Question 1 - In the year, TGIT Inc. incurred the following costs:
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Direct materials
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$ 4.00 per unit
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Direct labour
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$ 5.00 per unit
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Variable manufacturing overhead
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$ 3.00 per unit
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Fixed manufacturing overhead
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$ 100,000
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Variable selling expenses
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$ 1.00 per unit
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Fixed selling expenses
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$ 40,000
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In the year, TGIT produced 40,000 units and sold 42,000 units. The company had no beginning or ending work-in-process inventory. However, there are 5,000 units in beginning finished goods inventory. The 5,000 units produced in the previous year have the same costs per unit as the units produced in the year.
Hint - be clear about the difference between absorption and variable costing models
Using the information provided, answer the following questions:
a) Without making any calculations, which costing method will produce a higher net income for TGIT?
b) How many units are in finished goods inventory on December 31?
c) Under variable costing, what is the product cost per unit?
d) Under variable costing, what is the total value of TGIT's finished goods inventory on December 31?
e) Under variable costing,what is the total selling and administrative expense for the year?
f) Under absorption costing, what is the product cost per unit?
g) Under absorption costing, what is the total value of TGIT's finished goods inventory on December 31?
h) Under absorption costing,what is the total selling and administrative expense for the year?
Question 2 - In the current year, TGIT Corp. produced 10,000 units and sold 8,000 of the units. The company incurred the following costs:
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Direct materials used
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$120,000
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Direct labour cost
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68,000
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Variable manufacturing overhead
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40,000
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Fixed manufacturing overhead
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60,000
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Fixed selling and admin. expense
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45,000
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Variable selling and admin. expense
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36,000
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There was no beginning finished goods inventory and no beginning or ending work-in-process inventory.
Use the information provided to answer the following questions:
aa) Without doing any calculations, would net income be higher for the year under absorption costing or under variable costing?
a) What is the product cost per unit?
Under variable costing?
Under absorption costing?
b) Would net income be higher for the year under absorption costing or under variable costing?
And by what amount?
c) Would both of your answers in b) be the same if you were told that on January 1, TGIT had 1,000 units in finished goods inventory with the same cost per unit?
d) If you were told that TGIT produced 10,000 units and sold 9,000 units, what is the product cost per unit?
Under variable costing?
Under absorption costing?
e) Would net income be higher for the year under absorption costing or under variable costing?
And by what amount?
f) If TGIT produced 8,000 units and sold 8,000 units, what is the product cost per unit? HINT: Don't forgot how costs behave when answering this question.
Under variable costing?
Under absorption costing?
g) Would net income be higher for the year under absorption costing or under variable costing?
And by what amount?
Question 3 -
The bookkeeper of TGIT Corporation had its May financial information on post-it-notes that were stuck to a computer monitor. The manager's son was visiting the office. He was attracted to the brightly coloured pieces of paper and proceeded to colour on them with equally brightly coloured markers. Figures were obliterated on some of the post-it-notes. The following information was retrieved:
Price per unit: $12 per unit
Units sold: 20,000 units
Variable cost per unit: $4.80 per unit
Fixed costs: $54,000
Help reconstruct the May data by providing the value for each of the unknowns listed below:
a) Total sales revenue:
b) Total variable cost:
c) Contribution margin per unit:
d) Total contribution margin:
e) Operating income (income before taxes):
f) Break even sales in units:
g) Variable cost ratio expressed in percent:
h) Contribution margin ratio in percent:
i) Break even sales in revenue dollars:
j) The company wants a target profit before taxes of $125,000 in June?
What is the total contribution margin that the company would require in June to hit its target?
How many units would the company need to sell in June to hit its target in k)?
K) If the company wanted to earn a target profit after taxes of $45,000 with a tax rate of 40%. what would its income before taxes need to be?
What is the total contribution margin that the company would require in June to hit its target in l)?
How many units would the company need to sell to earn $45,000 after taxes?