Absorption costing and production-volume variance—alternative capacity bases. Planet Light First (PLF), a producer of energy-efficient light bulbs, expects that demand will increase markedly over the next decade. Due to the high fixed costs involved in the business, PLF has decided to evaluate its financial performance using absorption costing income. The production-volume variance is written off to cost of goods sold. The variable cost of production is $2.40 per bulb. Fixed
PLF is deciding among various concepts of capacity for calculating the cost of each unit produced. Its choices are as follows:
Theoretical capacity | 900,000 bulbs |
Practical capacity | 520,000 bulbs |
Normal capacity | 260,000 bulbs (average expected output for the next three years) |
Master-budget capacity | 225,000 bulbs expected production this year |
- 1. Calculate the inventoriable cost per unit using each level of capacity to compute fixed manufacturing cost per unit.
Required
- 2. Suppose PLF actually produces 300,000 bulbs. Calculate the production-volume variance using each level of capacity to compute the fixed manufacturing
overhead allocation rate. - 3. Assume PLF has no beginning inventory. If this year’s actual sales are 225,000 bulbs, calculate operating income for PLF using each type of capacity to compute fixed manufacturing cost per unit.
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Chapter 9 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
- Nonearrow_forwardIn the upcoming year, NUBD estimates that it will produce and sell 4,000 units. The variable costs per unit and the total fixed costs are expected to be the same as in the current year. However, it anticipates a sales price of P16 per unit. What is Value Pro's projected margin of safety for the coming year?arrow_forwardCalculate breakeven point in units and Compute the quantity of units which need to be sold to earn a target annual profit of $120,000 In attempting to achieve better results in the marketplace, management has been looking at changing the reward system for marketing, distribution and sales personnel. This would result in an increase in variable marketing and administrative costs by $2 per unit, and would reduce fixed marketing and distribution costs by $100,000: Calculate the number of units required to breakeven if management implemented the changes Would you suggest that management pursue the changes? Explain By reference to the above data - How can a company effectively use CPV (Cost-Volume-Profit) analysis to make strategic decisions about its product pricing and production levels?arrow_forward
- Rooney Company is considering adding a new product. The cost accountant has provided the following data: Expected variable cost of manufacturing $ 49 per unit Expected annual fixed manufacturing costs $ 68,000 The administrative vice president has provided the following estimates: Expected sales commission $ 3 per unit Expected annual fixed administrative costs $ 52,000 The manager has decided that any new product must at least break even in the first year. Required Use the equation method and consider each requirement separately. If the sales price is set at $67, how many units must Rooney sell to break even? Rooney estimates that sales will probably be 10,000 units. What sales price per unit will allow the company to break even? Rooney has decided to advertise the product heavily and has set the sales price at $72. If sales are 7,000 units, how much can the company spend on advertising and still break even?arrow_forward(Absorption vs. variable costing) Tomm’s T’s is a New York–based company that produces and sells t-shirts. The firm uses variable costing for internal purposes and absorption costing for external purposes. At year-end, financial information must be converted from variable costing to absorption costing to satisfy external requirements. At the end of 2009, management anticipated that 2010 sales would be 20 percent above 2009 levels. Thus, production for 2010 was increased by 20 percent to meet the expected demand. However, economic conditions in 2010 kept sales at the 2009 unit level of 40,000. The following data pertain to 2009 and 2010: 2009 2010 Selling price per unit $22 $22 Sales (units) 40,000 40,000 Beginning inventory (units) 4,000 4,000 Production (units) 40,000 48,000 Ending inventory (units) 4,000 ? Per-unit production costs (budgeted and actual) for 2009 and 2010 were: Material $2.50 Labor 4.00 Overhead…arrow_forwardHow much should the company set as selling price if it is to achieve the target of 20% RoI?arrow_forward
- Ignore income taxes and other costs not mentioned in exhibit 1 or in the question itself. Market research estimates that monthly volume could increase to 3,500 units, which is well within hoist production capacity limitations, if the price were cut from $4,350 to $3,850 per unit. assuming the cost behavior patterns implied by the data in exhibit 1 are correct, would you recommend that this action be taken? What would be the impact on monthly sales, costs, and income?arrow_forwardBerwin Inc. is a small industrial equipment manufacturer with approximately $3.5 million in annual sales.Berwin can always compete with other small appliance manufacturers. However, the market expandsonly when there is product innovation. The following is information on Berwin Inc's performance report:Required : Compute and analyze if the variance is favorable or unfavorable! Identify the strengths and weaknesses of the performance report and give your explanation! How should the report be revised to eliminate these weaknesses? Please explain!arrow_forwardSpeedy Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by the company's cost analyst has determined that if a truck is driven 120,000 miles during a year, the average operating cost is 11.6 cents per mile. If a truck is driven only 80,000 miles during a year, the average operating cost increases to 13.6 cents per mile. Required: 1. Using the high-low method, estimate the variable and fixed cost elements of the annual cost of truck operation. 2. Express the variable and fixed costs in the form Y = a + bX. 3. If a truck were driven 100,000 miles during a year, what total cost would you expect to be incurred?arrow_forward
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