Module+14000+III+Explanation+and+Examples

=III. Module 14000 Explanation and Examples CQ=

Profit by Product Line
It is understandable why a firm would like to know whether a particular product is profitable or not. A consistently losing-money product would be dropped sine it has no potential to be profitable. The saved resources would thus be given to a product with higher potential. On the other hand, a profitable product may merit additional time and attention. Let's examine HPX Company, which manufactures two products: basic calculators and multi-function calculators. The multi-function calculator uses more advanced technology and is more difficult to produce. Data on each product follow. * Annual overhead is $825,000, and overhead is applied on the basis of direct labor hours.
 * || Basic || Multi-Function ||
 * Number of units || 20,000 || 10,000 ||
 * Direct labor hours || 40,000 || 15,000 ||
 * Price || $200 || $350 ||
 * Prime cost per unit || $55 || $95 ||
 * Overhead per unit* || $30 || $22.50 ||

Marketing expenses, all variable, amount to 10 percent of sales. Administrative expenses of $2 million, all fixed, are allocated to the products in accordance with revenue.

HPX Company Absorption-Costing Income Statement (In thousands of dollars) ** Using Variable Costing to Measure Segment Profit ** HPX Company could use variable costing and segregate direct fixed and common fixed expenses as well. Additional information is needed on fixed and variable costs of overhead. Let's suppose that total variable overhead is $360,000 and total fixed overhead is $465,000. Since overhead is applied on the basis of direct labor hours, the variable costs of overhead. Assigned to basic calculators is $261,818 [$360,000x (40,000/55,000)]. The variable overhead assigned to multi-function calculators is $98,182 [$360,000x (15,000/55,000)].
 * || Basic || Multi-Function || Total ||
 * Sales || $4,000 || $3,500 || $7,500 ||
 * Less: COGS || __1,700__ || __1,175__ || __2,875__ ||
 * Gross profit || $2,300 || $2,325 || $4,625 ||
 * Less: ||  ||   ||   ||
 * Marketing expenses || (400) || (350) || (750) ||
 * Administrative expenses || __(1,067)__ || __(933)__ || __(2,000)__ ||
 * Operating income || ** __$ 833__ ** || ** __$1,042__ ** || ** __$1,875__ ** ||

HPX Company Variable-Costing Income Statement (In thousands of dollars)
 * || Basic || Multi-Function || Total ||
 * Sales || $4,000 || $3,500 || $7,500 ||
 * Less: ||  ||   ||   ||
 * Variable cost of goods sold || (1,362) || (1,048) || (2,410) ||
 * Sales commissions || __(400)__ || __(350)__ || __(750)__ ||
 * Contribution margin || __$2,238__ || __$2,102__ || $4,340 ||
 * Less: ||  ||   ||   ||
 * Fixed overhead ||  ||   || (465) ||
 * Administrative expenses ||  ||   || __(2,000)__ ||
 * Operating income ||  ||   || ** __$ 1,875__ ** ||

Information: Lasersaver Inc., a recycler of used toner cartridges for laser printers, began operations in August and manufactured 2,000 cartridges during the month with the following unit costs:
 * The HOW and WHY of Calculating Inventory Cost and Preparing the Income Statement Using Variable Costing **

*Unit FOH= $40,000/2,000 units produced= $20 Total fixed factory overhead is $40,000 per month. During August, 2,000 cartridges were sold at a price of $60, and fixed marketing and administrative expense were $12,000.
 * DM ||  || $5.00 ||
 * DL ||  || 15.00 ||
 * VOH* ||  || 4.00 ||
 * FOH ||  || 20.00 ||
 * Variable marketing cost ||  || 1.25 ||

Questions: 1. Using absorption costing, calculate the unit cost of each cartridge. 2. How many units are in ending inventory? What is the cost of ending inventory using absorption costing? 3. Prepare an absorption-costing income statement for Lasersaver Inc., for the month of August. 4. What if September production was 2,000 units, costs were stable, and sales were 1,000 units? What is the cost of ending inventory? What is operating income for September?

