Variable Cost and Company

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Section B
Attempt Any Six Questions (6*5= 30)

1. Company A’s costs are mostly variable, whereas Company B’s costs are mostly fixed. When sales increase, which company will tend to realize the greatest increase in profits? Explain.

2. Crystal Telecom has budgeted the sales of its innovative mobile phone over the next four months as follows:
Sales in Units

July. . . . . . . . . . . . . . 30,000
August . . . . . . . . . . . 45,000
September . . . . . . . . 60,000
October . . . . . . . . . . 50,000

The company is now in the process of preparing a production budget for the third quarter. Past experience has shown that end-of-month inventories of finished goods must equal 10% of the next month’s sales. The inventory at the
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. . . . . . . . . . . . . . . . . . . . . . . . . . $18
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7
Variable manufacturing overhead . . . . . . . . . . . . . $2
Variable selling and administrative . . . . . . . . . . . . . . $5
Fixed costs per year:
Fixed manufacturing overhead . . . . . . . . . . . . . . . . . $160,000
Fixed selling and administrative expenses . . . . . . . . $110,000

During the year, the company produced 20,000 units and sold 16,000 units. The selling price of the company’s product is $50 per unit.

Required
1. Assume that the company uses absorption costing:
a. Compute the unit product cost.
b. Prepare an income statement for the year.
2. Assume that the company uses variable costing:
a. Compute the unit product cost.
b. Prepare an income statement for the year.

12. Calgon Products, a distributor of organic beverages, needs a cash budget for September. The following information is available:
a. The cash balance at the beginning of September is $9,000.
b. Actual sales for July and August and expected sales for September are as follows:

July August September
Cash sales. . . . . . . . . . $ 6,500 $ 5,250 $ 7,400
Sales on account . . . . . 20,000 30,000 40,000
Total sales . . . . . . . . . . $26,500 $35,250 $47,400

Sales on account are collected over a three-month period as follows: 10% collected

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