High country inc produces and sells many recreational products

Managerial Accounting

1. High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant’s operation:

Beginning inventory

0

Units produced

44,000

Units sold

39,000

Selling price per unit

$

84

Selling and administrative expenses:

Variable per unit

$

3

Fixed (per month)

$

559,000

Manufacturing costs:

Direct materials cost per unit

$

14

Direct labor cost per unit

$

8

Variable manufacturing overhead cost per unit

$

3

Fixed manufacturing overhead cost (per month)

$

836,000

Management is anxious to assess the profitability of the new camp cot during the month of May.

Required:

1. Assume that the company uses absorption costing.

a. Calculate the unit product cost.

b. Prepare an income statement for May.

2. Assume that the company uses variable costing.

a. Calculate the unit product cost.

b. Prepare a contribution format income statement for May.

A. Determine the unit product cost. Assume that the company uses absorption costing.

B. Prepare an income statement for May. Assume that the company uses absorption costing.

C. Determine the unit product cost. Assume that the company uses variable costing.

D. Prepare a contribution format income statement for May. Assume that the company uses variable costing.

E.

High Country, Inc.

Variable Costing Income Statement

2. Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $15.00 per ball, of which 60% is direct labor cost.

Last year, the company sold 60,000 of these balls, with the following results:

Sales (60,000 balls)

$

1,500,000

Variable expenses

900,000

Contribution margin

600,000

Fixed expenses

375,000

Net operating income

$

225,000

Required:

1. Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year’s sales level.

2. Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.00 per ball. If this change takes place and the selling price per ball remains constant at $25.00, what will be next year's CM ratio and the break-even point in balls?

3. Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $225,000, as last year?

4. Refer again to the data in (2) above. The president feels that the company must raise the selling price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year (as computed in requirement 1a), what selling price per ball must it charge next year to cover the increased labor costs?

5. Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40.00%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company’s new CM ratio and new break-even point in balls?

6. Refer to the data in (5) above.

a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $225,000, as last year?

b. Assume the new plant is built and that next year the company manufactures and sells 60,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.

Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year’s sales level. (Round "Unit sales to break even" to the nearest whole unit and other answers to 2 decimal places.)

CM Ratio

%

Unit sales to break even

balls

Degree of operating leverage

Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.00 per ball. If this change takes place and the selling price per ball remains constant at $25.00, what will be next year's CM ratio and the break-even point in balls? (Round "CM Ratio" to 2 decimal places and "Unit sales to break even" to the nearest whole unit.)

CM Ratio

%

Unit sales to break even

balls

Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $225,000, as last year? (Round your answer to the nearest whole unit.)

Number of balls

Refer again to the data in (2) above. The president feels that the company must raise the selling price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year (as computed in requirement 1a), what selling price per ball must it charge next year to cover the increased labor costs? (Round your answer to 2 decimal places.)

Selling price

·

Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40.00%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company’s new CM ratio and new break-even point in balls? (Round "CM Ratio" to 2 decimal places and "Unit sales to break even" to the nearest whole unit.)

Show less

CM Ratio

%

Unit sales to break even

balls

·

If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $225,000, as last year? (Round your answer to the nearest whole unit.)

Number of balls

·

· Assume the new plant is built and that next year the company manufactures and sells 60,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage. (Round "Degree of operating leverage" to 2 decimal places.)

·

Northwood Company

Contribution Income Statement

Degree of operating leverage

3. Topper Sports, Inc., produces high-quality sports equipment. The company’s Racket Division manufactures three tennis rackets—the Standard, the Deluxe, and the Pro—that are widely used in amateur play. Selected information on the rackets is given below:

Standard

Deluxe

Pro

Selling price per racket

$

65.00

$

100.00

$

145.00

Variable expenses per racket:

Production

$

39.00

$

42.00

$

58.00

Selling (5% of selling price)

$

3.25

$

5.00

$

7.25

All sales are made through the company’s own retail outlets. The Racket Division has the following fixed costs:

Per Month

Fixed production costs

$

150,000

Advertising expense

130,000

Administrative salaries

80,000

Total

$

360,000

Sales, in units, over the past two months have been as follows:

Standard

Deluxe

Pro

Total

April

2,000

1,000

5,000

8,000

May

8,000

1,000

3,000

12,000

Required:

1-a. Prepare contribution format income statements for April.

1-b. Prepare contribution format income statements for May.

3. Compute the Racket Division’s break-even point in dollar sales for April.

4. Whether the break-even point would be higher or lower with May’s sales mix than with April’s sales mix?

5. Assume that sales of the Standard racket increase by $23,000. What would be the effect on net operating income? What would be the effect if Pro racket sales increased by $23,000? Do not prepare income statements; use the incremental analysis approach in determining your answer.

Prepare contribution format income statements for April. (Round "Total percent" answers to 1 decimal place)

Topper Sports, Inc.

Income Statement for April

Standard

Deluxe

Pro

Total

Amount

%

Amount

%

Amount

%

Amount

%

%

%

%

%

Variable expenses:

%

%

%

%

%

%

%

%

%

%

%

%

%

%

%

%

Total variable expenses

%

%

%

%

%

%

%

%

Fixed expenses:

Total fixed expenses

Prepare contribution format income statements for May. (Round "Total percent" answers to 1 decimal place)

Prepare contribution format income statements for May. (Round "Total percent" answers to 1 decimal place)

Topper Sports, Inc.

Income Statement for May

Standard

Deluxe

Pro

Total

Amount

%

Amount

%

Amount

%

Amount

%

%

%

%

%

Variable expenses:

%

%

%

%

%

%

%

%

%

%

%

%

%

%

%

%

Total variable expenses

%

%

%

%

%

%

%

%

Fixed expenses:

Total fixed expenses

Compute the Racket Division’s break-even point in dollar sales for April. (Round intermediate percentage calculations to 1 decimal place and final answer to the nearest whole dollar.)

Break-even point in dollar sales

Whether the break-even point would be higher or lower with May’s sales mix than with April’s sales mix?

Higher or lower?

Assume that sales of the Standard racket increase by $23,000. What would be the effect on net operating income? What would be the effect if Pro racket sales increased by $23,000? Do not prepare income statements; use the incremental analysis approach in determining your answer.

Standard

Pro

Net operating income