Rainy Company Manufactures Two Products, Yip And Zip

Rainy Company manufactures two products, Yip and Zip. Product Zip is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product Yip. Product Zip is the more complex of the two products, requiring 2.0 hours of direct labor time per unit to manufacture compared to 1.0 hour of direct labor time for Product Yip. Product Zip is produced on an automated production line.

Overhead currently is applied to the products using a single rate on the basis of direct labor hours. The company estimated it would incur $510,000 in manufacturing overhead costs and produce 10,000 units of Product Zip and 40,000 units of Product Yip during the current year.

Unit costs for materials and labor are:

Product Yip

Product Zip

Direct material………………………………………………………………….

$11

$24

Direct labor………………………………………………………………………

6

12

Required:

a.Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year.

b.The company is considering the use of activity-based costing as an alternative to its traditional costing method for manufacturing overhead. Data relating to the company’s activity cost centers for the current year are given below:

Estimated

Expected Activity

Overhead

Product

Product

Activity Cost Center

Costs

Yip

Zip

Total

Machine setups required……………………………………..

$204,000

800

1,600

2,400

Purchase orders issued……………………………………….

43,500

500

100

600

Machine-hours required………………………………………

105,000

7,000

10,500

17,500

Maintenance requests issued……………………………….

  157,500

650

850

1,500

$510,000

Using the data above, determine the unit product cost of each product for the current year using ABC.

c.Explain the difference in the unit product costs using ABC versus the    traditional system.  Be sure to provide appropriate quantitative analysis in your response. Use Machine setups batch activity for your economies of scale explanation.  Use the Machine-hours unit level activity to demonstrate the consistency principle of ABC that will result in different unit costs from the single rate system.

A. The following is Alabama Corporation’s contribution format income statement for last  month:

Sales……………………………………….

$1,200,000

Variable expenses……………………..

    800,000

Contribution margin………………….

400,000

Fixed expenses…………………………

    300,000

Net operating income………………..

$  100,000

The company has no beginning or ending inventories and produced and sold 20,000 units during the month.

Required:

a.What is the company’s contribution margin ratio?

b.What is the company’s break-even in units?

c.If sales increase by 100 units, by how much should net operating income increase?

d.How many units would the company have to sell to attain target profits of $125,000?

e.What is the company’s margin of safety in dollars?

f.What is the company’s degree of operating leverage?

Spencer Company’s most recent monthly contribution format income statement is given below:

Sales…………………………….

$60,000

Variable expenses…………..

 45,000

Contribution margin……….

15,000

Fixed expenses………………

 18,000

Net operating loss…………..

($3,000)

The company sells its only product for $10 per unit. There were no beginning or ending inventories.

Required:

a.What are total sales in dollars at the break-even point?

b.What are total variable expenses at the break-even point?

c.What is the company’s contribution margin ratio?

d.If unit sales were increased by 10% and fixed expenses were reduced by $2,000, what would be the company’s expected net operating income? (Prepare a new income statement.)

Multiple Choice Questions

1. Which of the following statements is true?
A. When production exceeds sales, a manufacturing company’s variable costing net operating income will usually be greater than its absorption costing net operating income.
B. The variable costing method is usually not used for external reporting purposes.
C. The absorption costing method treats fixed production costs as period costs.
D. All of these.

2.         Moo Corporation manufactures a gas operated barbecue grill. The following information relates to Moo’s operations for last year:

What is Moo’s variable costing unit product cost?
A. $29
B. $34
C. $58
D. $633

3.          Forsgren Inc., which produces a single product, has provided the following data for its most recent month of operations:

There were no beginning or ending inventories. The absorption costing unit product cost was:
A. $219
B. $151
C. $150
D. $300

4.        Dunes Company produces a single product. For the most recent year, the company’s net operating income computed by the absorption costing method was $7,400, and its net operating income computed by the variable costing method was $10,100. The company’s unit product cost was $17 under variable costing and $22 under absorption costing. If the ending inventory consisted of 1,460 units, the beginning inventory must have been:

A. 920 units
B. 1,460 units
C. 2,000 units
D. 12,700 units

5.   Gean Company produces a single product. Last year, the company’s net operating income computed by the absorption costing method was $9.100, and its net operating income computed by the variable costing method was $6.400. The company’s unit product cost was $17 under variable costing and $20 under absorption costing. If the ending inventory consisted of 2,100 units, the beginning inventory in units must have been:

A)        1,200

B)        2,100

C)        3,000

D)        4,800

6. Garcia Company produces a single product. During March, the company had net operating income under absorption costing that was $3,500 higher than under variable costing. The company sold 7,000 units in March, and its variable costs were $7 per unit, of which $3 was variable selling expense. If fixed manufacturing overhead was $2 per unit under absorption costing, then how many units did the company produce during March?

A)  5,250 units

B)  8,750 units

C)  6,500 units

D)  6,125 units

7. Campbell Company produces a single product. Last year, the company had 25,000 units in its ending inventory. Johnson’s variable production costs were $10 per unit and fixed manufacturing overhead costs were $5 per unit. The company’s net operating income last year was $10,000 lower under variable costing than it was under absorption costing. Given these facts, the number of units of product in beginning inventory last year must have been:

A)  24,000 units

B)  27,000 units

C)  23,000 units

D)  24,333 units

8.  Golf Corporation produces a single product. Last year, the company had net operating income of $50,000 using variable costing. Beginning and ending inventories were 13,000 units and 18,000 units, respectively. If the fixed manufacturing overhead cost was $2.00 per unit, what would have been the net operating income using absorption costing?

A)        $40,000

B)        $50,000

C)        $60,000

D)        $86,000

9.         Pungent Corporation manufactures and sells a spice rack. Shown below are the actual operating results for the first two years of operations:

Year 1

Year 2

Units (spice racks) produced……………………………

40,000

40,000

Units (spice racks) sold…………………………………..

37,000

41,000

Absorption costing net operating income…………..

$44,000

$52,000

Variable costing net operating income………………

$38,000

???

Pungent’s cost structure and selling price were the same for both years. What is Pungent’s variable costing net operating income for Year 2?

A)      $48,000

B)      $50,000

C)      $54,000

D)      $56,000

10.       Floaty Corporation manufactures a parachute. Shown below is Floaty’s cost structure:

Variable cost per parachute

Total fixed cost for the year

Manufacturing cost……………..

$160

$342,000

Selling and administrative…….

$10

$171,000

In its first year of operations, Floaty produced and sold 4,000 parachutes. The parachutes sold for $310 each.

How would Floaty’s absorption costing net operating income been affected in its first year if only 3,800 parachutes were sold instead of 4,000?

A)      net operating income would have been $2,350 lower

B)      net operating income would have been $10,900 lower

C)      net operating income would have been $12,900 lower

D)      net operating income would have been $28,000 lower