $1,785,600
36,000 units × $62.00* $2,232,000
Less inventory, July 31 (7,200 units × $62.00) 446,400
Variable cost of goods sold $1,785,600 $1,785,600
Manufacturing margin $ 374,400 $ 374,400
Variable selling and administrative expenses** 35,500 35,500
Contribution margin $ 338,900 $ 338,900
Fixed costs:
Fixed factory overhead $ 216,000 $ 216,000
Total fixed costs $ 245,400 $ 245,400
Income from operations $ 93,500 $ 93,500
* Unit variable cost of goods manufactured:

Direct materials ($1,324,800 ÷ 28,800)……………………………… $46.00
Direct labor ($316,800 ÷ 28,800)…………………………………… 11.00
Variable factory overhead cost ($144,000 ÷ 28,800)…………… 5.00
Total unit variable cost……………………………………………… $62.00
** Variable selling and administrative expenses are constant with constant sales levels.
b. If 36,000 units rather than 28,800 units are manufactured, the increase in income
from operations of $43,200 ($136,700 – $93,500) under absorption costing is
caused by the allocation of $216,000 of fixed factory overhead cost over a larger
number of units. If 28,800 units are manufactured, the fixed factory overhead cost
is $7.50 per unit ($216,000 ÷ 28,800) compared to $6.00 per unit ($216,000 ÷
36,000) if 36,000 units are manufactured. Thus, the cost of goods sold is $43,200
less by the amount of
$1.50/unit ($7.50 – $6.00) times the number of units sold, or $1.50 × 28,800 units =
$43,200. The $43,200 difference can also be explained by the amount of fixed
factory overhead cost included in the ending inventory if 36,000 units are
manufactured ($6.00 per unit × 7,200 units).
20-12
20 Analysis
Ex. 20–9 (FIN MAN); Ex. 5–9 (MAN)
a. WHIRLPOOL
CORPORATION
Variable Costing Income Statement
Sales (assumed) (in millions) $18,666
Beginning inventory (70% × $2,792) $ 1,954
Variable cost of goods manufactured* 11,627
Less: Ending inventory (70% × $2,354) (1,648)
Variable selling and administrative expenses** 691
Fixed costs:
Fixed selling and administrative expenses 930 4,954
* Variable cost of goods manufactured:

Cost of goods sold………………………………………………………… $16,089
Plus: Ending inventory…………………………………………………… 2,354
Less: Beginning inventory……………………………………………… (2,792)
Cost of goods manufactured…………………………………………… $15,651
Less: Manufacturing fixed costs………………………………………… 4,024
Variable cost of goods manufactured………………………………… $11,627
** Variable selling and administrative expenses:

Selling and administrative expenses…………………………………… $ 1,621
Less: Selling and administrative fixed expenses…………………… 930
Variable selling and administrative expenses………………………… $ 691
20-13
20 Analysis
b. The income from operations under the variable costing concept will not be the
same as the income from operations under the absorption costing concept when
the inventories either increase or decrease during the year. In this case,
Whirlpool’s inventory decreased, meaning it sold more than it produced. As a
result, the income from operations under the variable costing concept will be
greater than the income from operations under the absorption costing concept.
The reason is because the
variable costing concept will deduct the fixed costs in the period that they are
incurred, regardless of changes in inventory balances. In contrast, absorption
costing will match costs with sales by allocating the fixed costs to the beginning
and ending inventories. When sales are less than the cost of goods manufactured
(when inventories decrease), fixed costs from the beginning inventory are included
in cost of goods sold under absorption costing. Thus, more fixed costs will be
included in cost of goods sold
than were actually incurred during the period. This will result in a lower income
from operations than would be reported under the variable costing concept.
The difference between the income from operations under the two concepts can
be explained as follows (rounded):
Fixed cost portion of Jan. 1 inventory (30% × $2,792)…………………………… $
838
Less: Fixed cost portion of Dec. 31 inventory (30% × $2,354)……………… 706
Difference in income from operations…………………………………………… $ 132
Income from operations—variable costing……………………………………… $1,088
Income from operations—absorption 956
costing……………………………………
Difference……………………………………………………………………………… $ 132
20-14
20 Analysis
Ex. 20–10 (FIN MAN); Ex. 5–10 (MAN)
a. Management’s decision and conclusion are incorrect. The profit will not be
improved by $114,000 because the fixed costs used in manufacturing and selling
running shoes will not be avoided if the line is eliminated. These fixed costs total
$192,000 for the running shoe line. Thus, the actual profit will go down by $78,000
($192,000 – $114,000) if the running shoe line is eliminated. This is shown in the
variable costing income statements in (b). The absorption costing product profit
reports should not be used
for making this type of decision.
b. KOBEER, INC
Variable Costing Income Statements—Three Product
Lines
For the Year Ended December 31,
2014
Basketball Cross Training
Revenues $696,000 $588,000 $ 504,000
Running
Variable cost of goods sold 252,000 210,000 240,000
Shoes Shoes
Manufacturing margin $444,000 $378,000 $ 264,000
Shoes
Variable selling and administrative
expenses 204,000 144,000 186,000
Contribution margin $240,000 $234,000 $ 78,000
Fixed costs:
Fixed manufacturing costs $108,000 $ 78,000 $ 96,000
Fixed selling and administrative
expenses 84,000 72,000 96,000
$192,000 $150,000 $ 192,000
Income from operations $ 48,000 $ 84,000 $(114,000)
c. If the running shoe line were eliminated, then the contribution margin of the
product line also would be eliminated. The fixed costs would not be eliminated.
Thus, the profit of the company would actually decline by $78,000. Management
should keep the line and attempt to improve the profitability of the product by
increasing prices, increasing volume, or reducing costs. Alternatively, if the
volume of the other two products were to increase, then the running shoe line
could be eliminated and replaced with volume from the other two products.
20-15
20 Analysis
Ex. 20–11 (FIN MAN); Ex. 5–11
(MAN) Silent
No Noise
Candy
Headphone
Headphone
Unit volume increase………………………………………………… 35,700
39,600
× Contribution margin per unit…………………………………… $14.40
$20.20
Increase in profitability……………………………………………… $514,080
$799,920
The increase in total profitability would be $1,314,000 ($514,080 + $799,920). Note

that the income from operations per unit figures are not used in the analysis, since
the fixed costs should be excluded in determining the incremental income from
operations to be earned from the incremental sales. This is because the company
has sufficient capacity for the additional production. Thus, fixed costs will not be
affected by the decision.
Ex. 20–12 (FIN MAN); Ex. 5–12 (MAN)

