(Solution Manual) Managerial Accounting

Davis, Davis, 3

Business

Solution Manual

3rd Edition

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Solution Manual for Managerial Accounting, The downloadable file consists of 639 pages, and the total size of the file is 6.25 MB. Purchase now only for highly discounted price.

Author(s): Davis, Davis

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Chapter 1 – Accounting as a Tool for Management 1-1 Accounting as a Tool for Management Learning Objectives 1. Define managerial accounting. (Unit 1.1) 2. Describe the differences between managerial and financial accounting. (Unit 1.1) 3. List and describe the four functions of managers. (Unit 1.1) 4. Explain how the selection of a particular business strategy determines the information that managers need to run an organization effectively. (Unit 1.2) 5. Discuss the importance of ethical behavior in managerial accounting. (Unit 1.3) Summary of End of Ch apter Material Difficulty: E = Easy, M = Moderate, D = Difficult Bloom: K = Knowledge, C = Comprehension, AP = Application, AN = Analysis, S = Synthesis, E = Evaluation AACSB : A = Analytic, C = Communication, E = Ethics AICPA FN: DM = Decision modeling, RA = Risk Analysis, M = Measurement, R = Reporting, RS = Research, T = Technology AICPA PC: C = Communication, I = Interaction, L = Leadership, P = Professional demeanor, PM = Project Management, PS = Problem Solving and Decision Making, T = Technology IMA: BA = Business applications, BP = Budget Preparation, CM = Cost Management, DA = Decision Analysis, PM = Performance Measurement, R = Reporting, SP = Strategic Planning Item L. O. Difficulty Level Minutes to Complete Bloom’s Taxonomy AACSB AICPA FN AICPA PC IMA Ethics Coverage GUIDED UNIT PREPARATION Unit 1.1 1 1 E 2 K C R C R 2 2 E 2 K C R C R 3 2 E 2 K C R C R 4 2 M 5-10 C C R C R 5 3 E 5-7 K C R C DA Unit 1.2 1 4 M 4 C A R C PM, SP 2 4 D 5-7 C A R C SP Unit 1.3 1 5 M 4 C E R C BA  2 5 M 4 C, E A, E R C BA  EXERCISES 1-1 1 M 12 AP A DM PS DA 1-2 2 D 10-15 AP C R C R 1-3 3 D 10-12 C A R C DA 1-4 4 M 12 AP A M PS SP 1-5 4 D 15-20 S, AN A DM PS DA,SP 1-6 4 M 10-15 C C R C PM 1-7 5 D 20 AP, AN A, E R C BA  PROBLEMS 1-8 1, 3, 4 M 15-20 AP, AN A DM PS DA, SP Solutions for Davi s & Davis, Managerial Accounting , 3rd ed. 1-2 Item L. O. Difficulty Level Minutes to Complete Bloom’s Taxonomy AACSB AICPA FN AICPA PC IMA Ethics Coverage 1-9 5 M 15-20 C, AN E R C BA  CASES 1-10 3 M 15-20 S, AN A DM PS DA, SP 1-11 5 D 15-20 AN, E A, E R C BA  Chapter 1 – Accounting as a Tool for Management 1-3 SOLUTIONS TO GUIDED UNIT PREPARATION Unit 1.1 1. Managerial accounting is the generation of relevant information to support managers’ decision making activities. 2. The primary users of financial accounting are decision makers who are external to the organization. These decision makers might include investors, creditors, banks, and financial analysts. 3. The primary users of managerial accounting are managers within the organization. These managers may be in any department, such as marketing, operations, finance, human resources, and research and development. 4. Managerial Accounting Information Financial Accounting Information • Prepared for internal managers • Prepared for external users • Not subject to mandated rules • Must follow GAAP • Focuses on segments of the organization , such as product lines, regions, and divisions • Focuses on the organization as a whole • Uses results of past performance to project future results • Reports results of past performance • Prepared as needed to meet decision requirements • Prepared a fter the end of the accounting period • Timeliness is not sacrificed for absolute accuracy • Emphasis is on accuracy rather t han timeliness 5. Planning means setting a direction for the organization. Long -term, or strategic planning , provides direction for a five - to ten -year period. Short -term, or operational planning , provides more detailed guidance for the coming year; it translates the company’s strategy into action steps. Controlling is the monitoring of day -to-day operations t o identify any problems that require corrective action. Evaluating is the process of comparing a particular period’s actual results to planned results, for the purpose of assessing managerial Solutions for Davi s & Davis, Managerial Accounting , 3rd ed. 1-4 performance. Decision making means choosing between alternativ e courses of action. Unit 1. 2 1. Information is used by managers to monitor progress toward the corporate strategy. The information provides feedback about how well the strategy is being implemented. The balanced scorecard is one tool that assists managers in using information to assist in achieving corporate strategy. 2. Decision making activities should be made to move the organization toward a particular strategy , and t he accounting information used by decision makers will change dependi ng on the organization’s strategy. For example, an organization following a product differentiation strategy will want information on quality , while for a low-cost production strategy, production processes will be monitored to focus on lowering costs. Using information that does not assist in monitoring strategy achievement is wasted effort, since it does not move the organization toward its desired goals. Unit 1. 3 1. A code of conduct provides employees guidance in how to act. It provides a means for managers to communicate the importance of ethical behavior to all employees and assists in establishing a corporate culture of ethical behavior. The Sarbanes -Oxley Act requires all publicly -traded companies to have a code of conduct or to publis h a disclosure explaining why no code has been adopted . 2. An employee’s unethical behavior can have a number of effects on an organization. As employees witness such behavior without managerial intervention, the unethical behavior may appear acceptable and spread to other employees. Such an infection of unethical behavior will increase its occurrence. As recent events such as Enron illustrate, an employee’s unethical behavior can destroy an entire organization. Chapter 1 – Accounting as a Tool for Management 1-5 SOLUTIONS TO EXERCISES Exercise 1 -1 Student responses will vary depending on the position they choose. The following is one example of a solution a student might give. Position: Sales manager for a consumer products company Decision Information Needed What price to charge for a new product Cost to produce one unit of product, demand for the product, production capacity, availability of required materials Number of units that must be sold to break even Current price per unit, fixed costs, variable costs Whether to run a new advertising campaign Current sales volume, expected increase in sales volume, sales price, unit cost, expected cost of advertising campaign Exercise 1 -2 a. managerial – focus is on reducing cost in an operating segment b. financial – focus is on reporting quarterly financial data of the organization as a whole c. financial – focus is on GAAP -based principles d. managerial – focus is on monitoring performance of an operating segment with a balanced scorecard Solutions for Davi s & Davis, Managerial Accounting , 3rd ed. 1-6 Exercise 1 -3 a. planning b. evaluating c. controlling d. decision making e. evaluating f. planning g. evaluating Exercise 1 -4 a. The focus should be on information about this particular store, such as its sales and operating income . Customer satisfaction and employee turnover at this store are other measures to consider. b. The focus should be on information about the region , such as financial data for all the stores in the region. The same information examined for individual sto res can be examined for the entire region. Elements of the region’s supply chain may also be considered. c. The focus should be on information about the entire company . The same information examined for individual stores and regions can b e examined for the entire company . The executive vice president of operations should be monitored in relation to the performance of all the divisions as a whole. Chapter 1 – Accounting as a Tool for Management 1-7 Exercise 1 -5 Student response will vary. The supply chain should run from raw materials to end user. The following supply chain for a newspaper is one example. Supply Chain Partner Decisions affecting other partners Tree farm Variety of trees to plant, number of acres to plant Timber harvester Timing of timber harvest, choice of delivery method Paper mill Paper grades to produce, quantity of paper to produce Publisher/Printer Price charged per newspaper, choice of acceptable retail outlets Independent carrier Pick-up and delivery time End customer Desired days of delivery Tree farm Timber Harvester Paper Mill Publisher/ Printer Independent Carrier End Customer Solutions for Davi s & Davis, Managerial Accounting , 3rd ed. 1-8 Exercise 1 -6 a. learning and growth b. customer c. financial d. internal business processes e. internal business processes f. customer g. learning and growth h. customer i. financial j. financial Exercise 1 -7 a. competence, credibility , integrity b. confidentiality c. competence , integrity, credibility d. integrity, credibility SOLUTIONS TO PROBLEMS Problem 1 -8 a. Managerial accounting information can be useful when growing a business. The information obtained can be used in the areas of planning, controlling, evaluating, and ultimately for decision making. John can use managerial information to predict out -of-state demand, additional costs to meet this new demand, and the income generated by the new demand. After sales are made, John will be able to assess whether making out -of-state sales is a s profitable as he expected. b. One important decision that John wo uld need to make is how much to grow his business. In what areas and by how much should he increase capacity of operations? John would need to decide what type of strategy, product differentiation versus low -cost production, to Chapter 1 – Accounting as a Tool for Management 1-9 pursue when growing his bu siness. He will also need to decide h ow performance will be evaluated . c. Budgeting is a useful tool when growing a business and is an important part of the planning function of managerial accountants. Budget information will provide useful information about how resources are to be allocated. Problem 1 -9 Student response s will vary. Students should compare their examples to components contained in Exhibit 1.7. SOLUTIONS TO CASES Case 1 -10 a. Students’ supply chain diagrams may differ. For instance, they may go all the way back to tree farms and then pulp and paper manufacturers. The intent of the case is to have them think about the activities that must occur in the supply chain. b. Some of the cost s Martin would incur include: advertising equipment (computer and printer ) and graphics software utilities phone office supplies c. Planning: strategic and operational planning, budget preparation , job quotes for customers Controlling: prioritizing customer orders, monitoring delivery dates Solutions for Davi s & Davis, Managerial Accounting , 3rd ed. 1-10 Evaluating: surveying customers about satisfaction, comparing actual results to budget, using a balanced scorecard d. In the first few months, increasing demand for services and repeat sales will be the best indicators that Mart in’s business is becoming