Apple Sales and Profit

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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.

				
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