I.

The following information was extracted from the first year absorption-based accounting
records of Enigma Corporation

Total fixed costs incurred $100,000

Total variable costs incurred 50,000
Total period costs incurred 70,000
Total variable period costs incurred 30,000
Units produced 20,000
Units sold 12,000
Unit sales price $12
Refer to Enigma Corporation. What is Cost of Goods Sold for Enigma Corporation's first year?
a. $80,000
b. $90,000
c. $48,000
d. can't be determined from the information given
ANS: C
Total variable manufacturing costs = $50,000 - 30,000 = $20,000
Total fixed period costs incurred = $70,000 - 30,000 = $40,000
Total fixed manufacturing costs = $100,000 - 40,000 = $60,000
Total manufacturing costs = $60,000 + $20,000 = $80,000
Percent of goods sold: 12,000/20,000 = 60%
$80,000 * 60% = $48,000

Refer to Enigma Corporation. If Enigma Corporation had used variable costing in its first year of
operations, how much income (loss) before income taxes would it have reported?
a. ($6,000)
b. $54,000
c. $26,000
d. $2,000
ANS: D
Sales $144,000
Less: Variable Costs
Manufacturing $20,000 * 60% 12,000
Period Costs $30,000 30.000
Contribution Margin $102,000
Fixed Costs 100,000
Variable Costing Net Income 2,000
======

Refer to Enigma Corporation. Based on variable costing, if Enigma had sold 12,001 units instead of
12,000, its income before income taxes would have been
a. $9.50 higher.
b. $11.00 higher.
c. $8.50 higher.
d. $8.33 higher.
ANS: C
Sales Price per Unit: $12.00
Variable Costs per Unit ($50,000 / 20,000) 2.50
Contribution Margin $ 8.50
======
 II. Bennett Corporation produces a single product that sells for $7.00 per unit. Standard capacity is
100,000 units per year; 100,000 units were produced and 80,000 units were sold during the year.
Manufacturing costs and selling and administrative expenses are presented below.

There were no variances from the standard variable costs. Any under- or overapplied overhead is written
off directly at year-end as an adjustment to cost of goods sold.

Fixed costs Variable costs

Direct material $0 $1.50 per unit produced
Direct labor 0 1.00 per unit produced
Manufacturing overhead $150,000 0.50 per unit produced
Selling & Administration expense 80,000 0.50 per unit sold

Bennett Corporation had no inventory at the beginning of the year.

Refer to Bennett Corporation. In presenting inventory on the balance sheet at December 31, the unit cost
under absorption costing is
a. $2.50.
b. $3.00.
c. $3.50.
d. $4.50.
ANS: D

DM + DL + VOH + FOH = Absorption Cost per Unit

$1.50 + $1.00 + $0.50 + $(150,000/100,000) = $4.50 / Unit

Refer to Bennett Corporation. What is the net income under variable costing?
a. $50,000
b. $80,000
c. $90,000
d. $120,000
ANS: A
Sales $560,000
Variable Costs:
Materials $120,000
Labor 80,000
Overhead 40,000
Selling and Administrative 40,000
Contribution Margin $280,000
Fixed Costs
Overhead 150,000
Selling and Administrative 80,000
Net Income $ 50,000
=======
Refer to Bennett Corporation. What is the net income under absorption costing?
a. $50,000
b. $80,000
c. $90,000
d. $120,000
ANS: B
Sales $560,000
Cost of Goods Sold:
Materials $120,000
Labor 80,000
Overhead (Variable and Fixed) 160,000
Gross Profit $200,000
Fixed Costs:
Selling and Administrative $120,000
Net Income $ 80,000
=======

III. Sports Innovators has developed a new design to produce hurdles that are used in track and field
competition. The company's hurdle design is innovative in that the hurdle yields when hit by a runner and
its height is extraordinarily easy to adjust. Management estimates expected annual capacity to be 90,000
units; overhead is applied using expected annual capacity. The company's cost accountant predicts the
following 20x1 activities and related costs:

Standard unit variable manufacturing costs $12

Variable unit selling expense $5
Fixed manufacturing overhead $480,000
Fixed selling and administrative expenses $136,000
Selling price per unit $35
Units of sales 80,000
Units of production 85,000
Units in beginning inventory 10,000

Other than any possible under- or overapplied fixed overhead, management expects no variances from the
previous manufacturing costs. Under- or overapplied fixed overhead is to be written off to Cost of Goods
Sold.