a. SNOW MOTOR SPORTS INC.
Contribution Margin by
Product ARCTIC CAT
Revenues $12,600,000 $5,720,000
Variable cost of goods sold 7,440,000 3,696,000
Manufacturing margin $ 5,160,000 $2,024,000
Variable selling and administrative expenses 1,884,000 765,600
Contribution margin $ 3,276,000 $1,258,400
Contribution margin ratio 26.00% 22.00%
b. The Arctic line provides the largest total contribution margin and the largest
contribution margin ratio. If the sales mix were shifted more toward the Arctic,
the overall profitability of the company would increase.
20-16
20 Analysis
Ex. 20–13 (FIN MAN); Ex. 5–13 (MAN)
a. COAST TO COAST SURFBOARDS
INC.
Contribution Margin by East Coast West Coast
Territory
Sales $8,000,000 $8,000,000
Manufacturing margin $2,000,000 $2,000,000
Variable selling expenses 1,360,000 1,250,000
Contribution margin $ 640,000 $ 750,000
b. The total contribution margin is slightly lower for the East Coast, while the
contribution margin ratio is slightly higher for West Coast. This is because East
Coast sells only Atlantic Waves, which have a lower contribution margin ratio
(8.0% vs.
11.7%)* but a higher contribution margin per unit ($16 vs. $14). In attempting to
improve the company’s profitability, it is unlikely that changing the mix of
products to the two territories will have much effect. East Coast will sell very few
Pacific Pounders (due to surf style), while West Coast has a mixed surf.
However, there appears to be a number of profit opportunities. First, the Atlantic
Wave has a manufacturing margin of $50 per unit, while the Pacific Pounder is
only $30 per unit. Why such a large difference? Maybe the Pacific Pounder is
underpriced or made in inefficient manufacturing processes. Second, the
variable selling expense per unit for the Atlantic Wave is much higher than that
of the Pacific Pounder ($34 vs. $16). This suggests that the variable selling
expenses per unit for the Atlantic Wave may be too high. It seems difficult to
justify a more than two-to-one difference in this expense. Reducing the variable
selling expense for the Atlantic Wave by half, for example, would have a
significant impact on the firm’s overall profitability.
* 8% = $16 ÷ $200, rounded to one decimal place
11.7% = $14 ÷ $120
20-17
20 Analysis
Ex. 20–14 (FIN MAN); Ex. 5–14 (MAN)
a. 1. REYES INDUSTRIES INC.
Salesperson
Cassy G. Todd Tim Jeff
Sales $2,688,000 $2,016,000 $2,592,000 $2,964,000
Variable cost of goods sold 1,612,800 806,400 1,555,200 1,185,600
Manufacturing margin $1,075,200 $1,209,600 $1,036,800 $1,778,400
Variable expense— 322,560 322,560 414,720 355,680

Commission
Contribution margin $752,640 $887,040 $622,080 $1,422,720
Contribution margin ratio 28.00% 44.00% 24.00% 48.00%
2. Jeff earns the highest contribution margin and has the highest contribution margin
ratio. This is because he sells the most units, has a low commission rate, and sells
a product mix with a high manufacturing margin (60% of sales, $1,778,400 ÷
$2,964,000). Todd also sells products with a high average manufacturing margin
(60% of sales,
$1,209,600 ÷ $2,016,000) but at a high commission rate. This accounts for the four
percentage point difference in the contribution margin ratio between Jeff and
Todd. The other two salespersons sell products with lower average
manufacturing margins (40% of sales). Combining this with the high commission
rate causes Tim to have the poorest contribution margin ratio among the four
salespersons. In addition, because Tim has the lowest sales volume and the
highest variable cost of goods sold, he also provides the lowest overall
contribution margin. Again, the four percentage point difference between Tim and
Cassy is due to the difference in their commission rates.
20-18
20 Analysis
b. 1. REYES INDUSTRIES INC.
Territory Northeast Southwest
Sales $4,704,000 $5,556,000
Manufacturing margin $2,284,800 $2,815,200
Variable commission expense 645,120 770,400
Contribution margin $1,639,680 $2,044,800
2. The Southwest Region has $852,000 more sales and $405,120 more
contribution margin. In addition, the Southwest Region has the largest
contribution margin ratio. In the Southwest Region, the salesperson with the
highest sales unit volume also has the highest contribution margin ratio (Jeff).
The Southwest Region has the highest performance, even though it also has
the salesperson with the
lowest contribution margin and contribution margin ratio (Tim). In the Northeast
Region, both salespersons are performing similarly. The Northeast Region
contribution margin is less than the Southwest Region because of the
outstanding performance of Jeff. Jeff is driving the Southwest Region’s
performance.
20-19
CHAPTER 20 Variable Costing for Management Analysis
Ex. 20–15 (FIN MAN); Ex. 5–15 (MAN)

a. CATERPILLAR, INC. Contribution Margin by
Segment (assumed) (in millions, except
ratio figures)
Building Large Marine &

Construction Core Electric Power Petroleum
Products Cat Japan Components Earthmoving Power Excavation Systems Logistics Power Mining Turbines
Sales $2,217.00 $1,225.00 $1,234.00 $5,045.00 $2,847.00 $4,562.00 $2,885.00 $659.00 $2,132.00 $3,975.00 $3,321.00
Variable cost of goods sold 997.65 673.75 604.66 2,572.95 1,537.38 2,372.24 1,529.05 329.50 1,066.00 2,067.00 1,594.08
Manufacturing margin $1,219.35 $ 551.25 $ 629.34 $2,472.05 $1,309.62 $2,189.76 $1,355.95 $329.50 $1,066.00 $1,908.00 $ 1,726.92
Dealer commissions $ 199.53 $ 134.75 $ 98.72 $ 403.60 $ 284.70 $ 273.72 $ 144.25 $ 65.90 $ 191.88 $ 278.25 298.89
Variable promotion expenses 310.00 120.00 150.00 600.00 200.00 600.00 300.00 75.00 270.00 480.00 400.00
Variable selling expenses $ 509.53 $ 254.75 $ 248.72 $1,003.60 $ 484.70 $ 873.72 $ 444.25 $140.90 $ 461.88 $ 758.25 $ 698.89
Contribution margin $ 709.82 $ 296.50 $ 380.62 $1,468.45 $ 824.92 $1,316.04 $ 911.70 $188.60 $ 604.12 $1,149.75 $1,028.03
Contribution margin ratio 32.0% 24.2% 30.8% 29.1% 29.0% 28.8% 31.6% 28.6% 28.3% 28.9% 31.0%
b.
Building Large Marine &
Construction Core Electric Power Petroleum
Products Cat Japan Components Earthmoving Power Excavation Systems Logistics Power Mining Turbines
Manufacturing margin 55.0% 45.0% 51.0% 49.0% 46.0% 48.0% 47.0% 50.0% 50.0% 48.0% 52.0%
Commission –9.0% –11.0% –8.0% –8.0% –10.0% –6.0% –5.0% –10.0% –9.0% –7.0% –9.0%
Variable promotion –14.0% –9.8% –12.2% –11.9% –7.0% –13.2% –10.4% –11.4% –12.7% –12.1% –12.0%
Contribution margin ratio 32.0% 24.2% 30.8% 29.1% 29.0% 28.8% 31.6% 28.6% 28.3% 28.9% 31.0%
19
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
c. The Building Construction Products segment has the highest contribution margin
ratio. The manufacturing margin is high, while the dealer commission rate is
average. The variable promotion expenses as a percent of sales is higher than
average. Cat Japan is the poorest performing segment in terms of contribution
margin ratio. This
is because the manufacturing margin is the lowest and dealer commissions are
the highest. The high dealer commission is out of balance with the rest of the
business segments. This may be the result of the high labor cost structure of
Japan. The Large Power Systems are sold mostly to other manufacturers. As a
result, each
sale has more volume and requires less effort, so the commission rate is lower.
This helps the Large Power Systems segment perform well in light of a low
manufacturing margin. The Electric Power segment operates similarly to the
Large Power Systems segment and exhibits similar contribution margin
characteristics.
20-20
Ex. 20–16 (FIN MAN); Ex. 5–16 (MAN)
a. Filmed
Entertainmen Networks Publishing
t
Revenues…………………………… $11,784.0 $13,562.0 $6,328.0
…
Variable 4,006.6 4,339.8 4,429.6
costs…………………………
Contribution $ 7,777 $ 9,222 $ 1,898
margin…………………
Contribution margin ratio………… 66% 68% 30%
b. The Filmed Entertainment and Networks segments sell an information or

