EXERCISE 1
Accounting Terminology
Listed below are nine technical accounting terms introduced in this chapter:
Variable costs Relevant range Contribution margin
Break-even point Fixed costs Semivariable costs
Economies of scale Sales mix Unit contribution margin
Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms.
a. The level of sales at which revenue exactly equals costs and expenses.
b. Costs that remain unchanged despite changes in sales volume.
c. The span over which output is likely to vary and assumptions about cost behavior generally remain valid.
d. Sales revenue less variable costs and expenses.
e. Unit sales price minus variable cost per unit.
f. The reduction in unit cost achieved from a higher level of output.
g. Costs that respond to changes in sales volume by less than a proportionate amount.
h. Operating income less variable costs.
EXERCISE 2
Using Cost-Volume-Profit
Formulas
MURDER TO GO! writes and manufactures murder mystery parlor games that it sells to retail stores. The following is per-unit information relating to the manufacture and sale of this product:
Unit sales price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30
Variable cost per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Fixed costs per year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360,000
Determine the following, showing as part of your answer the formula that you used in your computation.
For example, the formula used to determine the contribution margin ratio (part a ) is:
Unit Sales Price 2 - Variable Costs per Unit
Contribution Margin Ratio 5 = -------------------------------------
Unit Sales Price
a. Contribution margin ratio.
b. Sales volume (in dollars) required to break even.
c. Sales volume (in dollars) required to earn an annual operating income of $440,000.
d. The margin of safety (in dollars) if annual sales total 60,000 units.
e. Operating income if annual sales total 60,000 units.
EXERCISE 3
Home Depot 's Financial
Statements: Incremental, Sunk, and Opportunity Costs
Read the footnote in Appendix A referring to Home Depot 's decision to close all of its remaining big box stores in China. Write a short paragraph identifying the incremental, sunk, and opportunity costs associated with this decision. Assume that any cost savings will be invested elsewhere in more productive stores.
EXERCISE 4
Incremental Analysis: Make or Buy Decision
The cost to Swank Company of manufacturing 15,000 units of a particular part is $135,000, of which $60,000 is fixed and $75,000 is variable. The company can buy the part from an outside supplier for $6 per unit. Fixed costs will remain the same regardless of Swank's decision. Should the company buy the part or continue to manufacture it? Prepare a comparative schedule in the format illustrated.
BRIEF EXERCISE 5
Responsibility Accounting
System Characteristics
The president of Cold Moo Ice Cream Company, a chain of ice cream stores in the Midwest, was unhappy with the actual six-month profit figures for the company recently prepared by the CFO. The president asked the CFO for a profit breakdown, by store, of the actual six-month results. When the president received the report, he was extremely upset and called the CFO into his office. The president stated, "These reports show that each store in the chain is profitable, but our company results are unprofitable! How can this be?" The CFO pointed out that each store was allowed to set prices for ice cream based on its cost structure. However, the stores' cost structures did not include headquarters costs or the costs of advertising and delivery of products. What are the three characteristics for operating a successful responsibility accounting system? Consider whether the accounting system at Cold Moo Ice Cream Company includes the three characteristics of a successful responsibility accounting system. How could the responsibility accounting system at Cold Moo be improved?
PROBLEM 6
Preparing and Using
Responsibility Income
Statements
Chocolatiers Company produces two products: Solid chocolate and powdered chocolate. Cost and revenue data for each product line for the current month are as follows:
Product Lines
Solid Powdered
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$850,000 $870,000
Contribution margin as a percentage of sales . . . . . . . . . . . . . . . . . . 45% 55%
Fixed costs traceable to product lines . . . . . . . . . . . . . . . . . . . . . . . $175,000 $250,000
In addition, fixed costs that are common to both product lines amount to $125,000.
Instructions
a. Prepare Chocolatiers's responsibility income statement for the current month. Report the responsibility margin for each product line and income from operations for the company as a whole. Also include columns showing all dollar amounts as percentages of sales.
b. According to the analysis performed in part a, which product line is more profitable? Should the common fixed costs be considered when determining the profitability of individual product lines? Why or why not?
c. Chocolatiers has $15,000 to be used in advertising for one of the two product lines and expects that this expenditure will result in additional sales of $50,000. How should the company decide which product line to advertise?