Chapter 7, Problem 7.18P

To determine

Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits no loss for the company.

To compute: The financial advantage of investing additional capital of $80,000 in fixed selling expense.

Answer to Problem 7.18P

Explanation of Solution

Particular	Amount $
Sales   $75000unit\times \$32perunit$	2,400,000
Less: Variable expense
Direct materials   $75000unit\times \$10.00perunit$	750,000
Direct labor   $75000unit\times \$4.50perunit$	337,500
Variable manufacturing overhead   $75000unit\times \$2.30perunit$	172,500
Variable selling expenses   $75000unit\times \$1.20perunit$	90,000
Contribution margin	1,050,000
Less: fixed expense
Fixed manufacturing overhead	300,000
Fixed selling expense   $210,000unit+\$80,000$	290,000
Net income	460,000
Less: net income under current policy	330,000
Incremental net income	130,000

Unit product cost for both years by using super variable costing would include direct materials of $19 per unit. Net operating income for year is $8,000.

  $\begin{array}{l}60,000units+25\%(60,000units)\\ =75,000units\end{array}$

Increase in fixed selling expense will lead to increase in sales from current policy of 60000 units to 75000 units. Increase in sales and the fixed selling expense will lead to increase the net income by $130000

Thus increased fixed selling expense is justified

The net income under the current policy of selling 60000 units as shown below:

Particular	Amount $
Sales   $60,000unit\times \$32perunit$	1920000
Less: Variable expense
Direct materials   $60000unit\times \$10.00perunit$	600000
Direct labor   $60000unit\times \$4.50perunit$	270000
Variable manufacturing overhead   $60000unit\times \$2.30perunit$	138000
Variable selling expenses   $60000unit\times \$1.20perunit$	72000
Contribution margin	840000
Less: fixed expense
Fixed manufacturing overhead	300000
Fixed selling expense	210000
Net income	330000

Hence the net income under the current policy of selling 60000 units is $330,000

To determine

Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits no loss for the company.

To compute: The break-even price per unit

Answer to Problem 7.18P

The per unit break-even price on the order is $22.15

Explanation of Solution

Per unit break-even price on the order:

Particular	Amount $
Direct material per unit	10
Add: direct labor per unit	4.50
Add: variable manufacturing overhead	2.30
Add: variable selling expense	3.20
Add: import duties per unit	1.70
Add: permit and license per unit ()	0.45
Per unit break-even price	$22.15

Thus, the per unit break-even price on the order is $22.15

To determine

Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits no loss for the company.

To compute: The unit cost figure that is relevant for setting a minimum selling price.

Answer to Problem 7.18P

The relevant cost per unit is $1.20.

Explanation of Solution

The relevant cost of the units that are considered to be seconds is the variable selling expense. Direct material, direct labor and variable manufacturing overhead costs are already incurred. It implies all the three costs are sunk cots. Thus the relevant cost per unit is $1.20.

To determine

Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits no loss for the company.

To compute: The total contribution margin, total fixed cost, financial advantage and the effect closing the plant for two month.

Answer to Problem 7.18P

The fixed selling expense to be incurred on closing the plant is $28,000.

Explanation of Solution

The impact on profit of closing the plant as:

Particular	Amount $	Amount $
Contribution margin lost		42000
Fixed costs:
Fixed manufacturing overhead cost	(30000)
Fixed selling expense	(28000)	(58000)
Net disadvantage of closing the plant		(16000)

Thus, the net disadvantage of closing the plant is $16,000.

The contribution margin per unit current policy

	Particular	Amount$
A	Selling price per unit	32
	Variable expense per unit
B	Direct material	10
C	Direct labor	4.50
D	Variable manufacturing overhead	2.30
E	Variable selling expenses	1.20
$F=B+C+D+E$	To variable expense per unit	18
$G=A-F$	Contribution margin per unit	14

Thus the contribution margin per unit under current policy is $14

The contribution margin lost:

  $\begin{array}{l}contributionm\arg inlost=unitsfor2months\times \%canbesold\times contributionm\arg in\\ =\left(\frac{60000units}{12months}\times 2months\right)\times 30\%\times \$14\\ =10,000units\times 30\%\times \$14\\ =\$42,000\end{array}$

Thus the contribution margin lost during the closure of the plant is $42,000

The fixed manufacturing overhead to be incurred on closing the plant

  $\begin{array}{l}Fixedmanufacturingoverhead=\frac{Total\cos t}{12months}\times 2months\times 30\%\\ =\frac{\$300000}{12month}\times 2months\times 60\%\\ =\$30,000\end{array}$

The fixed selling expense to be incurred on closing the plant

  $\begin{array}{l}Fixedselling\exp ense=\frac{Total\cos t}{12months}\times 2months\times (100\%-20\%)\\ =\frac{\$210,000}{12month}\times 2months\times 80\%\\ =\$28,000\end{array}$

Thus, the fixed selling expense to be incurred on closing the plant is $28,000

To determine

Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits no loss for the company.

To compute: avoidable cost per unit

Answer to Problem 7.18P

The unit cost that will be relevant is $20.95

Explanation of Solution

The unit cost will be relevant if the outside supplier supplies the required units as:

	Particular	Amount$
A	Direct material	10
B	Direct labor	4.50
C	Variable manufacturing overhead	2.30
D	Fixed manufacturing overhead cost   $\$5.00\times 75\%$	3.75
E	Variable selling expenses   $\$1.20\times \frac{1}{3}$	0.40
$F=A+B+C+D+E$	Total relevant cost per unit	20.95

Thus the unit cost that will be relevant is $20.95