Production Costs Nonproduction Costs

Direct materials cost $4 per unit Variable S&A expenses $2 per unit

Direct labor cost $8 per unit Fixed S&A expenses $200,000 per year

Variable overhead cost $3 per unit

Fixed overhead cost $600,000 per year

Sales price/unit $40

Units Produced Units Sold Units in Ending Inventory

2009 60,000 60,000 0

2010 60,000 45,000 15,000

2011 60,000 75,000 0

UNITS PRODUCED EXCEED UNITS SOLD

ICEAGE COMPANY

Income Statement (Absorption Costing)

For Year Ended December 31, 2010

Sales

Cost of goods sold

Gross margin

S&A expenses

Net income

ICEAGE COMPANY

Income Statement (Variable Costing)

For Year Ended December 31, 2010

Sales

Variable expenses

Variable production costs

Variable S&A expenses

Contribution margin

Fixed expenses

Fixed overhead

Fixed S&A expenses

Net income

Variable Costing and Absorption Costing

UNITS PRODUCED ARE LESS THAN UNITS SOLD

ICEAGE COMPANY

Income Statement (Absorption Costing)

For Year Ended December 31, 2011

Sales

Cost of goods sold

Gross margin

S&A expenses

Net income

ICEAGE COMPANY

Income Statement (Variable Costing)

For Year Ended December 31, 2011

Sales

Variable expenses

Variable production costs

Variable S&A expenses

Contribution margin

Fixed expenses

Fixed overhead

Fixed S&A expenses

Net income

1. What is gross margin if 45,000 units are sold?

A. $650,000

B. $675,000

C. $700,000

D. $725,000

2. What is net income under absorption costing if 45,000 units are sold?

A. $375,000

B. $380,000

C. $385,000

D. $390,000

3. What is contribution margin if 45,000 units are sold?

A. $1,035,000

B. $1,040,000

C. $1,045,000

D. $1,050,000

4. What is net income under variable costing if 45,000 units are sold?

A. $190,000

B. $205,000

C. $220,000

D. $235,000

5. What is gross margin if 75,000 units are sold?

A. $1,123,000

B. $1,125,000

C. $1,230,000

D. $1,345,000

6. What is net income under absorption costing if 75,000 units are sold?

A. $775,000

B. $785,000

C. $790,000

D. $800,000

7. What is contribution margin if 75,000 units are sold?

A. $1,725,000

B. $1,850,000

C. $1,930,000

D. $1,963,000

8. What is net income under variable costing if 75,000 units are sold?

A. $873,000

B. $905,000

C. $925,000

D. $935,000

Preparation and analysis of budgeted income statements Questions 9 14.

Lilliput, a one-product mail-order firm, buys its product for $60 per unit and sells it for $130 per unit. The sales staff receives a 10% commission on the sale of each unit. Its December income statement follows:

LILLIPUT COMPANY

Income Statement

For Month Ended December 31, 2011

Sales $1,300,000

Cost of goods sold 600,000

Gross profit 700,000

Expenses

Sales commissions (10%) 130,000

Advertising 200,000

Store Rent 24,000

Administrative salaries 40,000

Depreciation 50,000

Other expenses 12,000

Total expenses 456,000

Net income $244,000

Management expects Decembers results to be repeated in January, February, and March of 2012 without any changes in strategy. Management, however, has an alternative plan. It believes that unit sales will increase at a rate of 20% each month for the next three months (beginning with January) if the items selling price is reduced to $115 per unit and advertising expenses are increased by 25% and remain at that level for all three months. The cost of its product will remain at $60 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same.

Required

Prepare budgeted income statements for each of the months of January, February, and March that show the expected results from implementing the proposed changes. Use a three-column format, with one column for each month.

LILLIPUT COMPANY

Budgeted Income Statement

For Months of January, February, and March

January February March

Sales*

Cost of goods sold*

Gross profit

Expenses

Sales commissions (10%)

Advertising ($200,000 x 1.25)

Store rent

Administrative salaries

Depreciation

Other expenses

Total expenses

Net income

*Volume for the next three months increases by 20% per month.

Sales Cost of Goods

Units (@ $115) Sold (@ $60)

December ($1,300,000/$130)

January

February

March

9. What is the expected gross profit in January?

A. $660,000

B. $670,000

C. $715,000

D. $725,000

10. What is the expected net income in January?

A. $126,000

B. $132,000

C. $146,000

D. $155,000

11. What is the expected gross profit in February?

A. $665,000

B. $684,000

C. $792,000

D. $815,000

12. What is the expected net income in February?

A. $242,300

B. $250,400

C. $265,800

D. $271,300

13. What is the expected gross profit in March?

A. $927,900

B. $933,500

C. $942,600

D. $950,400

14. What is the expected net income in March?

A. $375,680

B. $382,460

C. $387,670

D. $397,350

Computing Net Present Value, Internal Rate of Return, and Payback Period Questions 15 20.

FasTrac is considering investing in a Project A and Project B which will require an initial investment of $16,000. Assume FasTrac requires a 11% annual return. The expected annual cash inflows are as follows:

Project A Project B

1 $3,000 1 $4,000

2 $4,000 2 $4,000

3 $4,000 3 $4,000

4 $4,000 4 $4,000

5 $5,000 5 $4,000

6 $3,000 6 $4,000

7 $2,000 7 $4,000

8 $2,000 8 $4,000

15. What is the NPV for Project A?

A. $1,735.85

B. $1,911.23

C. $2,235.67

D. $2,366.95

16. What is the IRR for Project A?

A. 12.25%

B. 14.47%

C. 16.25%

D. 18.30%

17. What is the payback period for Project A?

A. 3.5 years

B. 3.75 years

C. 4.0 years

D. 4.2 years

18. What is the NPV for Project B?

A. $4,154.35

B. $4,425.93

C. $4,584.49

D. $4,750.35

19. What is the IRR for Project B?

A. 18.62%

B. 16.58%

C. 14.35%

D. 12.10%

20. What is the payback period for Project B?

A. 3.5 years

B. 4.0 years

C. 4.25 years

D. 4.60 years

21. Bonus Question!! You have taken out a $25,000 loan to purchase a car. Your interest rate is 6% and your loan term is 4 years. How much is your monthly car payment?

1. $524.56
2. $587.13
3. $595.39
4. $602.85