media product that has a very small variable cost per unit. For example, the
Networks segment earns revenue monthly from each customer. However,
the variable cost of each customer is rather small. The cost of providing the
service is essentially fixed. The same holds true for the Filmed
Entertainment segment. The variable cost per ticket sold to a motion picture
is rather small. The costs
of producing and promoting a new film are essentially fixed to the number of
tickets sold. The studio will have enough capacity to release a set number of
films per year. The costs will be incurred regardless of the number of tickets
sold. The same logic holds for HBO and the cable network. Much of their
costs are fixed to the number of subscribers. The Publishing segment
produces and sells products that do have a variable cost per unit. The total
cost of producing a magazine will increase as more units are sold. The
editorial costs will likely
be fixed, but the printing and distribution costs will be variable to the number
of units sold. Thus, the Publishing segment will have a much lower
contribution margin ratio than the other segments.
c. The higher contribution margin ratios of the Filmed Entertainment and Networks
segments should not be interpreted as being the most profitable. The fixed costs
cannot be ignored. These segments will have high fixed costs. If the volume of
business is not sufficient to exceed the break-even point, then the segments
would be unprofitable. In the final analysis, the fixed costs also should be
considered in determining the overall profitability of the segments. The
contribution margin ratio shows how sensitive the profit will be to changes in
volume. These segments increase their profitability rapidly with increases in
subscription or audience volume, compared to the Publishing segment.
20-21
Ex. 20–17 (FIN MAN); Ex. 5–17 (MAN)
a. BUY BEST INC. Contribution Margin
Analysis—Sales For the Year Ended
December 31, 2015
Effect of change in sales:
Sales quantity factor (36,000 – 32,250) × $32.50 $121,875
Unit price factor ($30 – $32.50) × 36,000 (90,000)
Total effect of change in sales* $31,875
* This represents the total effect that the change in sales has on Buy Best Inc.’s contribution
margin.
b. The sales will increase by $31,875. If the variable cost per unit were $10,
and there were 3,750 more units than planned, then the variable cost will
increase
by $37,500 due to the variable cost quantity factor. Thus, the contribution
margin will decrease by $5,625 ($37,500 – $31,875) as a result of the price
reduction.
Ex. 20–18 (FIN MAN); Ex. 5–18 (MAN)

ROMERO PRODUCTS INC.
Contribution Margin Analysis—Sales
Effect of change in sales: 2014
Sales quantity factor (38,000 – 41,000) × $200 $(600,000)
Unit price factor ($220 – $200) × 38,000 760,000
Total effect of change in sales* $160,000
* This represents the total effect that change in sales has on Romero Products Inc.’s contribution
margin.
20-22
Ex. 20–19 (FIN MAN); Ex. 5–19 (MAN)
ROMERO PRODUCTS INC. Contribution
Margin Analysis—Variable Costs For the
Year Ended December 31, 2014
Effect of changes in variable costs of goods sold:
Variable cost quantity factor (41,000 – 38,000) × $80 $ 240,000
Unit cost factor ($80 – $92) × 38,000 (456,000)
Total effect of change in variable cost of
goods sold $(216,000)
Effect of changes in variable selling and administrative
expenses:
Unit cost factor ($22 – $20) × 38,000 76,000
Total effect of changes in selling and 142,000
administrative expenses
Decrease in contribution margin from change in
variable costs $ (74,000)
20-23
Ex. 20–20 (FIN MAN); Ex. 5–20 (MAN)
a. EAST COAST RAILROAD
Route
For the Month Ended April 30,
2014
Revenues Atlanta/
$255,000 Baltimore/
$594,000 Pittsburgh/
$542,080 $1,391,080
Baltimore Pittsburgh Atlanta Total
Variable costs:
Labor costs for loading
and unloading railcars $ 19,550 $ 99,360 $ 56,672 $ 175,582
Fuel costs 159,154 126,480 174,592 460,226
Train crew labor costs 92,412 73,440 101,376 267,228
Switchyard labor costs 13,175 66,960 38,192 118,327
Total variable costs $284,291 $366,240 $370,832 $1,021,363
Contribution margin $ (29,291) $227,760 $171,248 $ 369,717
Contribution margin ratio –11.5% 38.3% 31.6% 26.6%
Revenues: Revenue per railcar × Number of railcars

Labor costs for loading and unloading railcars: $46.00 × Number of railcars
Fuel costs: $12.40 × Number of train-miles
Train crew labor costs: $7.20 × Number of train-miles
Switchyard labor costs: $31 × Number of railcars
b. The Atlanta/Baltimore route performs significantly worse than do the other two
routes.
A close examination of the operating statistics indicates that this route runs very
few railcars, combined with fairly high total mileage. This combination suggests
that the railroad is running many short trains on the railroad. That is, the railroad’s
profitability is very sensitive to the size, or length, of the train in railcar terms. A
short train costs nearly as much fuel and crewing costs as does a longer train.
Thus, short trains will
be inherently less profitable than longer trains. The other two routes have much
better ratios of train-miles to railcars, indicating that their train sizes are larger.
Note to Instructors: Part (b) is somewhat subtle but a worthy discussion. The
cost behavior issues discussed in (b) are common in service companies. For
example, large classes in a university are inherently more profitable than small
classes, dense data traffic on a telecommunication system is more profitable than
less traffic, full airplanes are more profitable than empty airplanes, and faster
table turns in a restaurant create greater profitability than do slower turns, etc.
20-24
Ex. 20–21 (FIN MAN); Ex. 5–21 (MAN)
a. EAST COAST RAILROAD Contribution Margin
for Atlanta/Baltimore Route For the Month
Ended May 31, 2014
Revenues ($500 × 700 railcars) $350,000
Labor costs for loading and unloading railcars
($46.00 × 700 railcars) $ 32,200
Fuel costs ($12.40 × 12,835 train-miles) 159,154
Train crew labor costs ($7.20 × 12,835 train-miles) 92,412
Switchyard labor costs ($31.00 × 700 railcars) 21,700
Total variable costs $305,466
Contribution margin ratio 12.7%
b. EAST COAST
RAILROAD
Contribution Margin Analysis—Atlanta/Baltimore
Route
Planned contribution margin $(29,291)
For the Month Ended May 31,
Effect of change in sales: 2014
Sales quantity factor (700 – 425) × $600 $165,000
Unit price factor ($500 – $600) × 700 (70,000)
Total effect of change in sales 95,000
Effect of changes in variable cost of goods sold:
Variable cost quantity factor (425 – 700) × $77* $ (21,175)
Unit cost factor ($77 – $77) × 700 0
Total effect of changes in variable cost
of goods sold (21,175)
Actual contribution margin $ 44,534
* $46 per car + $31 per car
Note to Instructors: If Exercise 20–20 was assigned, the increase in