Solutions: 1. The unit manufacturing cost under absorption costing is:
 * DM || $5.00 ||
 * DL || 15.00 ||
 * VOH || 4.00 ||
 * FOH || __20.00__ ||
 * Total cost || **$44.00** ||

2. Units in ending inventory= Units of beginning inventory+ Units produced- Units sold 0+ 2,000- 2,000 = 0 units Cost of ending inventory= $0

3.
 * || Lasersaver Inc. ||  ||   ||
 * || Absorption-Costing Income Statement ||  ||   ||
 * || For the Month of August ||  || Percent of Sales ||
 * Sales ($60x 2,000) ||  || $120,000 || 100% ||
 * Less: Cost of goods sold ($44x 2,000) ||  || __88,000__ || __73.33__ ||
 * Gross profit ||  || $32,000 || 26.67% ||
 * Less: ||  ||   ||   ||
 * Variable marketing expenses ($1.25x 2,000) ||  || (2,500) || (2.08) ||
 * Fixed marketing and administrative expenses ||  || __(12,000)__ || __(10.00)__ ||
 * Operating income ||  || ** $ 17,500 ** || **14.59%** ||

4. Units in ending inventory= Units of beginning inventory+ Units produced- Units sold 0+ 2,000- 1,000= 1,000 units Cost of ending inventory= $39x 1,000= $39,000

The new operating income is $12,750, calculated as follows: *Fixed manufacturing cost= $20,000/2,000= $10; therefore, unit product cost= $5+ 15+ 4+ 10= $34
 * Sales ($60x 1,000) ||  || $60,000 ||
 * Less: Cost of goods sold ($34*x 1,000) ||  || __34,000__ ||
 * Gross profit ||  || $26,000 ||
 * Less: ||  ||   ||
 * Variable marketing expenses ($1.25x 1,000) ||  || (1,250) ||
 * Fixed marketing and administrative expenses ||  || __(12,000)__ ||
 * Operating income ||  || **$ 12,750** ||

** The HOW and WHY of Calculating Inventory Cost and Preparing the Income Statement Using Variable Costing ** Information: Lasersaver Inc., a recycler of used toner cartridges for laser printers, began operations in August and manufactured 2,000 cartridges during the month with the following unit costs: *Unit FOH= $40,000/2,000 units produced= $20 Total fixed factory overhead is $40,000 per month. During August, 2,000 cartridges were sold at a price of $60, and fixed marketing and administrative expense were $12,000.
 * DM ||  || $5.00 ||
 * DL ||  || 15.00 ||
 * VOH* ||  || 4.00 ||
 * FOH ||  || 20.00 ||
 * Variable marketing cost ||  || 1.25 ||

Questions: 1. Using variable costing, calculate the unit cost of each cartridge. 2. How many units are in ending inventory? What is the cost of ending inventory using variable costing? 3. Prepare an variable-costing income statement for Lasersaver Inc., for the month of August. 4. What if September production was 2,000 units, costs were stable, and sales were 1,000 units? What is the cost of ending inventory? What is operating income for September?

Solutions: 1. The unit manufacturing cost under variable costing is: 2. Units in ending inventory= Units of beginning inventory+ Units produced- Units sold= 0+ 2,000- 2,000= 0 units Cost of ending inventory= $0 3.
 * DM ||  || $ 5.00 ||
 * DL ||  || 15.00 ||
 * VOH ||  || __4.00__ ||
 * Total cost ||  || **$24.00** ||
 * || Lasersaver Inc. ||  ||
 * || Variable-Costing Income Statement ||  ||
 * || For the Month of August || Percent of Sales ||
 * Sales ($60x 2,000) || $120,000 || 100.00% ||
 * Less: ||  ||   ||
 * Variable cost of goods sold ($24x 2,000) || (48,000) || (40.00) ||
 * Variable marketing expenses ($1.25x 2,000) || __(2,500)__ || __(2.08)__ ||
 * Contribution margin || $ 69,500 || 57.92% ||
 * Less: ||  ||   ||
 * Fixed factory overhead || (20,000) || (16.67) ||
 * Fixed marketing and administrative expenses || __(12,000)__ || __(10.00)__ ||
 * Operating income || ** __$ 37,500__ ** || ** __31.25%__ ** ||

4. Units in ending inventory= Units of beginning inventory+Units produced- Units sold= 0+ 2,000- 1,000=1,000 units Costing of ending inventory= $24x 1,000= $24,000 The new operating income is $2,750, calculated as follows:
 * Sales ($60x 1,000) ||  || $60,000 ||
 * Less: ||  ||   ||
 * Variable cost of goods sold ($24x 1,000) ||  || (24,000) ||
 * Variable marketing expense ($1.25x 1,000) ||  || __(1,250)__ ||
 * Contribution margin ||  || $ 34,750 ||
 * Less: ||  ||   ||
 * Fixed factory overhead ||  || (20,000) ||
 * Fixed marketing and administrative expenses ||  || __(12,000)__ ||
 * Operating income ||  || ** __$ 2,750__ ** ||