Purchase Solution

# Variable costing/Absorption costing/Breakeven

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ABC, Inc. is a newly organized manufacturing business this year.
The following company's costs and expenses are:

Sales price per unit \$55
Manufacturing costs:
Direct materials
Direct labor
Period expenses:
Totals
Units produced 5,800
Units sold 5,600

Required: Use the information in the DATA field above using cell referencing to answer the following requirements.
1. Calculate the unit cost for variable costing.
2. Calculate the unit cost for absorption costing.
3. Prepare an absorption-costing income statement.
4. Prepare a variable-costing income statement.
5. Reconcile the differences in income that you calculated in #3 and #4 .
6. Calculate the breakeven point in units.
7. Calculate the breakeven point in sales dollars.
8. Calculate the safety margin.
9. What does the margin of safety mean?
10. Calculate the operating leverage .
11. What if sales volume increases by 7% how much will income increase in percentage terms?

Solution:
1.
Variable costing
Direct materials
Direct labor
Total per unit cost

3. ABC Company Inc.
Absorption Costing Income statement

Sales revenue
Less: Cost of goods sold
Gross Margin
Variable
Fixed
Net income

4. ABC Company Inc.
Variable Costing Income statement

Sales Revenue
Less: Variable Expenses:
Variable manufacturing costs
Contribution margin
Less: Fixed Expenses:
Net income
5. I am using a modification of the short cut method on page 331 as my model.
Change in inventory:
Units produced
Units sold
Increase in inventory

Net income:
Absorption costing
Variable costing
Difference

6. Break even in units
Units

7. Break even in sales \$

8. Safety Margin

9. What does the margin of safety mean?

10. Calculate the operating leverage .

11. What if sales volume increases by 7% how much will income increase in percentage terms?

##### Solution Summary

The solution provides answers to various Variable costing/Absorption costing/Breakeven questions for ABC, Inc. which is a newly organized manufacturing business.

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