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Apple Sales and Profit document sample
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BE6-16
Direct materials $ 14,490
Direct labor 25,530
Variable manufacturing overhead 32,420
Total variable costing product costs $ 72,440
BE6-17
Direct materials $ 14,490
Direct labor 25,530
Fixed manufacturing overhead 10,000
Variable manufacturing overhead 32,420
Total absorption costing product costs $ 82,440
E6-6
Weighted
average
Contribution contribution
margin per unit Sales mix margin
Lawnmowers $ 30 30% $ 9
Weed-trimmers 20 50% 10
Chainsaws 40 20% 8
$ 27
Fixed cost $ 4,600,000
Weighted average contribution margin 27
Breakeven units 170,370
Breakeven Units of each Contribution Product line
units Sales mix product margin per unit contribution
Lawnmowers 170,370 30% 51,111 $ 30 $ 1,533,333
Weed-trimmers 170,370 50% 85,185 20 1,703,704
Chainsaws 170,370 20% 34,074 40 1,362,963
$ 4,600,000
E6-8
Weighted
average
Contribution contribution
margin ratio Sales mix margin ratio
Pouches and standard boxes 10% 80% 8%
Non-standard boxes 60% 20% 12%
20%
(a) Fixed costs $ 12,000,000
Weighted average contribution margin ratio 20%
Breakeven sales revenue $ 60,000,000
Breakeven Contribution
Breakeven revenue by margin ratio Contribution
sales revenue Sales mix product by product by product
Pouches and standard boxes $ 60,000,000 80% $ 48,000,000 10% $ 4,800,000
Non-standard boxes 60,000,000 20% $ 12,000,000 60% 7,200,000
$ 12,000,000
Weighted
average
Contribution contribution
(b) margin ratio Sales mix margin ratio
Pouches and standard boxes 10% 40% 4%
Non-standard boxes 60% 60% 36%
40%
Fixed costs $ 12,000,000
Weighted average contribution margin ratio 40%
Breakeven sales revenue $ 30,000,000
Breakeven Contribution
Breakeven revenue by margin ratio Contribution
sales revenue Sales mix product by product by product
Pouches and standard boxes $ 30,000,000 40% $ 12,000,000 10% $ 1,200,000
Non-standard boxes 30,000,000 60% $ 18,000,000 60% 10,800,000
$ 12,000,000
E6-10
(a) Sales mix percentage
TV division $ 600,000 60%
DVD division 400,000 40%
Total sales $ 1,000,000 100%
Contribution margin ratios
TV division DVD division
Sales $ 600,000 100% $ 400,000 100%
Variable costs 450,000 75% 240,000 60%
Contribution margin $ 150,000 25% $ 160,000 40%
Weighted
average
Contribution contribution
(b) margin ratio Sales mix margin ratio
TV division 25% 60% 15%
DVD division 40% 40% 16%
31%
(c) Fixed costs $ 124,000
Weighted average contribution margin ratio 31%
Breakeven sales revenue $ 400,000
Breakeven
Breakeven revenue by Contribution Contribution
(d) sales revenue Sales mix division margin ratio by division
TV division $ 400,000 60% $ 240,000 25% $ 60,000
DVD division 400,000 40% 160,000 40% 64,000
$ 124,000
E6-11
(a) Product
A B C
Selling price $ 9.00 $ 12.00 $ 14.00
Variable costs and expenses 3.00 9.50 12.00
Contribution margin per unit $ 6.00 $ 2.50 $ 2.00
Machine hours to produce 2 1 2
Contribution per machine hour $ 3.00 $ 2.50 $ 1.00
(b) The best use of 1,500 additional machine hours is to produce Product
A since Product A has the largest contribution margin per machine
hour.
(c) Product
A B C Total
Contribution per machine hour $ 3.00 $ 2.50 $ 1.00
Additional machine hours 500 500 500
Additional contribution $ 1,500 $ 1,250 $ 500 $ 3,250
Product A
Contribution per machine hour $ 3.00
Additional machine hours 1,500
Additional contribution $ 4,500
E6-13
Product
(a) Basic Deluxe
Selling price $ 40 $ 52
Variable costs 18 24
Contribution margin per unit $ 22 $ 28
Machine hours per unit 0.5 0.7
Contribution margin per machine hour $ 44 $ 40
(b) Dalton should use the 1,000 additional hours to manufacture the Basic product. The
Basic product has the higher contribution margin per machine hour, implying that it makes
the best use of machine hours.