contribution margin can be reconciled. The increase in the contribution
margin is reconciled from the planned contribution margin for the route from
Exercise 20–20 of
$(29,291) to the actual contribution margin of $44,534 in part (b).
20-25
Ex. 20–22 (FIN MAN); Ex. 5–22 (MAN)
a. UNDERWATER UNIVERSITY
Statement For the Fall Term 2014
Revenue $7,254,000
Variable costs:
Registration, records, and marketing cost $1,237,500
Instructional costs 3,868,800
Total variable costs $5,106,300
Depreciation on classrooms and equipment 825,600
Supporting Calculations
Revenue: $120 × 60,450 credit hours
Registration, records, and marketing costs: $275 × 4,500 students
Instructional costs: $64 × 60,450 credit hours
b. UNDERWATER UNIVERSITY
Contribution Margin
Analysis For the Fall Term
Planned contribution margin* 2014 $ 2,105,625
Effect of change in revenue:
Revenue quantity factor (60,450 – 43,200)
× $135 $ 2,328,750
Unit price factor ($120 – $135) × 60,450 (906,750)
Total effect of change in sales 1,422,000
Effect of changes in registration, records, and
marketing costs:
Variable cost quantity factor (4,125 – 4,500)
× $275 $ (103,125)
Unit cost factor ($275 – $275) × 4,500 0
Total effect of changes in registration, (103,125)
records, and marketing costs
Effect of changes in instructional costs:
Variable cost quantity factor (43,200 – 60,450)
× $60 $(1,035,000)
Unit cost factor ($60 – $64) × 60,450 (241,800)
Total effect of changes in instructional cost (1,276,800)
Actual contribution margin $ 2,147,700
Note: There was no unit cost change for registration, records, and marketing cost.
* $5,832,000 – $1,134,375 – $2,592,000
20-26
PROBLEMS
Prob. 20–1A (FIN MAN); Prob. 5–1A (MAN)
1. ICE COLD FRIDGE COMPANY
Statement For the Month Ended May
Sales 31, 2014 $4,095,000
Cost of goods sold:
Cost of goods manufactured $3,465,000
Less inventory, May 31 (1,120 units × $198.00*) 221,760
Gross profit $ 851,760
Selling and administrative expenses 475,020
* $3,465,000 ÷ 17,500 units = $198.00
2. ICE COLD FRIDGE COMPANY

Statement For the Month Ended
Sales May 31, 2014 $4,095,000
Variable cost of goods manufactured $3,202,500
Less inventory, May 31 (1,120 units × $183.00*) 204,960
Variable cost of goods sold 2,997,540
Fixed costs:
* $3,202,500 ÷ 17,500 units = $183.00
3. The income from operations reported under absorption costing exceeds the
income from operations reported under variable costing by $16,800
($376,740 –
$359,940). This $16,800 is due to including $16,800 of fixed manufacturing
cost in inventory under absorption costing [1,120 units × 15 ($262,500 ÷
17,500)]. The
$16,800 was thus deferred to a future month under absorption costing,
while it was included as an expense of May (part of fixed costs) under
variable
costing.
20-27
1. HEYWARD INDUSTRIES
INC.
Estimated Income Statement—Absorption Costing—
Solvent
Sales (2,925 units) $315,900
For the Month Ending May 31,
Cost of goods sold: 2015
Direct materials $117,000
Direct labor 52,650
Variable manufacturing cost 43,875
Fixed manufacturing cost 70,000
Cost of goods sold 283,525
Selling and administrative expenses:
Variable selling and administrative expenses $ 35,100
Loss from operations $ (39,225)
2. HEYWARD INDUSTRIES
INC.
Estimated Income Statement—Variable Costing—
Solvent
Sales (2,925 units) $315,900
For the Month Ending May 31,
Direct materials $117,000
Direct labor 52,650
Variable manufacturing cost 43,875 213,525
Fixed costs:
Fixed manufacturing cost $ 70,000
Loss from operations $ (39,225)
3. $106,500. The loss from operations from temporarily closing the portion of the
plant associated with solvent would be $106,500 (fixed manufacturing cost of
$70,000 plus fixed selling and administrative expenses of $36,500).
4. Production of solvent should be continued. Temporary suspension of production

would result in an operating loss of $106,500 [from (3) above], compared with a
loss from operations of $39,225 if production is continued. The savings of
$67,275, measured by the excess of $106,500 over $39,225, is the amount
reported as contribution margin on the variable costing income statement.
20-28
1. a. HIP AND CONSCIOUS CLOTHING
COMPANY Absorption Costing Income
Statement
Sales For the Month Ended January 31, $771,750
Cost of goods manufactured $715,950
Less inventory, January 31 (4,050 units × 52,245
$12.90*)
Gross profit $108,045
* $715,950 ÷ 55,500 units = $12.90
b. HIP AND CONSCIOUS CLOTHING

COMPANY Absorption Costing Income
Statement
Sales For the Month Ended February 28, $771,750
2015
Cost of goods sold:
Inventory, February 1 (4,050 units × $12.90) $ 52,245
Cost of goods manufactured 619,560
2. a. HIP AND CONSCIOUS CLOTHING

COMPANY Variable Costing Income
Statement
2015
Variable cost of goods manufactured $660,450
$11.90*)
Fixed costs:
* $660,450 ÷ 55,500 units = $11.90
20-29
Prob. 20–3A (FIN MAN); Prob. 5–3A (MAN) (Concluded)
2. b. HIP AND CONSCIOUS CLOTHING
COMPANY Variable Costing Income
Statement
2015
Inventory, February 1 (4,050 units × $11.90) $ 48,195
Variable cost of goods manufactured 564,060
Fixed costs:
3. a. For January, the income from operations reported under absorption