successful. Case 1 -11 Determining if the clinic’s business practices are unethical depends on the quality of the lab ’s work. If the lab is doing substandard work, the clinic is pursuing profit at the expense of the patient’s w ell-being. This is a clear violation of the AMA’s code of ethics. If the lab is providing high -quality tests at a low price, the clinic may be violating the code of ethics, as the patient should benefit from the lower price, not the clinic. The clinic should not charge a markup on the lab’s services. Chapter 2 - Cost Behavior and Cost Estimation 2-1 Cost Behavior and Cost Estimation Learning Objectives 1. Identify basic cost behavior patterns and explain how changes in activity level affect total cost and unit cost. (Unit 2.1) 2. Estimate a cost equation fr om a set of cost data and predict future total cost from that equation. (Unit 2.2) 3. Prepare a contribution format income statement. (Unit 2.3) Summary of End of Chapter Material Difficulty: E = Easy, M = Moderate, D = Difficult Bloom: K = Knowledge, C = Comprehension, AP = Application, AN = Analysis, S = Synthesis, E = Evaluation AACSB : A = Analytic, C = Communication, E = Ethics AICPA FN: DM = Decision modeling, RA = Risk Analysis, M = Measurement, R = Reporting, RS = Research, T = Techn ology AICPA PC: C = Communication, I = Interaction, L = Leadership, P = Professional demeanor, PM = Project Management, PS = Problem Solving and Decision Making , T = Technology IMA: BA = Business applications, BP = Budget Preparation, CM = Cost Management, DA = Decision Analysis, PM = Performance Measurement, R = Reporting, SP = Strategic Planning Item L. O. Difficulty Level Minutes to Complete Bloom’s Taxonomy AACSB AICPA FN AICPA PC IMA Ethics Coverage GUIDED UNIT PREPARATION Unit 2.1 1 1 M 2 C A R C CM 2 1 M 4 C, K A R C CM 3 1 M 3 C, K A R C CM 4 1 E 2 C A R C CM 5 1 M 4 C, K A R C CM 6 1 M 4 C, K A R C CM Unit 2.2 1 2 E 1 K A M PS CM 2 2 M 2 C A M PS CM 3 2 M 4 K A M PS CM 4 2 E 2 C A M PS CM 5 2 M 4 C A M PS CM Unit 2.3 1 3 E 1 K A M PS CM 2 3 E 2 K A M PS CM 3 3 D 3 C A M PS CM 4 3 D 3 C A M PS CM EXERCISES 2-1 1 M 12 C A R C CM 2-2 1 M 15 C A R C CM 2-3* 1 M 12 AP A M PS CM 2-4* 1 M 15 AP, C A M PS CM 2-5 1 M 15-20 AP, AN A M PS CM 2-6 1 D 5-7 AN A M PS CM Solutions for Davis & Davis, Managerial Accounting , 3rd ed. 2-2 Item L. O. Difficulty Level Minutes to Complete Bloom’s Taxonomy AACSB AICPA FN AICPA PC IMA Ethics Coverage 2-7* 1 D 8 AP, AN A M PS CM 2-8* 2 M 15-20 AP, AN A M PS CM 2-9* 2 M 20 AP, AN A M PS CM 2-10+ 2 M 12 AP, AN A M PS CM 2-11* 2 D 20 AP A M PS CM 2-12 2 D 10-15 AP A M PS CM 2-13+ 3 M 10-15 AP A M PS CM 2-14* 3 E 10-15 AN A M PS CM 2-15* 3 D 10-15 AP A M PS CM 2-16+ 3 M 15 AP A M PS CM 2-17* 3 E 15 AP A M PS CM 2-18* 3 E 10 AP A M PS CM PROBLEMS 2-19* 1 E 20-25 AP, AN A M PS CM 2-20* 2 M 20-25 AP, AN A M PS CM 2-21* 2 D 15-20 AP, AN A M PS CM 2-22* 2 M 20-25 AP, AN A M PS CM 2-23* 2 D 30-35 AP, AN A M PS CM 2-24* 1, 3 D 20-25 AP A M PS CM 2-25* 2, 3 D 20 AP A M PS CM 2-26* 3 D 20-25 AP A M PS CM, DA C&C CONTINUING CASE 2-27 1 E 5-7 C A M PS CM 2-28* 2, 3 M 10 AP, AN A M PS CM CASES 2-29 1 D 20-25 AP A M PS CM 2-30 M 10-15 AN A, E R C BA  DATA ANALYTICS CASE 2-31n 2 M 30-40 AP, AN, E A DM PM, PS DA * Revised problem in 3rd edition + Lightboard video solution available n New problem Chapter 2 - Cost Behavior and Cost Estimation 2-3 SOLUTIONS TO GUIDED UNIT PREPARATION Unit 2.1 1. Managers must be able to predict the financial results of their various decisions. The only way to predict results is to know how costs will change or “behave” with changes in activity . 2. A variable cost is a cost that varies in total in proportion to a business activity. Within the relevant range, variable cost per unit is constant. As the level of activity increases, the total cost increases by the same proportion. Examples include com missions, cost of bicycle tires for a bicycle manufacturer, and cost of postage for a direct mail advertiser . 