mba642 project 3

Type in your name here: Worth
10 pts. Grading Rubric:
Project 3 is due by
January 21st at 6:15 pm CT. Send via the
assignment area and make sure you save your file with first initial of first
name and last name. Requirement Points
You will be graded on the accuracy of your answer and usage
of cell referencing in the DATA area. 1 0.6
This project covers material in chapters 7 and 8. Please make sure you review the support
material I have set up in the chapter folders. 2 1
DATA 3 1
ABC, Inc. has been in business 2 years and the president does not understand how in
the 2nd year the income would be higher after they sold the same amount of
units. 4 0.5
Below are the income statements for the first two years of
operations. 5 0.9
Absorption
Costing Income Statement 6 1
Year 1 Year 2 7 0.5
Sales $640,000 $640,000 8 0.5
Less: Cost of good
sold460,000420,000 9 1
Gross Margin 180,000220,000 10 0.5
Selling and administrative expenses: 11 0.5
Variable 20,000 20,000 12 1
Fixed 70,000 70,000 13 1
Net income 90,000 130,000 “Total
pts.
Possible” 10

Below is the production and sales information for the first
2 years:
Year 1 Year 2
Production in units
20,000 25,000
Sales in units
20,000 20,000
Sales price per unit $32
$32
Direct material per unit$7
$7
Direct labor per unit $4
$4
Variable manufacturing overhead per unit $2 $2

Variable selling and administrative expense per unit sold $1 $1
Fixed manufacturing overhead costs(Total) $200,000 $200,000
Fixed Selling and Administrative costs (Total) $70,000 $70,000

***ABC, Inc. applies fixed manufacturing overhead costs to
its only product on the basis of each year’s annual production. Therefore, there is a new fixed manufacturing
overhead rate each year.

Required: Use
the information in the DATA field above using cell referencing to answer the
following requirements.
1. Calculate the unit
production cost for variable costing for year 1 and year 2. Review Exhibit 8-2 on page 320.
2. Calculate the unit
production cost for absorption costing for year 1 and year 2. Review Exhibit 8-2 on page 320.
3. Prepare variable-costing income statements for year 1
and year 2. Review Exhibit 8-3 on page 321.
4. Reconcile the
differences in income between absorption and variable costing. Use the information I provided in the
absorption income statement, the data, and your answers from 1-3 to complete
the table below.
I have set up the table using the shortcut reconciliation on page 323.
5. Explain to the
President, why there is a difference in the absorption costing income statement
from year 1 to year 2 and if the company is actually more profitable.
6. Calculate the
breakeven point in units. Reference page
271.
7. Calculate the
breakeven point in sales dollars.
8. Prepare a variable
costing income statement for this company if they sold at breakeven. How do you know that your breakeven income
statement is correct?
9. Calculate the
safety margin in dollars. Explain
what the margin of safety means in your
own words using this project? Reference page 289-290. Be very explicit in your answer, so I know
you understand this concept and the importance of it to managers.
10. Calculate the
operating leverage factor. Reference
page 288.
11. What if sales
volume increases by 3% how much will income increase in percentage terms? Make sure you have read over the operating
leverage material and
understand the operating leverage factor that impacts the
percentage change in net income when there are
changes in sales volume.
12. What if the direct
labor cost per unit increases from $4 a
unit to $5, what will be the new breakeven in units? Explain why it changed.
You should only have to change the direct labor in the data
area and all your answers should be
updated.
Please put the direct
labor cost back to the original number once you have answered the question,
since this is a what if question and want the answers for 1-11 to be based on
the original data.
13. What if the
manufacturing overhead cost decreases from $200,000 to $180,000, 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, since
this is a what if question and want the answers for 1-11 to be based on the
original data.

Solution:
1.
Unit production cost for Variable costing Year 1 Year 2

Total per unit cost

2.
Unit production cost for Absorption Costing Year 1 Year
2

Total per unit cost

3. ABC
Company Inc.
Variable
Costing Income statement
Year 1 Year 2
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

4.
Year Change in
inventory Predetermined
Fixed-Overhead rate Difference
in Fixed Overhead Expensed Absorption-Costing
Income minus Variable-costing income
Year 1 X = =
Year 2 X = =

5. Explanation to
President
The difference in income is caused because of the increase
in production in year 2. For external
reporting purposes, a company is allowed to defer recognition of FOH until the
units are sold under the matching principle.
The company is actually not more profitable in year 2 and if
you review the variable costing income statement you will see that net income
is the same both years. I would
recommend we use
variable costing income statement for internal purposes to
monitor the profitability of the company, since variable costing expenses off
all fixed overhead.

6. Break
even in units
Units

7. Break
even in sales $

Breakeven
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

9. Safety Margin in Dollars On
page 290, I realize the author uses budgeted sales revenue in the margin of
safety calculation, but if you are
given
the actual sales revenue you can replace budgeted sales with actual sales,
which you should do for #9.
What does the margin of safety mean? Be very explicit in your answer, so I know
you understand this concept and the importance of it to managers.

10. Calculate the operating leverage . Reference page 288.

11. What if sales
volume increases by 3% how much will income increase in percentage terms? Make sure you have read over the operating
leverage material and
understand the operating leverage factor that impacts the
percentage change in net income when there are
changes in sales volume.

12. What if the
direct labor cost per unit increases
from $4 a unit to $5, what will be the new breakeven in units? Explain why it changed.
You should only have to change the direct labor in the data area
and all your answers should be
updated. Please put the direct labor
cost back to the original number once you have answered the question?
Please put the direct
labor cost back to the original number once you have answered the question,
since this is a what if question and want the answers for 1-11 to be based on
the original data.

13. What if the
manufacturing overhead cost decreases from $200,000 to $180,000, 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?
Please put the fixed
MOH cost back to the original number once you have answered the question, since
this is a what if question and want the answers for 1-11 to be based on the
original data.