Required:
1. Determine the amount of under- or overapplied fixed overhead using (a) variable
costing and (b) absorption costing.

2. Prepare projected income statements using (a) variable costing and (b) absorption
costing.

3. Reconcile the incomes derived in part 2.

ANS:

1. a. $0
 b. (90,000 - 85,000)  $5.33 = $26,650 U

2. a. Sales (80,000  $35) = $2,800,000

- VC (80,000  $17) = (1,360,000)
CM $1,440,000
- FC   (616,000)
Income before income taxes $ 824,000

b. Sales (80,000  $35) $2,800,000

- COGS ($17.33  80,000) (1,386,400)
GM $1,413,600
- S&A   (536,000)
Income before income (STD) $ 877,600
- VOL VAR    (26,650)
Income before income taxes $ 850,950

3. 5,000  $5.33 = $26,650.

NI. AC 850,950
Add: FFOH, beg inventory
10,000 x 5.33 53,300
Total 904,250
Less : FFOH in ending inv
15,000 x 5.33 79,950
NI, VC 824,300
Note : Difference is due to rounding off. The FFOH per unit is 5.33333

IV. Mike is interested in entering the catfish farming business. He estimates if he enters this business, his
fixed costs would be $50,000 per year and his variable costs would equal 30 percent of sales. If each
catfish sells for $2, how many catfish would Mike need to sell to generate a profit that is equal to 10
percent of sales?
a. 40,000
b. 41,667
c. 35,000
d. No level of sales can generate a 10 percent net return on sales.
ANS: B
Let x = sales in dollars
x - .30x - $50,000 = .10x
.60x = $50,000
x = $83,333 Units = $83,333/$2 per unit = 41,667 units

X= 50,000 + .1( 2x)/1.4

1.2 x= 50,000
Sales in units = 50,000/1.2 = 41,667 units

V. Information concerning Averie Corporation's Product A follows:

Sales $300,000
Variable costs 240,000
Fixed costs 40,000
Assuming that Averie increased sales of Product A by 20 percent, what should the profit from Product A
be?
a. $20,000
b. $24,000
c. $32,000
d. $80,000

ANS: C
Contribution margin at $300,000 in sales = $60,000
Increase contribution margin by 20% = $60,000 * 1.20 = $72,000
Contribution margin - fixed costs = Profit
$(72,000 - 40,000) = $32,000

VI.The Graves Company makes three products. The cost data for these three products is as follows:
Product A Product B Product C
Selling price $10 $20 $40
Variable costs   7  12  16

Total annual fixed costs are $840,000. The firm's experience has been that about 20 percent of dollar sales
come from product A, 60 percent from B, and 20 percent from C.

Required:
a. Compute break-even in sales dollars.

b. Determine the number of units to be sold at the break-even point.

ANS:

A B C
a. SP $10 $20 $40
- VC   (7)  (12)  (16)
= CM $ 3 $ 8 $24
CMR   30%   40%   60%

CMR = (.2  30%) + (.6  40%) + (.2  60%) = 42%

BE = $840,000/.42 = $2,000,000

b. A ($2,000,000  .20)/$10 = 40,000 units

B ($2,000,000  .60)/$20 = 60,000 units

C ($2,000,000  .20)/$40 = 10,000 units

VII. Perry Corporation predicts it will produce and sell 40,000 units of its sole product in the current
year. At that level of volume, it projects a sales price of $30 per unit, a contribution margin ratio of 40
percent, and fixed costs of $5 per unit.
Refer to Perry Corporation. What is the company's projected breakeven point in dollars and units?

ANS: Given the CM ratio of 40 percent, and the Sales price per unit of $30, the CM per unit must be $30
 .40 = $12. The total fixed costs would be projected at $5  40,000 = $200,000. Breakeven would be:
$200,000/$12 = 16,667 units. This would also equate to $500,000 of sales.

Refer to Perry Corporation. What would the company's projected profit be if it produced and sold 30,000
units?

ANS:

Projected profit would be:

Sales (30,000  $30) $900,000
Variable costs (30,000  $18) (540,000)
Contribution margin $360,000
Fixed costs (200,000)
Profit $160,000
Margin of safety = 900,000-500,000
= 400,000
Margin of safety ratio= 400,000/900,000
= 44.4%