costing exceeds the income from operations reported under variable
costing by
$4,050. This difference is due to including $4,050 of fixed
manufacturing cost in inventory under absorption costing [4,050 units
× $1.00 ($55,500 ÷
55,500)]. The $4,050 was thus deferred to February under absorption
b. For February,
costing, while the income
it was fromas
included operations reported
an expense under(part
of January absorption
of fixed
costing is less than the income
costs) under variable costing. from operations reported under variable
costing by
$4,050. This difference is due to including $4,050 of fixed manufacturing
cost in the February 1 inventory under absorption costing (4,050 units × $1.00).
Thus, this $4,050 was included in February’s cost of goods sold under
absorption costing. Under variable costing, this $4,050 was included as an
expense of January (part of the fixed costs) and thus is excluded from
4. The February’s income statement.
Hip and Conscious Clothing Company was equally profitable in January
and February under the variable costing concept. Sales and the variable cost
per unit were the same for both January and February. The difference in
income reported under the absorption costing concept is due to allocating
$4,050 of fixed manufacturing cost to the January 31 ending inventory.
Note: The combined income from operations reported for January and February
($84,510) is the same for both absorption costing and variable costing. This
problem illustrates the need for management to exercise care in interpreting
income from operations reported under absorption costing when large changes in
inventory levels occur.
20-30
1. VICTORN INSTRUMENTS
COMPANY Salespersons’ Analysis
2014 Variable
Variable Cost Selling
of Goods Sold Expenses Contribution
Contribution as a Percent as a Percent Margin
Salesperson Margin of Sales of Sales Ratio
Case $147,560 50.0% 19.0% 31.0%
Dix 139,200 50.0% 21.0% 29.0%
Johnson 140,760 46.0% 18.0% 36.0%
LaFave 177,940 41.0% 18.0% 41.0%
Orcas 171,000 44.0% 18.0% 38.0%
Sussman 312,700 31.0% 16.0% 53.0%
Willbond 157,250 44.0% 19.0% 37.0%
2. Sussman has the highest contribution margin and contribution margin ratio for
the year. This is because of two factors. First, Sussman has the smallest
variable cost of goods sold as a percent of sales. This is probably due to selling
a favorable
mix of product that has high manufacturing margins as a percent of sales. Second,
Sussman has the lowest variable selling expenses as a percent of sales. This
could be due to a lower sales commission or selling support costs.
3. Other factors that should be considered in evaluating the performance of

salespersons include rate of growth in sales for the current year compared with
past years, years of experience for salespersons, size of sales territory, and actual
sales compared with budgeted sales.
20-31
1. VALDESPIN COMPANY
Contribution Margin by Size
Segment
For the Year Ended Size
June 30,
S 2014 M L Total
Sales $668,000 $737,300 $956,160 $2,361,460
Variable cost of goods sold 300,000 357,120 437,760 1,094,880
Manufacturing margin $368,000 $380,180 $518,400 $1,266,580
Variable operating expenses 132,480 155,500 195,840 483,820
Contribution margin $235,520 $224,680 $322,560 $ 782,760
Fixed costs:
Manufacturing costs $ 385,930
Operating expenses 311,040
Total fixed costs $ 696,970
2. Annual income from operations would be reduced below its present level by
$146,360
if Size M were to be discontinued (Proposal 2), as indicated below:
Contribution margin for Size M $224,680

Less reduction in fixed production costs and fixed operating
expenses ($46,080 + $32,240) 78,320
Reduction in annual income from operations $146,360
If Size M is discontinued, $224,680 of contribution margin would be forgone and only

$78,320 in fixed costs would be saved, resulting in a decrease of $146,360 in
income from operations.
20-32
Prob. 20–5A (FIN MAN); Prob. 5–5A (MAN) (Concluded)
3. VALDESPIN COMPANY
Contribution Margin—Proposal
3 Size
S L Total
Sales $1,536,400 $956,160 $2,492,560
Variable cost of goods sold 690,000 437,760 1,127,760
Manufacturing margin $846,400 $518,400 $1,364,800
Variable operating expenses 304,704 195,840 500,544
Contribution margin $ 541,696 $322,560 $ 864,256
Fixed costs:
Operating expenses (including $34,560 additional rent) 345,600
4. $46,936. A comparison of the amount of income from operations under present

conditions, as indicated in (1), and under Proposal 3, as indicated in (3), suggests
an
increase of $46,936 if Proposal 3 is accepted, as illustrated below.
Income from operations, Proposal 3 $132,726

Income from operations, present conditions 85,790
Increase in income from operations $ 46,936
Alternatively, the $46,936 increase can be determined as follows:
Contribution margin, Size S, Proposal 3 $541,696

Contribution margin, Size S, present operations 235,520
Increase in contribution margin $306,176
Less contribution margin, Size M, present operations $224,680
Additional rent 34,560 259,240
20-33
1. DOZIER INDUSTRIES INC.
Contribution Margin
Analysis
For
Planned contribution margin the Year Ended December 31, $1,386,000
2014
Sales quantity factor (19,250 – 22,000) × $125 $(343,750)
Unit price factor ($144 – $125) × 19,250 365,750
Unit cost factor ($51 – $55) × 19,250 (77,000)
Total effect of changes in variable cost of
goods sold 63,250
Effect of changes in variable selling and
administrative expenses:
Unit cost factor ($11 – $15) × 19,250 (77,000)
Total effect of changes in variable selling and
administrative expenses (46,750)
Actual contribution margin $1,424,500
2. The president’s first statement appears correct taken at face value. The president
is incorrect regarding variable cost of goods sold. The majority of the decrease
in the variable cost of goods sold was due to the variable cost quantity factor.
However, this decrease was offset by a $4.00 increase in the variable cost of
goods sold per unit. The contribution margin improved, but some inefficiency
reduced the expected amount of improvement from the variable cost quantity
factor.
The president is correct in saying that an investigation of the increase in

variable selling and administrative expenses is needed. The unit cost factor
increased by
$4.00, which more than offset the favorable variable cost quantity factor, resulting
in an overall decrease in the contribution margin. The increase in the variable
selling and administrative expenses is probably due to the additional selling
effort required
in the face of price increases. It will probably be very difficult to improve the
efficiency of this effort as prices go up. Therefore, the president’s suggestion is
probably unwarranted. Increasing the price again will require even more selling
effort to overcome this negative influence. In addition, there is a limit as to how
much price increase the market will likely be able to support.
20-34
Prob. 20–1B (FIN MAN); Prob. 5–1B (MAN)
1. YOSAN INC.
Statement
Sales For the Month Ended July 31, $2,150,000
2014
Cost of goods sold:
Cost of goods manufactured $1,824,000
Less inventory, July 31 (400 units × $760*) 304,000
* $1,824,000 ÷ 2,400 units = $760
2. YOSAN INC.
Statement
Sales For the Month Ended July 31, $2,150,000
2014
Variable cost of goods manufactured $1,536,000
Less inventory, July 31 (400 units × $640*) 256,000
Fixed costs:
* $1,536,000 ÷ 2,400 units = $640
3. The income from operations reported under absorption costing exceeds the
income from operations reported under variable costing by $48,000 ($330,000 –
$282,000). This difference is due to including $48,000 of fixed manufacturing cost
in inventory under absorption costing [400 units × $120 ($288,000 ÷ 2,400)]. The
$48,000 was
thus deferred to a future month under absorption costing, while it was included
as an expense of July (part of fixed costs) under variable costing.
20-35
1. SMOOTH SKIN CARE PRODUCTS
INC.
Estimated Income Statement—Absorption Costing—Aloe Vera Hand
Lotion
Sales (320,000 units) $25,600,000
For the Month Ending February 28,
Direct materials $ 4,800,000
Direct labor 5,440,000
Variable manufacturing cost 11,200,000
Fixed manufacturing cost 1,530,000
Gross profit $ 2,630,000
Selling and administrative expenses:
Variable selling and administrative expenses $ 3,200,000
Operating loss $ (840,000)
2. SMOOTH SKIN CARE PRODUCTS

