Variable Costing and Segment Reporting: Tools for Management cable to a segment only if the cost is caused by the segment and could be avoided by chiming 255 the segment. Fixed common costs are not allocated to segments. The segment margin consum of revenues, less variable expenses, less traceable fixed expenses ses of the segment The dollar sales required for a segment to break even is computed by dividing the segments traceable fixed expenses by its contribution margin ratio. A company's common fixed expense could not be allocated to segments when performing break even calculations because they will not change in response to segment-level decisions. Review Problem 1: Contrasting Variable and Absorption Costing Dexter Corporation produces and sells a single product, a wooden hand loom for weaving small given below: kems such as scarves. Selected cost and operating data relating to the product for two years are Selling price per unit Manufacturing costs: $50 Variable per unit produced: Direct materials . Direct labor . . .. . $11 Variable manufacturing overhead ... $6 $3 Fixed manufacturing overhead per year . ..... $120,000 Selling and administrative expenses: Variable per unit sold $4 Fixed per year $70,000 Year 1 Year 2 Units in beginning inventory ..... . . . 2,000 Units produced during the year . . . 10,000 6,000 Units sold during the year . .... 8,000 8,000 Units in ending inventory . ............ 2,000 Required: 1. Assume the company uses absorption costing. a. Compute the unit product cost in each year. b. Prepare an income statement for each year. 2. Assume the company uses variable costing. a Compute the unit product cost in each year. b. Prepare an income statement for each year. 3. Reconcile the variable costing and absorption costing net operating incomes. Solution to Review Problem 1 1. a. Under absorption costing, all manufacturing costs, variable and fixed, are included in unit product costs: Year 1 Year 2 $11 $17 Direct materials . . ... 6 . . . Direct labor .......... CO Variable manufacturing overhead ..... . ... . Fixed manufacturing overhead 12 ($120,000 + 10,000 units) . . .. ... 20 ($120,000 + 6,000 units) ... .. . ........ $32 $40 . . . ... Absorption costing unit product costconnect ACCOUNTING All applicable problems are available with McGraw-Hill's Connect Accounting. PROBLEM 5-19 Break-Even Analysis; Pricing [L05-1, L05-4, L05-5] Minden Company introduced a new product last year for which it is trying to find an optimal sell- ing price. Marketing studies suggest that the company can increase sales by 5,000 units for each $2 reduction in the selling price. The company's present selling price is $70 per unit, and variable expenses are $40 per unit. Fixed expenses are $540,000 per year. The present annual sales volume (at the $70 selling price) is 15,000 units. Required: 1. What is the present yearly net operating income or loss? 2. What is the present break-even point in unit sales and in dollar sales? 3. Assuming that the marketing studies are correct, what is the maximum annual profit that the company can earn? At how many units and at what selling price per unit would the company generate this profit? 4. What would be the break-even point in unit sales and in dollar sales using the selling price you determined in (3) above (e.g., the selling price at the level of maximum profits)? Why is this break-even point different from the break-even point you computed in (2) above