Question 1:
Jay Manufacturing’s sales slumped badly in 2006 due to so many people purchasing gifts online. The company’s income statement showed the following results from selling 500,000 units of product: Net sales, $2,000,000; total costs and expenses, $2,500,000; and net loss of $500,000. Costs and expenses consisted of the following:
Total Variable Fixed
Cost of goods sold $2,000,000 $1,300,000 $700,000
Selling expenses 200,000 50,000 150,000
Administrative expenses 300,000 150,000 150,000
$2,500,000 $1,500,000 $1,000,000
Management is considering the following alternative for 2007:
Purchase new automated equipment that will change the proportion between variable and fixed costs to 40% variable and 60% fixed.
Instructions:
A. Determine the selling price per unit.
B. Compute the break-even point in dollars for 2006.
C. Compute the break-even point in dollars under the alternative course of action for 2007.
D. Which course of action do you recommend? Justify your answer.
Question 2:
Fresh Air Products manufactures and sells a variety of camping products. Recently the company opened a new plant to manufacture a deluxe portable cooking unit. Cost and sales data for the first month of operations are shown below:
Manufacturing Costs
Fixed overhead $108,000
Variable overhead $3 per unit
Direct labor $12 per unit
Direct material $30 per unit
Beginning inventory 0 units
Units produced 12,000
Units sold 10,000
Selling and administrative costs
Fixed $ 200,000
Variable $ 4 per unit sold
The portable cooking unit sells for $110. Management is interested in the opening month’s results and has asked for an income statement.
Instructions:
Assume the company uses variable costing.
Q1. Calculate the production cost per unit, and prepare an income statement for the month of June 2005.
Q2. Explain the amount by which absorption costing income would differ from variable costing income. (Compute difference without computing absorption costing income.