Adjusting variable cost income to absorption net income

E10-6 Adjusting variable cost income to absorption net income:

the fixed overhead budgeted for MacBeth Co. at an expected capacity of 500,000 units is 1,500,000. variable costing is used internally, and the net income is adjusted to an absorption costing net income at year-end.

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Data collected over the last three years show the following:

Units produced: 502,000 (first year), 498,000 (second year), 496,000 (third year)

Units sold: 496,000 (first year), 503,000 (second year), 496,000 (third year)

net income (variable cost): $500,000 (first year), $521,000 (second year), $497,000 (third year)

Determine the adjustment each year to convert the variable costing income to absorption costing net income. Compute the absorption costing net income for each year.

P10-8

Break-even analysis:

the production of a new product required Venetian Manufacturing Co. to lease additional plant facilities.

Based on studies, the following data have been made available: Estimated annual sales- 24,000 units:

Estimated costs: materials $96,000 at $4 per unit

direct labor $14,400 at $0.60 per unit

factory overhead 24,000 at $1.00 per unit

administrative expense 28,800 at $1.20 per unit

total $163,200 at $6.80 per unit

selling expenses are expected to be 5% of sales, and net income is to amount to $2.00 per unit.

1. calculate the selling price per unit (hint: let “x” equal the selling price and express selling expense as a percentage of “x”)

2. prepare an absorption costing income statement for the year ended December 31, 2013

3. calculate the break-even point expressed in dollars and in units, assuming that administrative expense and factory overhead are all fixed but other costs are fully variable.

P10-11

Calculating break-even point, contribution margin ration, and margin of safety ratio:

leprechaun enterprises inc., is considering building a manufacturing plant in county cork. predicting sales of 100,000 units, leprechaun estimates the following expenses:

materials: $19,000 (total annual expenses), 10% (percent of total annual expenses that are fixed)

labor: $26,000 (total annual expenses), 20% (percent of total annual expenses that are fixed)

overhead: $40,000 (total annual expenses), 40% (percent of total annual expenses that are fixed)

marketing and administration: $14,000 (total annual expenses, 60% (percent of total annual expenses that are fixed)

total: $99,000

an irish firm that specializes in marketing will be engaged to sell the manufactured product and will receive a commission of 10% of the sales price. none of the u.s. home office expense will be allocated to the irish facility.

1. if the unit sales price is $2, how many units must be sold to break even? (hint: first compute the variable cost per unit)

2. calculate the margin of safety ratio

3. calculate the contribution margin ratio