3. A fixed cost is a cost that does not change in total with the activity level. Within the relevant range, the total fixed cost remains constan t as the activity level changes. However, the cost per unit varies inversely with changes in activity level . Examples include monthly rent, a manager’s salary, and property taxes. 4. Discretionary fixed costs are fixed costs that can be changed over the short run. Committed fixed costs cannot be changed over the short run. 5. A mixed cost is a cost that has both fixed and variable components. As the level of activity increases, the total cost increases and the cost per unit decreases. Examples include electricity cost, party hall rental when the charge includes a flat fee plus a cost per guest, and t -shirt printing when the charge includes a set -up fee plus a charge for each t-shirt printed. 6. A step cost is a cost that is fixed over a small range of activity. Total cost will not change as activity levels increase if the level of activity is within a certain range. However, once the activity level exceeds this range, total cost w ill increase. Examples include maintenance costs when a new maintenance worker is needed per 10 machines, nurse salaries per 5 patients on a hospital floor, and hotel room rates per 4 students on a class trip. Solutions for Davis & Davis, Managerial Accounting , 3rd ed. 2-4 Unit 2.2 1. TC = (VC  x) + FC 2. With a scattergraph, a line is drawn to best fit the data points. The point at which the line intersects the y-axis is the value for fixed costs. The slope of the line, change in total cost divided by change in activity, is the variable cost per unit. 3. The high -low method uses the highest and lowest point s within a data range to construct a total cost line . The variable cost per unit is calculated by dividing the change in total cost by the change in activity. The fixed cost is calculated by plugging the variable cost in the formula TC = (VC  x) + FC and using either the high point or low point of activity. 4. Regression analysis is preferable as it produces a line with the least amount of error and is relatively easy to use in Excel or other spread sheet software. 5. The relevant range is the normal level of operating activity. The relevant range applies to the whole company and is valid for all cost relationships. The steps in a step cost are ranges that are only valid for that particular cost. The steps in the range are smaller than the relevant range. Unit 2.3 1. Contribution margin is the difference between sales and variable cost. 2. Contribution margin ratio is the contribution margin divided by sales. The variable cos t ratio is 1 minus the contribution margin ratio. The larger the variable cost ratio, the smaller the contribution margin will be, since the two ratios must add to 100%. 3. If the variable cost per unit increases and the selling price decreases, the cont ribution margin per unit will decrease. The change in fixed cost has no bearing on the contribution margin. Chapter 2 - Cost Behavior and Cost Estimation 2-5 4. A product’s c ontribution margin can be increased by increasing the selling price per unit or decreasing variable costs per unit . Total contrib ution margin can be increased by selling more units. SOLUTIONS TO EXERCISES Exercise 2-1 a. variable e. step b. fixed f. fixed c. variable g. mixed d. fixed Exercise 2-2 a. variable f. fixed b. fixed g. mixed c. step h. variable d. mixed i. variable e. variable j. fixed Exercise 2-3 a. TC(300) = (300 × $10 per return) + $500 fee = $3,500 TC(400) = (400 × $10 per return) + $500 fee = $4,500 TC(500) = (500 × $10 per return) + $500 fee = $5,500 b. Cost