Answered: Use (a) the Equation method and (b)…

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter11: Differential Analysis And Product Pricing

Section: Chapter Questions

Problem 22E: Total cost method of product pricing Based on the data presented in Exercise 17, assume that Smart...

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Question

Windows is a small company that installs windows. Its cost structure is as follows:

Selling price from each window installation	$500
Variable cost of each window installation	$400
Annual fixed costs	$150,000

Use (a) the Equation method and (b) the contribution method to calculate operating income if

Bernard

installs

2,000

windows.

Use (a) the Equation method to calculate operating income if

Bernard

installs

2,000

windows.

Begin by determining the formula to calculate the operating income using the equation method. Then, calculate the operating income. (Abbreviation used: FC = Fixed costs, SP = Selling price, VCU = Variable cost per unit, Q = Quantity of units sold.)

(	SP	×	Q	) - (	VCU	×	Q	) -	FC	=	Operating income
(	$500	×	2,000	) - (	$400	×	2,000	) -	$150,000	=	$50,000

Next, use (b) the contribution method to calculate operating income if

Bernard

installs

2,000

windows.

Begin by determining the formula to calculate the operating income using the contribution method. Then, calculate the operating income.

(

) -

Operating income

(

) -

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