Please show all work. 1. One spring, Jake and Chad Driller decided to earn money

Question

Please show all work.

1. One spring, Jake and Chad Driller decided to earn money providing professional athletic coaching and training services. As the business, Drillmaker's Inc., has grown, they have expanded into product sales and recreation related construction projects. They are currently contracting with several recreation facilities across the state to design and build volleyball courts. They are six months into the planning and production of the courts and the information for the current month, August, is as follows:

Required: (round all dollars to whole dollars, refer to August information to compute a - g)
Compute the following items:
f. If the per unit variable production costs increase by 20%, and if fixed selling expenses increase by 15%, what will be the New Net Operating Income? New break-even point in dollar sales? New break-even point in units?

g. Calculate the degree of operating leverage (round two decimal places). What would net income be if sales increase by 25%?

2. Given the following and assuming that costs of goods sold and the selling expense are a mixed cost.

July Income Statement

Required: (refer to August information to answer b - f)

a. Using the high low method, separate each mixed expense into its variable and fixed components. State the cost formula for each mixed expense.

b. What is the unit product cost for the month under variable costing?
c. What is the unit product cost for the month under absorption costing?
d. Prepare a contribution format income statement for the month using variable costing.
e. Prepare an income statement for the month using absorption costing.

f. Reconcile the variable costing and absorption costing net operating incomes for the month.  

Sales (7 courts) $431,000 Variable expenses: Cost of goods sold: $221,100 Selling expenses 21,000 242,100 Contribution margin 188,900 Fixed expenses: Selling expenses 31,000 Depreciation 14,000 Executive salaries 36,000 81,000 Net operating income 107,900

Explanation / Answer

1f) New Net Operating Income:

1g) The degree of Operating Leverage = $144680 / $59030 = 2.45

In Selling price rise by 25% , the net income would be $59030 + $107750 (25% of above sales) = $166780

2a) Using the high low method, separate each mixed expense into its variable and fixed components. State the cost formula for each mixed expense:

7 courts Selling expenses = $52000

4 courts Selling expenses = $43000

3 courts Selling expenses = $9000

Pre court variable selling expense = $3000

Formula = Selling Expense = (43000 - 4 * 3000) + $3000 * Cases = $31000 + $3000 * courts

b. What is the unit product cost for the month under variable costing?

Answer: Unit product cost under variable costing = $131100 / 4 + $3000 = $32775 + $3000 = $35775 per court

c. What is the unit product cost for the month under absorption costing?

Answer: Unit product cost under absorption costing = ($131100 + 93000)/4 = $224100 /4 = $56025 per  court

d. A contribution format income statement for the month using variable costing:

e. An income statement for the month using absorption costing:

f. Reconcile the variable costing and absorption costing net operating incomes for the month.

Answer: There is not change in the Net Operating Income under Variable costing and Absorption costing as units produced is sold away. If there exists a difference between the units produced and sold, there do exists a difference in Net operating income because of valuation of closing stock - in variable costing the same is valued at variable costs only and in absorption costing the closing stock is valued at total cost of production whether fixed or variable.

Sales $431,000 Less: Variable Costs: Cost of Goods Sold 221100 * 1.20 $265,320 Selling expenses $21000 Total variable costs $286320 Contribution $144680 Less: Fixed costs: Selling expenses 31000 * 1.15 $35650 Depreciation $14000 Executive Salaries $36000 Net Operating Income $59030

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