per unit (300) = $3,500  300 = $11.67 Cost per unit (400) = $4,500  400 = $11.25 Cost per unit (500) = $5,500  500 = $11.00 c. As the number of returns increased from 300 to 500, the fixed cost of $500 decreased on a per unit basis. Solutions for Davis & Davis, Managerial Accounting , 3rd ed. 2-6 Exercise 2-4 Answer Reasoning Balloons variable The total cost increases as activity increases and the cost per unit remains constant at $ 3 per bouquet. Insurance fixed The total cost remains constant across all activity levels. Delivery mixed The total cost increases as activity increases and the cost per unit decreases as activity increases. Employee compensation mixed The total cost increases as activity increases and the cost per unit decreases as activity increases. Advertising fixed The total cost remains constant across all activity levels. Per unit costs: 3,000 5,000 7,000 Balloons $9,000 3,000 bouquets = $3 $15,000 5,000 bouquets = $3 $21,000 7,000 bouquets = $3 Delivery $5,300 3,000 bouquets = $1. 77 $8,300 5,000 bouquets = $1. 66 $11,300 7,000 bouquets = $1.61 Employee compensation $11,000 3,000 bouquets = $3.67 $15,000 5,000 bouquets = $3.00 $19,000 7,000 bouquets = $2.71 Chapter 2 - Cost Behavior and Cost Estimation 2-7 Exercise 2-5 Home Visit Hours F, V, M 10,000 12,500 15,000 17,500 Medical records automation and storage mixed $3,000 $3,625 $4,250 $4,875 Medical testing supplies variable $7,500 $9,375 $11,250 $13,125 Insurance filing services variable $4,000 $5,000 $6,000 $7,000 Communications system lease fixed $2,000 $2,000 $2,000 $2,000 Variable cost per unit: Medical records automation and storage : $4,875 $3,000 17,500 10,000− − = $0.25 per home visit hour Medical testing supplies: $13,125 $7,500 17,500 10,000− − = $0.75 per home visit hour Insurance filing services: $6,000 $4,000 15,000 10,000− − = $0.40 per home visit hour Fixed cost (using the low point) : Medical records automation and storage : $3,000 – (10,000 hours × $.25) = $500 Medical testing supplies: $7,500 – (10,000 hours × $.75) = $0 Insurance filing services: $4,000 – (10,000 hours × $.40) = $0 Solutions for Davis & Davis, Managerial Accounting , 3rd ed. 2-8 Exercise 2-5, continued Total cost : Medical records automation and storage : (12,500 hours × $.25) + $500 = $3,625 Medical testing supplies: (15,000 hours × $.75) + $0 = $11,25 0 Insurance filing services: (17,500 hours × $.40) + $0 = $7,000 Chapter 2 - Cost Behavior and Cost Estimation 2-9 Exercise 2-6 Undoubtedly, some of your costs are fixed and will not change with the number of units sold. For example, you probably pay rent to the mall to set up your kiosk. Total rent does not change with the number of video games sold. Using the unit cost you cal culated, your estimate will be too high if you sell more units next year and too low if you sell fewer games next year. Exercise 2-7 a. No effect – total fixed costs do not change with changes in quantit y. b. Decrease – the increase in accounting quant ity would lower the fixed costs per unit, which would lower the unit cost of the 737 Next Generation plane. Solutions for Davis & Davis, Managerial Accounting , 3rd ed. 2-10 Exercise 2-8 a. Note: Students may draw lines that differ from the one above. That will affect the equation they use in the remaining parts of the exercise. b. The line intersects the y -axis at $50, representing total fixed costs. The line passes through the point ( 520, $260), so the slope can be calculated as follows: − −$260 $50 520 0 = $0. 404 per machine hour The equation of the line is: y = ($0.404 × MH) + $50 c. Total cost = ($0.404 × 750 MH) + $50 = $ 353 d. The line is merely an estimation of what costs will be. Since the line does not intersect the actual cost at which machine hours is 750, then the cost estimate will not equal the actual cost. $0$50$100$150$200$250$300$350$400 0 100 200 300 400 500 600 700 800 900 Machine hoursChapter 2 - Cost Behavior and Cost Estimation 2-11 Exercise 2-9 a. Variable cost = − −$360 $120 840 240 = $0. 