(c) Hours divided evenly
Product
Basic Deluxe Total
Contribution per machine hour $ 44.00 $ 40.00
Additional machine hours 500 500
Additional contribution $ 22,000 $ 20,000 $ 42,000
All hours allocated to the Basic product
Basic
product
Contribution per machine hour $ 44
Additional machine hours 1,000
Additional contribution $ 44,000
E6-14
(a) Billings Bozeman
Sales revenue $ 600,000 $ 600,000
Variable costs 280,000 80,000
Contribution margin $ 320,000 $ 520,000
Fixed costs 170,000 370,000
Net income $ 150,000 $ 150,000
Contribution margin $ 320,000 $ 520,000
Net income 150,000 150,000
Operating leverage 2.13 3.47
(b) Billings Bozeman
Sales revenue $ 660,000 $ 660,000
Variable costs 308,000 88,000
Contribution margin $ 352,000 $ 572,000
Fixed costs 170,000 370,000
Net income $ 182,000 $ 202,000
% increase in net income 21.3% 34.7%
(c) Billings Company has relatively high variable costs as a percentage of sales. Therefore, any
increase in sales causes a relatively high increase in variable costs and a relatively low
increase in contribution margin. The relatively low increase in contribution margin translates
into a relatively low increase in net income.
Bozeman Company has relatively low variable costs as a percentage of sales. Therefore, any
increase in sales causes a relatively low increase in variable costs and a relatively high
increase in contribution margin. The relatively high increase in contribution margin translates
into a relatively high increase in net income.
High varlable costs mean that a large percentage of sales is immediately "eaten up" by those
costs, leaving little to add to net income. Conversely, a drop in sales means that variable
costs will also drop by a relatively high amount, so net income will not decline too much. Net
income will not experience wide swings when sales increase or decrease.
Low variable costs and high fixed costs mean that costs will not change very much as sales
increase or decrease. Consequently, net income will experiences wide swings as sales
increase or decrease.
E6-16
Old-Fashion
(a) Apples Mech-Apple
Sales revenue $ 400,000 $ 400,000
Variable costs 320,000 160,000
Contribution margin $ 80,000 $ 240,000
Fixed costs 20,000 180,000
Net income $ 60,000 $ 60,000
Contribution margin $ 80,000 $ 240,000
Net income 60,000 60,000
Operating leverage 1.33 4.00
(b) 10% decrease
Old-Fashion
Apples Mech-Apple
Sales revenue $ 360,000 $ 360,000
Variable costs 288,000 144,000
Contribution margin $ 72,000 $ 216,000
Fixed costs 20,000 180,000
Net income $ 52,000 $ 36,000
% change in net income -13.3% -40.0%
5% increase
Old-Fashion
Apples Mech-Apple
Sales revenue $ 420,000 $ 420,000
Variable costs 336,000 168,000
Contribution margin $ 84,000 $ 252,000
Fixed costs 20,000 180,000
Net income $ 64,000 $ 72,000
% change in net income 6.7% 20.0%
(c) Which company represents the better investment depends on the investment banker's risk
tolerance. Old-Fashion Apple has the lower operating leverage. That means Old-Fashion
Apple will be more stable as sales rise or fall. It is the "low-risk, low-reward" alternative.
Mech-Apple has a cost structure that leans more toward fixed costs, giving it a higher
operating leverage. Mech-Apple's costs will not fluctuate very much as sales rise or fall.
Consequently, Mech-Apple will experience large increases in net income when sales
increase, but it will also experience large declines in net income when sales decrease. It is
the "high-risk, high-reward" alternative.
E6-19
Variable Absorption
Costing Costing
(a) & (b) Wood $ 54,000 $ 54,000
Nails 340 340
Direct labor 37,000 37,000
Utilities
Fixed portion 24,000
Variable portion 2,700 2,700
Rent 21,400 21,400
$ 139,440 $ 139,440
(c) The difference between variable and absorption costing is in the treatment
of fixed overhead. Variable costing only includes variable costs as product
costs. All fixed costs, including fixed overhead, are treated as period costs
and expensed in the period incurred.
Absorption costing treats fixed overhead as a product cost. Since it is
included in product costs, fixed overhead only becomes an expense when
the related product is sold. Therefore, fixed overhead can be incurred in
one period (when the product is produced), but not hit the income
statement as an expense (part of cost of goods sold) until a later period
when the product is sold.