INC.
Estimated Income Statement—Variable Costing—Aloe Vera Hand
Lotion
Sales (320,000 units) $25,600,000
For the Month Ending February 28,
Direct materials $ 4,800,000
Direct labor 5,440,000
Variable manufacturing cost 11,200,000 21,440,000
Manufacturing margin $ 4,160,000
Fixed costs:
Fixed manufacturing cost $ 1,530,000
Operating loss $ (840,000)
3. $1,800,000. The operating loss from temporarily closing the portion of the
plant associated with A.V. lotion would be $1,800,000 (fixed manufacturing
cost of
$1,530,000 plus fixed selling and administrative expenses of $270,000).
This assumes that the variable costs would be eliminated with the
shutdown.
4. Production of A.V. lotion should be continued. Temporary suspension of

production would result in an operating loss of $1,800,000 [from (3)
above], compared with an operating loss of $840,000 if production is
continued. The savings of $960,000, measured by the excess of
20-36
$1,800,000 over $840,000, is the amount reported as contribution margin
on the variable costing income statement.
20-37
1. a. HEAD GEAR INC.
Statement For the Month Ended
Sales January 31, 2014 $104,000
Cost of goods sold:
Cost of goods manufactured $97,280
$15.20*)
* $97,280 ÷ 6,400 units = $15.20
b. HEAD GEAR INC. Absorption Costing

Income Statement For the Month
Ended February 28, 2014
Sales $104,000
Cost of goods sold:
Inventory, February 1 (1,200 units × $15.20) $18,240
Cost of goods manufactured 66,560
2. a. HEAD GEAR INC.

Statement
2014
Variable cost of goods manufactured $81,920
$12.80*)
Fixed costs:
* $81,920 ÷ 6,400 units = $12.80
20-38
Prob. 20–3B (FIN MAN); Prob. 5–3B (MAN) (Concluded)
2. b. HEAD GEAR INC.
Statement
2014
Inventory, February 1 (1,200 units × $12.80) $15,360
Variable cost of goods manufactured 51,200
Fixed costs:
3. a. For January, the income from operations reported under absorption

costing exceeds the income from operations reported under variable
costing by
$2,880. This difference is due to including $2,880 of fixed cost in inventory
under absorption costing [1,200 units × $2.40 ($15,360 ÷ 6,400)]. The $2,880
was thus deferred to February under absorption costing, while it was
included
b. For as anthe
February, expense
incomeoffrom
January (part ofreported
operations fixed costs) under
under variable
absorption
costing.is less than the income from operations reported under variable
costing
costing by
$2,880. This difference is due to including $2,880 of fixed cost in the February
1 inventory under absorption costing (1,200 units × $2.40). Thus, this $2,880
was included in February’s cost of goods sold under absorption costing.
Under variable costing, this $2,880 was included as an expense of January
4. Head(part
GearofInc.
the fixed
was costs)
equally and thus
profitable is excluded
in January and in from February’s
February under theincome
statement.
variable costing concept. Sales and the variable cost per unit were the same for
both January and February. The difference in income reported under the
absorption costing concept is due to allocating $2,880 of fixed manufacturing
cost to the January 31 ending inventory.
Note: The combined income from operations reported for January and
February ($11,920) is the same for both absorption costing and variable
costing. This problem illustrates the need for management to exercise care in
interpreting income from operations reported under absorption costing when
large changes in inventory levels occur.
20-39
1. PACHEC INC.
Salespersons’
Analysis
Variable
For the Year Ended June 30,
2014Cost
Variable Selling
of Goods Sold Expenses Contribution
Contribution as a Percent as a Percent Margin
Salesperson Margin of Sales of Sales Ratio
Asarenka $157,500 45.0% 19.0% 36.0%
Crowell 250,800 40.0% 16.0% 44.0%
Dempster 222,750 46.0% 21.0% 33.0%
MacLean 217,375 42.0% 21.0% 37.0%
Ortiz 183,750 41.0% 24.0% 35.0%
Sullivan 240,875 42.0% 17.0% 41.0%
Williams 207,000 44.0% 20.0% 36.0%
2. Crowell has the highest contribution margin and contribution margin ratio
for the year. This is because of two factors. First, Crowell had the smallest
variable cost of goods sold as a percent of sales. This is probably due to
selling a favorable mix of product that has high manufacturing margins as a
percent of sales. Second, Crowell has the lowest variable selling expenses
as a percent of sales. This could be due to a lower sales commission or
selling support costs.
3. Other factors that should be considered in evaluating the performance of

salespersons include rate of growth in sales for the current year compared
with past years, years of experience for salespersons, size of sales territory,
and actual sales compared with budgeted sales.
20-40
1. KIMBRELL, INC. Contribution
Margin by Size Segment
For the Year Ended January 31,
2015 Size
S M L Total
Sales $990,000 $1,087,500 $945,000 $3,022,500
Variable cost of goods sold 538,500 718,500 567,000 1,824,000
Manufacturing margin $451,500 $ 369,000 $378,000 $1,198,500
Variable operating expenses 118,100 108,750 85,050 311,900
Contribution margin $333,400 $ 260,250 $292,950 $ 886,600
Fixed costs:
Operating expenses 88,900
2. Annual income from operations would be reduced below its present level by
$89,400 if Size M were to be discontinued (Proposal 2), as indicated below.
Contribution margin for Size M $260,250

Less reduction in fixed production costs and fixed operating
expenses ($142,500 + $28,350) 170,850
Reduction in annual income from operations $ 89,400
If Size M is discontinued, $260,250 of contribution margin would be forgone

and only $170,850 in fixed costs would be saved, resulting in a decrease of
$89,400 in income from operations.
20-41
Prob. 20–5B (FIN MAN); Prob. 5–5B (MAN) (Concluded)
3. KIMBRELL, INC.
Contribution Margin—Proposal
3 Size
S L Total
Sales $2,277,000 $945,000 $3,222,000
Variable cost of goods sold 1,238,550 567,000 1,805,550
Manufacturing margin $1,038,450 $378,000 $1,416,450
Contribution margin $ 766,820 $292,950 $1,059,770
Fixed costs:
Operating expenses (including $85,050 additional salary) 173,950
4. $88,120. A comparison of the amount of income from operations under

present conditions, as indicated in (1), and under Proposal 3, as indicated
in (3), suggests an increase of $88,120 if Proposal 3 is accepted, as
illustrated
below.
Income from operations, Proposal 3 $106,820

Income from operations, present conditions 18,700
Alternatively, the $88,120 increase can be determined as follows:
Contribution margin, Size S, Proposal 3 $766,820