40 per machine hour b. Fixed cost using the low point = $120 – ($0.40 × 240) = $24 Fixed cost using the high point = $360 – ($0.40 × 840) = $24 c. Total cost = ($0.40 × MH) + $24 d. Total cost = ($0.40 × 750 MH) + $24 = $ 324 e. The equation of the line was determined using two points, neither of which was 750 machine hours. Since the line does not intersect the actual cost at which machine hours is 750, then the cost estimate will not equal the actual cost. Exercise 2-10 a. Variable cost = $10,000 $6,500 1 ,200 500− − = $5 per instrument b. Fixed cost using the low point = $6,500 – ($5 × 500) = $ 4,000 c. Total cost = ($5 × # of instruments) + $4,000 d. Total cost = ($5 × 1,150 instruments ) + $4,000 = $9,750 Solutions for Davis & Davis, Managerial Accounting , 3rd ed. 2-12 Exercise 2-11 Answer Calculations Balloons y = $ 3.00x + $0 VC = − −$21 ,000 $9,000 7,000 3,000 = $3.00 FC = $2 1,000 – $3(7,000) = $0 Insurance y = $ 7,500 Since the total cost is constant, no calculations are needed. Delivery y = $1 .50x + $ 800 VC = − −$11 ,300 $5,300 7,000 3,000 = $1.50 FC = $ 11,300 – $1.50(7,000) = $ 800 Employee y = $ 2.00x + $ 5,000 VC = − −$19,000 $11 ,000 7,000 3,000 = $2.00 Compensation FC = $ 19,000 – $2(7,000) = $ 5,000 Advertising y = $ 2,000 Since the total cost is constant, no calculations are needed. Chapter 2 - Cost Behavior and Cost Estimation 2-13 Exercise 2-12 a. Current system = (.03  sales) + $60,000 Salary and 5% = (.05  sales) + $50,000 12% commission = .12  sales b. Current system Salary and 5% commission 12% commission Sales revenuea $1,000,000 $1,120,000 $1,200,000 Cost of goods sold 300,000 336,000 360,000 Gross profit 700,000 784,000 840,000 Compensation expense 90,000b 106,000c 144,000d Operating i ncome $610,000 $678,000 $696,000 The 12% commission results in the most profitable result for the company. a.3  Sales revenue b$60,000 + ($1,000,000 × 0.03) c$50,000 + ($1,120,000 × 0.05) d$1,200,000 × 0.12 Exercise 2-13 Per Unit Sales revenue $50,000 $100 Variable expenses : Cost of goods sold $30,000 60 Commissions expense 3,000 6 Shipping expense 1,000 2 Total variable expenses 34,000 68 Contribution margin 16,000 $ 32 Fixed expenses : Salaries expense 8,000 Advertising expense 6,000 Total fixed expenses 14,000 Operating income $ 2,000 Solutions for Davis & Davis, Managerial Accounting , 3rd ed. 2-14 Exercise 2-14 a. b. c. d. Sales revenue $295,000 $425,000 $267,000 $700,000 Variable expenses 210,000 275,000 86,000 300,000 Contribution margin 85,000 150,000 181,000 400,000 Fixed expenses 58,000 70,000 120,000 200,000 Operating income 27,000 80,000 61,000 200,000 Income taxes 16,500 18,000 16,000 55,000 Net income $10,500 $62,000 $45,000 $145,000 Exercise 2-15 Per Unit Sales revenue $10,000 $10.00 Variable costs: Cost of goods sold $3,000 3.00 Operating expenses 500a .50 Total variable expenses 3,500 3.50 Contribution margin 6,500 $6.50 Fixed operating expenses 2,000b Operating Income $4,500 Units sold = $10,000 sales revenue ÷ $ 10.00 per unit = 1,000 units a1,000 units × $0.50 per unit b$2,500 total operating costs – $500 variable cost Chapter 2 - Cost Behavior and Cost Estimation 2-15 Exercise 2-16 a. Sales price $5.00 Less variable costs: Towel, water, protein shake 1.75 Contribution margin $3.25 b. $3.25 $5.00 = 65% c. Unit Sales revenue $25,000 $5.00 Variable expenses : Towel, water, shake 8,750 1.75 Contribution margin 16,250 $3.25 Fixed expenses : Instructor salaries expense $3,000 Management salary expense 4,000 Rent expense 1,500 Depreciation expense 1,250 Utilities & insurance expense 1,800 Total fixed expenses 11,550 Operating Income $ 4,700