ABC, Inc. is a newly organized manufacturing business this year.
The following company’s costs and expenses are:
Sales price per unit
$80
Manufacturing costs:
Direct materials
Direct labor
Variable Manufacturing overhead
Fixed Manufacturing overhead
Period expenses:
Variable Selling and administrative expenses
Fixed Selling and Administrative expenses
Totals
Units produced
5,850 units
Units sold
5,650 units

Fixed Costs

Variable Costs
$10
11
6

$122,850
5
9,000
$131,850

$32

Required:
Use the information in the DATA field above using cell referencing to answer the following requirements.
1. Calculate the unit cost for variable costing. Review Exhibit 8-2 on page 328.
2. Calculate the unit cost for absorption costing. Review Exhibit 8-2 on page 328.
3. Prepare an absorption-costing income statement. Review Exhibit 8-3 on page 329.
4. Prepare a variable-costing income statement. Review Exhibit 8-3 on page 329.
5. Reconcile the differences in income that you calculated in #3 and #4 using exhibit 8-4 on page 330 as your guide or use the shortcut reconciliation on page 330-331.
6. Calculate the breakeven point in units. Reference page 279.
7. Calculate the breakeven point in sales dollars.
8. Calculate the safety margin and explain what the margin of safety means for this ABC Inc. Reference page 285.
9. Calculate the operating leverage . Reference page 296.
10. What if sales volume increases by 5% how much will income increase in percentage terms? Make sure you have read over the DOL discussion and
understand the multiplier impact of changes in sales volume that occurs based on DOL. See the bottom of page 296.
11. What if the direct material cost per unit decreases from $10 a unit to $8, what will be the new breakeven in units? Explain why it changed.
You should only have to change the direct material cost in the data area and actually all your answers should be updated. P lease put the direct material cost back to the original number once you have answered the question.
12. What if the manufacturing overhead cost increases from 122,850 to 128,700, what will be the new breakeven in units? Explain why it changed.
You should only have to change the fixed MOH in the data area and actually all your answers should be updated. Please put the fixed MOH cost back to the original number once you have answered the question.
Solution:
1.

2.

Direct materials
Direct labor
Variable overhead
Fixed overhead
Total per unit cost

Variable costing
$10.00

3.

Absorption Costing
$10.00

ABC Company Inc.
Absorption Costing Income statement

Sales revenue
Less: Cost of goods sold
Gross Margin
Less: Selling and administrative expenses
Variable
Fixed
Net income
4.

ABC Company Inc.
Variable Costing Income statement

Sales Revenue
Less: Variable Expenses:
Variable manufacturing costs
Variable Selling and administrative costs
Contribution margin
Less: Fixed Expenses:
Fixed manufacturing overhead
Fixed selling and Administrative expenses
Net income
5.
I am using a modification of the short cut method on page 331 as my model.
Change in inventory:
Units produced
Units sold
Guidance:
Increase in inventory
Fixed overhead rate
This difference should
Difference in fixed overhead expensed
equal the difference in net
Net income:
Absorption costing
Variable costing
Difference
6.

Break even in units
Units

7.

Break even in sales $

income below.

Guidance:
This answer should be a whole number, since we don’t make
partial units. Break even analysis does not follow the rounding
rules. You will need to round up in order to ensure you have
reached the break even point.

8. Calculate the safety margin and explain what the margin of safety means for this ABC Inc. Reference page 285.
On page 285 I realize the author uses budgeted sales revenue in the safety margin calculation, but if you are
given the actual sales revenue you can replace budgeted sales with actual sales, which you should do for #8.

9. Calculate the operating leverage . Reference page 296.

10. What if sales volume increases by 5% how much will income increase in percentage terms? Make sure you have read over the DOL discussion and
understand the multiplier impact of changes in sales volume that occurs based on DOL. See the bottom of page 296.

11. What if the direct material cost per unit decreases from $10 a unit to $8, what will be the new breakeven in units? Explain why it changed.
You should only have to change the direct material cost in the data area and actually all your answers should be updated. P lease put the direct material cost back to the original number once you have answered the question.

12. What if the manufacturing overhead cost increases from 122,850 to 128,700, what will be the new breakeven in units? Explain why it changed.
You should only have to change the fixed MOH in the data area and actually all your answers should be updated. Please put the fixed MOH cost back to the original number once you have answered the question.