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)
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- Change in Contribution Margin Head Pops Inc. manufactures two models of solar-powered, noise-canceling headphones: Sun Sound and Ear Bling models. The company is operating at less than full capacity. Market research indicates that 29,400 additional Sun Sound and 32,300 additional Ear Bling headphones could be sold. The operating income by unit of product is as follows: Sales price Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed manufacturing costs Operating income Head Pops Inc. Analysis Line Item Description Unit volume increase x Contribution margin per unit Increase in profitability Sun Sound Ear Bling Headphones Headphones $29.80 $46.50 (16.70) (26.00) $13.10 $20.50 (6.00) $7.10 (2.70) $4.40 Prepare an analysis indicating the increase or decrease in total profitability if 29,400 additional Sun Sound and 32,300 additional Ear Bling headphones are produced and sold, assuming that there is sufficient capacity for…arrow_forwardThe marketing manager of Perez Corporation has determined that a market exists for a telephone with a sales price of $22 per unit. The production manager estimates the annual fixed costs of producing between 40,800 and 81,700 telephones would be $374,100. Required Assume that Perez desires to earn a $133,000 profit from the phone sales. How much can Perez afford to spend on variable cost per unit if production and sales equal 46,100 phones? Variable cost per unitarrow_forwardCost-plus, target pricing, working backward. The new CEO of Rusty Manufacturing has asked for a variety of information about the operations of the firm from last year. The CEO is given the following information, but with some data missing: Find (a) total sales revenue, (b) selling price, (c) rate of return on investment, and (d) markup percentage on full cost for this product. The new CEO has a plan to reduce fixed costs by $225,000 and variable costs by $0.30 per unit while continuing to produce and sell 500,000 units. Using the same markup percentage as in requirement 1, calculate the new selling price. Assume the CEO institutes the changes in requirement 2 including the new selling price. However, the reduction in variable cost has resulted in lower product quality resulting in 5% fewer units being sold compared with before the change. Calculate operating income (loss). What concerns, if any, other than the quality problem described in requirement 3, do you see in implementing the…arrow_forward
- Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning