Variable administrative expense per unit = 0.04 × $50 per book = $2 per book
Y = ($10,000 + $68,000) + ($5 + $2) X
Y = $78,000 + $7X
Difficulty: 3 Hard
Topic: Cost Classifications for Predicting Cost Behavior; Using Different Cost Classifications for Different Purposes
Learning Objective: 01-04 Understand cost classifications used to predict cost behavior: variable costs, fixed costs, and mixed costs.; 01-06 Prepare income statements for a merchandising company using the traditional and contribution formats.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
256) An income statement for Sam's Bookstore for the first quarter of the year is presented below:
Sam's Bookstore
Income Statement
For Quarter Ended March 31
Sales
$
900,000
Cost of goods sold
630,000
Gross margin
270,000
Selling and administrative expenses
Selling
$
100,000
Administration
104,000
204,000
Net operating income
$
66,000
On average, a book sells for $50. Variable selling expenses are $5 per book with the remaining selling expenses being fixed. The variable administrative expenses are 4% of sales with the remainder being fixed.
If 20,000 books are sold during the second quarter and this activity is within the relevant range, the company's expected contribution margin would be:
A) $300,000
B) $160,000
C) $860,000
D) $58,000
Answer: B
Explanation: Unit sales = $900,000 ÷ $50 per book = 18,000 books
Unit cost of goods sold = $630,000 ÷ 18,000 books = $35 per book
Sales ($50 per book × 20,000 books)
$
1,000,000
Variable expenses:
Cost of goods sold ($35 per book × 20,000 books)
$
700,000
Variable selling ($5 per book × 20,000 books)
100,000
Variable administrative (4% of $1,000,000)
40,000
840,000
Contribution margin
$
160,000
Difficulty: 3 Hard
Topic: Cost Classifications for Predicting Cost Behavior; Using Different Cost Classifications for Different Purposes
Learning Objective: 01-04 Understand cost classifications used to predict cost behavior: variable costs, fixed costs, and mixed costs.; 01-06 Prepare income statements for a merchandising company using the traditional and contribution formats.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
257) Dominik Corporation purchased a machine 5 years ago for $527,000 when it launched product M08Y. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 310 machine costing $545,000 or by a new model 240 machine costing $450,000. Management has decided to buy the model 240 machine. It has less capacity than the model 310 machine, but its capacity is sufficient to continue making product M08Y. Management also considered, but rejected, the alternative of dropping product M08Y and not replacing the old machine. If that were done, the $450,000 invested in the new machine could instead have been invested in a project that would have returned a total of $532,000.
In making the decision to buy the model 240 machine rather than the model 310 machine, the differential cost was:
A) $95,000
B) $5,000
C) $77,000
D) $18,000
Answer: A
Explanation: Differential cost = $545,000 − $450,000 = $95,000
Difficulty: 1 Easy
Topic: Cost Classifications for Decision Making
Learning Objective: 01-05 Understand cost classifications used in making decisions: differential costs, sunk costs, and opportunity costs.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Decision Making
258) Dominik Corporation purchased a machine 5 years ago for $527,000 when it launched product M08Y. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 310 machine costing $545,000 or by a new model 240 machine costing $450,000. Management has decided to buy the model 240 machine. It has less capacity than the model 310 machine, but its capacity is sufficient to continue making product M08Y. Management also considered, but rejected, the alternative of dropping product M08Y and not replacing the old machine. If that were done, the $450,000 invested in the new machine could instead have been invested in a project that would have returned a total of $532,000.