Contribution margin, Size S, present operations 333,400
Increase in contribution margin $433,420
Less contribution margin, Size M, present operations $260,250
Additional salaries 85,050 345,300
20-42
1. MATHEWS COMPANY
Contribution Margin
Analysis
For
Planned contribution margin the Year Ended December 31, $540,000
2014
Sales quantity factor (34,500 – 30,000) × $69 $ 310,500
Unit price factor ($66 – $69) × 34,500 (103,500)
Variable cost quantity factor (30,000 – 34,500) × $33 $(148,500)
Unit cost factor ($33 – $30) × 34,500 103,500
Total effect of changes in variable cost of (45,000)
goods sold
Effect of changes in variable selling and
administrative expenses:
Variable cost quantity factor (30,000 – 34,500) × $18 $ (81,000)
Unit cost factor ($18 – $24) × 34,500 (207,000)
Total effect of changes in variable selling and
administrative expenses (288,000)
Actual contribution margin $ 414,000
2. No, the president is not correct in saying that the variable cost of goods sold
got out of control in 2014. The majority of the increase in the variable cost of
goods sold was due to the variable cost quantity factor. Specifically, the
increase of
4,500 units in the quantity of product sold increased the variable cost of
goods sold by $148,500, based on planned unit costs. Actually, the unit cost
of variable cost of goods sold decreased $3.00, which had a favorable effect
of $103,500 on the contribution margin.
The president is correct in saying that an investigation of the increase in variable

selling and administrative expenses is needed. Of the $288,000 increase in
these expenses, only $81,000 was due to the quantity factor. The unit cost
increase of
$6.00 for selling and administrative expenses does raise concern. This increase
may have been caused by additional selling expenses associated with the
increased sales. The increase in selling and administrative expenses also could
have been caused by increased marketing and advertising expenditures to
promote the price decrease. Thus, the increase in sales may not have been
caused entirely by the lowering of the unit sales price. If this is the case, the
president should exercise caution in deciding to lower the selling price further to
increase sales. In addition, the reduction in sales price does not generate
20-43
sufficient volume to compensate for the variable cost quantity factor. Therefore,
reducing the price further will not likely be a successful strategy.
20-44
CASES & PROJECTS
CP 20–1 (FIN MAN); CP 5–1 (MAN)
Aston Melon has performed the task requested by the division manager.
However, Aston Melon has not exercised good judgment, to the point of
bordering on unethical behavior. Aston Melon should question the wisdom of
manipulating
the amount of inventory solely for purposes of meeting numerical profit
targets. The Standards of Ethical Conduct for Practitioners of Management
Accounting and Financial Management states that the management
accountant should “recognize and communicate professional limitations or
other constraints
that would preclude responsible judgment or successful performance of an
activity.” In addition, the management accountant should “communicate
unfavorable as well as favorable information and professional judgments or
opinions.” The absorption costing income statements could mislead the
senior management overseeing the division managers. It may erroneously
conclude that the division has become more efficient. Moreover, it may not
be wise for the division to build more inventory. The excess inventory may
need to be sold at a
later date at “fire sale” prices. Thus, the division actually may be worse off in
the long run by building the excess inventory. Aston Melon has a
responsibility to communicate these concerns to the general manager. As a
last resort, Aston Melon may need to report the concerns to the company’s
senior management if the division manager refuses to respond favorably.
20-45
1. Absorption costing is required under generally accepted accounting principles.
Under this approach, the fixed manufacturing costs are allocated to sold and
inventoried units. Thus, if production exceeds sales, a portion of the fixed
manufacturing cost is included in the ending inventory balance and not
matched against current period sales. This has the effect of reducing cost of
goods sold by the amount of fixed costs allocated to the inventory. Thus, net
income is improved by increasing inventory. Likewise, when sales exceed
production and the inventory is liquidated, the fixed manufacturing cost in
the beginning
goods sold by the amount of fixed costs included in the beginning
inventory. Therefore, net income is reduced when inventory is liquidated.
2. Gordon is incorrect in implying that nothing can be done because of

generally accepted accounting principles (GAAP). GAAP is required for
external financial reporting. However, the income reports used to guide
management may be developed under the variable costing concept. Under
variable costing, the fixed manufacturing cost is not allocated to sold goods
and inventory. Rather, fixed manufacturing cost is allocated to the period in
which it is incurred. Treating fixed manufacturing cost in this way causes net
income to be unaffected by either inventory building or reduction. Changes
in net income under variable costing only occur from business events such
as changes in volume, price, or cost. Reporting under variable costing
would address Matt’s concern by
tying profit more directly to profit-changing business events rather
than inventory decisions.
20-46
Martin is earning more contribution margin than Dean; however, both
salespersons are earning the same contribution margin ratio. Dean’s total sales
are less than Martin’s. However, the manufacturing margin ratio is much
different between the two salespersons. Dean is selling products with a much
higher manufacturing margin than is Martin. This indicates that Dean is selling a
more attractive product mix than is Martin. Unfortunately, Dean’s very attractive
manufacturing margin is offset by very high promotional costs (as a percent of
sales). As a result, Dean’s
final contribution margin ratio is no better than Martin’s. Both employees
apparently earn the same commission rate of 14% of sales. Thus, the promotion
expenses as a percent of sales for Dean (18%) are much greater than for Martin
(9%). In summary, Martin should be encouraged to sell products with higher
manufacturing margins, while Dean should be encouraged to trim promotional
costs. Both salespersons should be encouraged to improve total sales volume
(with a little more encouragement going to Dean).
As a final point, it may be the case that the high manufacturing margin product
mix sold by Dean requires extensive promotional support. For example, maybe
Dean
is selling newly introduced products that have high margins but require
extensive launch-related promotional expenses. In this case, there may be little
opportunity
for Dean to improve profitability, except by increasing total sales.

1. Danica Kyle Richard Tom
Manufacturing margin as a percent of sales 65% 50% 50% 50%
Contribution margin ratio 32% 22% 22% 22%
2. Danica has the highest contribution margin and contribution margin ratio of
the four salespersons, even though Danica’s sales level is ranked third. There
are two reasons for Danica’s superior performance. First, Danica sells
products that have the highest manufacturing margin (65% vs. 50% for the
others). This means that Danica is selling a more profitable mix of products
than the other three salespersons. However, Danica spends more on variable
selling expenses as a
percent of sales than do the other three salespersons (33% vs. 28% for the
others). Together these two explanations cause Danica to have a contribution
margin ratio that is 10 percentage points higher than the other three
salespersons. As a result, Danica is able to contribute more profit than either
Kyle or Richard, both of whom have higher sales.
20-47
1. TRANS SPORT COMPANY
State Florida Georgia Tennessee
Revenue $1,125,000 $1,000,000 $1,181,250
Variable cost of goods sold 450,000 310,000 436,000
Manufacturing margin $ 675,000 $ 690,000 $ 745,250
Contribution margin $ 393,775 $ 487,500 $ 438,875
Contribution margin ratio 35.0% 48.8% 37.2%
Note: The variable cost of goods sold and variable selling expenses are
determined by subtracting the respective fixed costs from the cost of goods sold
and selling
expenses found on the income statement.
2. Florida Georgia Tennessee
Increase in contribution margin $78,755 $97,500 $87,775
Less additional advertising 42,200 42,200 42,200
Additional profit $36,555 $55,300 $45,575
Note: The increase in contribution margin is determined by multiplying

