Management And Accounting Web

Bob's Boats Case Answers

Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

MAAW's Chapter 8 | Contribution Margin Questions

Introduction

To facilitate easy comparisons, net income for each inventory valuation method is stated in relation to direct costing net income in the illustrations below. Using this approach allows us to start with direct costing net income and then adjust for the inventory change effect to arrive at the net income amounts for absorption costing and throughput costing. As noted below, the income change effects provide rewards and penalties that reveal a key element in the controversy over income measurements.

Year 1 Equations
Xp = 12,000, Xs = 6,500
Questions

Type of Costing

Direct costing equation

Inventory Change Effect

Net Income

24. & 25. Direct Costing NI =

-TFC + (P-V)(Xs)

-960,000 + (320-160)(6,500)

= $80,000

No effect $80,000
26. & 27.

Absorption Costing NI =

-TFC + (P-V)(Xs)

-960,000 + (320-160)(6,500)

= $80,000

+ (F)(Xp-Xs)

+ (60)(5,500)

+ $330,000 Reward

$410,000
28. & 29.

Throughput Costing NI =

-TFC + (P-V)Xs)

-960,000 + (320-160)(6,500)

= $80,000

- (Vm-DM)(Xp-Xs)

-(150-100)(5,500)

- $275,000 Penalty

$-195,000


Year 2 Equations
Xp = 0, Xs = 5,500
Question

Type of Costing

Direct costing equation

Inventory Change Effect

Net Income

31. Direct NI = -TFC + (P-V)(Xs)

-960,000 + (320-160)(5,500) =

-$80,000

No effect -$80,000
33.

Absorption NI =

-TFC + (P-V)(Xs)

-960,000 + (320-160)(5,500) =(320-160)(5,500) =

-$80,000

+ (F)(Xp-Xs)

(60)(-5,500) =

-$330,000 Penalty

-$410,000

35.

Throughput NI =

-TFC + (P-V)Xs)

-960,000 + (320-160)(5,500) =

-$80,000

- (Vm-DM)(Xp-Xs)

-(150-100)(5,500) =

+$275,000 Reward

$195,000



Direct Costing Statements
Year 1 Year 2
Sales (6,500)(320)   $2,080,000   Sales (5,500)(320)   $1,760,000
COGS:         COGS:      
  BFG 0       BFG4 825,000  
  COGM1 1,800,000       COGM5 0  
  EFG2 825,000 975,000     EFG 0 825,000
MM     1,105,000   MM     935,000
Less VS3     65,000   Less VS6     55,000
CM     1,040,000   CM     880,000
Less Fixed     960,000   Less Fixed     960,000
NIBT     $80,000   NIBT     -$80,000


1 COGM year 1 = (12,000 Xp)($150) = 1,800,000
2 EFG year 1 = (5,500)($150) = 825,000
3 S&A year 1 = (6,500 Xs)($10) 65,000
4 BFG year 2 = EFG year 1.
5 COGM year 2 = (0  Xp)($150) = 0
6 S&A year 2 = (5,500Xs)($10) = 55,000



Absorption Costing Statements
Year 1 Year 2
Sales (6,500)(320) $2,080,000 Sales (5,500)(320) $1,760,000
COGS:   COGS:
  BFG 0       BFG5 1,155,000  
  COGM1 2,520,000       COGM6 0  
  EFG2 1,155000 1,365,000     EFG 0 1,155,000
GP     715,000   GP     605,000
LessS&A3     305,000   Less S&A7     295,000
Less PVV4     0   Less PVV8     720,000
NIBT     $410,000   NIBT     -$410,000


1 COGM year 1 = (12,000 Xp)($210) = 2,520,000
2 EFG year 1 = (5,500)($210) = 1,155,000
3 S&A year 1 = (6,500 Xs)($10) + 240,000 = 305,000
4 Production volume variance year 1 = (12,000 - 12,000)($60) = 0
5 BFG year 2 = EFG year 1.
6 COGM year 2 = 0, but since there is no production, all the fixed manufacturing cost is charged to expense. See note 8 below.
7 S&A year 2 = (5,500Xs)($10) + 240,000 = 295,000
8 Production volume variance year 2 = (12,000-0)($60) = 720,000 unfavorable, i.e., under-applied.


Throughput Costing Statements
Year 1   Year 2
Sales (6,500)(320)   $2,080,000   Sales (5,500)(320)   $1,760,000
COGS:         COGS:      
  BFG 0       BFG4 550,000  
  COGM1 1,200,000       COGM5 0  
  EFG2 550,000 650,000     EFG 0 550,000
Throughput     1,430,000   Throughput     1,210,000
Less exp3     1,625,000   Less exp6     1,015,000
NIBT     -$195,000   NIBT     $195,000


1 COGM year 1 = (12,000 Xp)($100) = 1,200,000
2 EFG year 1 = (5,500)($100) = 550,000
3 Operating expenses = ($50)(12,000) for variable conversion + ($10)(6,500) variable selling + 960,000 fixed
    = 600,000 + 65,000 +960,000 = 1,625,000.
4 BFG year 2 = EFG year 1.
5 COGM year 2 = (0 Xp)($100) = 0.
6 Operating expenses = ($50)(0) + ($10)(5,500) + 960,000 = 0 + 55,000 + 960,000 = 1,015,000.

Questions 32, 34 and 36.
The equations needed for break-even calculations are as follows:

32. Direct NI = -TFC + (P-V)(Xs)
                0  = -960,000 + 160(Xs)

34. Absorption NI = -TFC + (P-V)(Xs) + F(Xp-Xs)
                        0  = -960,000 + 160(Xs) + 60(Xp-Xs)

36. Throughput NI = -TFC + (P-V)(Xs) - (Vm-DM)(Xp-Xs)
                         0  = -960,000 + 160(Xs) - (150-100)(Xp-Xs)