the contribution margin in (1) by 20%.
3. Georgia will generate the greatest profit increase for an additional $42,200
in advertising. This may seem surprising, because the profit report indicates
that Georgia is the least profitable on an absorption costing basis. However,
Georgia also has the largest fixed costs. These costs will not change with a
change in sales volume. Thus, the contribution margin and contribution
margin ratio for Georgia are actually higher than the other two states [from
(1)].
Increasing sales volume by 20% will produce the greatest increase in
contribution margin in Georgia. Increases in contribution margin translate
directly into increases in income from operations because the fixed costs are
not expected
to change beyond the increase in advertising.
20-48
1. CRAIG COMPANY
Absorption Costing Income Statement—44,000 units
manufactured
Sales (44,000 × $106) For the Year Ended December 31, $4,664,000
2014
Cost of goods sold (44,000 × $61) 2,684,000
Selling and administrative expenses ($1,050,000 + $330,000) 1,380,000
CRAIG COMPANY
Absorption Costing Income Statement—55,000 units
manufactured
2014
Cost of goods sold:
Cost of goods manufactured (55,000 × $58.8) $3,234,000
Less inventory, December 31 (11,000 × $58.8) 646,800
Selling and administrative expenses
($1,050,000 + $330,000) 1,380,000
2. The $96,800 difference in the amount of income from operations ($696,800 –

$600,000) is due to the allocation of fixed manufacturing costs to ending
inventory. The entire amount of the $484,000 of fixed manufacturing costs
is included in the cost of goods sold when 44,000 units are manufactured.
When
55,000 units are manufactured, $96,800 (11,000 units × $8.8) of the fixed
manufacturing costs are included in ending inventory and are thus
excluded from the cost of goods sold.
3. a. Base salary……………………………………………………………………… $140,000

Bonus ($600,000 – $670,000) × 10%……………………………………… —
Total salary………………………………………………………………………
$140,000
b. Base salary……………………………………………………………………… $140,000
Bonus ($696,800 – $670,000) × 10%………………………………………… 2,680
Total salary……………………………………………………………………… $142,680
4. By manufacturing 55,000 units, Pinder increased his salary by $2,680.

Note: Instructors may also point out that by increasing the ending inventory by
20-49
11,000 units, Craig Company will risk higher obsolescence and incur
additional costs of carrying and storing inventory, and these costs will
reduce future income of Craig Company.
20-50
CP 20–6 (FIN MAN); CP 5–6 (MAN) (Concluded)
5. If Pinder’s salary were $140,000 (plus a bonus based on income from
operations) and the variable costing method had been used, income from
operations would have been $600,000, regardless of how many units were
manufactured. Thus, Pinder would not have been able to increase his salary
simply by manufacturing more units.
Note: Instructors may ask students to verify that income from operations,
using the variable costing method, would be $600,000 regardless of whether
44,000 or
55,000 units are manufactured. The variable costing income statements are as
follows:
CRAIG COMPANY
Variable Costing Income Statement—44,000 Units
Manufactured
2014
Cost of goods sold (44,000 × $50) 2,200,000
Fixed costs:
CRAIG COMPANY
Variable Costing Income Statement—55,000 units
manufactured
2014
Variable cost of goods manufactured
(55,000 × $50) $2,750,000
Less inventory, December 31 (11,000 × $50) 550,000
Fixed costs:
20-51

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CHAPTER 20 (FIN MAN); CHAPTER 5 (MAN)

PE 20–1B (FIN MAN); PE 5–1B (MAN)

PE 20–2A (FIN MAN); PE 5–2A (MAN)

PE 20–2B (FIN MAN); PE 5–2B (MAN)

PE 20–3A (FIN MAN); PE 5–3A (MAN)

PE 20–3B (FIN MAN); PE 5–3B (MAN)

PE 20–4B (FIN MAN); PE 5–4B (MAN)

PE 20–5A (FIN MAN); PE 5–5A (MAN)

PE 20–5B (FIN MAN); PE 5–5B (MAN)

PE 20–6A (FIN MAN); PE 5–6A (MAN)

PE 20–6B (FIN MAN); PE 5–6B (MAN)

* Production costs per unit:

b. BEACH MOTORS INC. Variable

* $111 + $54 + $27 = $192

Variable cost of $20,736,000

Absorption cost of goods ($20,736,000 +

Absorption cost of goods

Ex. 20–5 (FIN MAN); Ex. 5–5 (MAN)

* $1,008,000 – $75,600 (total manufacturing cost less fixed manufacturing cost)

* $3,240,000 + $675,000 (total variable plus fixed manufacturing cost)

Ex. 20–7 (FIN MAN); Ex. 5–7 (MAN)

* Unit cost of goods manufactured:

** Unit cost of goods manufactured:

* Unit variable cost of goods manufactured:

* Variable cost of goods manufactured:

** Variable selling and administrative expenses:

The increase in total profitability would be $1,314,000 ($514,080 + $799,920). Note

Ex. 20–12 (FIN MAN); Ex. 5–12 (MAN)

Variable expense— 322,560 322,560 414,720 355,680

Ex. 20–15 (FIN MAN); Ex. 5–15 (MAN)

Building Large Marine &

b. The Filmed Entertainment and Networks segments sell an information or

Ex. 20–18 (FIN MAN); Ex. 5–18 (MAN)

Revenues: Revenue per railcar × Number of railcars

* $46 per car + $31 per car

Note to Instructors: If Exercise 20–20 was assigned, the increase in

* $5,832,000 – $1,134,375 – $2,592,000

* $3,465,000 ÷ 17,500 units = $198.00

2. ICE COLD FRIDGE COMPANY

* $3,202,500 ÷ 17,500 units = $183.00

4. Production of solvent should be continued. Temporary suspension of production

* $715,950 ÷ 55,500 units = $12.90

b. HIP AND CONSCIOUS CLOTHING

2. a. HIP AND CONSCIOUS CLOTHING

* $660,450 ÷ 55,500 units = $11.90

3. a. For January, the income from operations reported under absorption

3. Other factors that should be considered in evaluating the performance of

Contribution margin for Size M $224,680

If Size M is discontinued, $224,680 of contribution margin would be forgone and only

4. $46,936. A comparison of the amount of income from operations under present

Income from operations, Proposal 3 $132,726

Alternatively, the $46,936 increase can be determined as follows:

Contribution margin, Size S, Proposal 3 $541,696

The president is correct in saying that an investigation of the increase in

* $1,824,000 ÷ 2,400 units = $760

* $1,536,000 ÷ 2,400 units = $640

2. SMOOTH SKIN CARE PRODUCTS

4. Production of A.V. lotion should be continued. Temporary suspension of

* $97,280 ÷ 6,400 units = $15.20