ACCT Midterm

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During January, Long, Inc. produced 10,000 units of product with costs as follows: Direct materials $45,000 Direct labor 23,000 Variable overhead 17,000 Fixed overhead 60,000 $145,000 What is Lang's unit cost for January, calculated on the variable costing basis?

$10.75 = ($50,000 + 24,000 + 12,000) ÷ 8,000 = $8.50.

Techno Incorporated manufactures two models of cameras that can be used as cell phones, MPX, and digital camcorders. ModelAnnual Sales in UnitsHigh F10,000Great P16,000 Techno uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows: High FGreat PDirect materials$ 38.00$ 25.40Direct labor$ 17.52$ 13.14 Budget factory overhead: Engineering and Design2,409engineering hours$ 404,712Quality Control12,848inspection hours269,808Machinery33,726machine hours539,616Miscellaneous Overhead26,400direct labor hours134,904Total $ 1,349,040 Techno's controller had been researching activity-based costing and decided to switch to it. A special study determined Techno's two products have the following budgeted activities: High FGreat PEngineering and design hours9691,440Quality control inspection hours5,6487,200Machine hours20,28613,440Labor hours12,00014,400 Using activity-based costing, applied quality control factory overhead for the High F model per unit is: (Rounded to the nearest cent.) Multiple Choice $6.13. $11.86. $16.28. $32.46. $66.73.

$11.86 (1. $269,808 / 12,848 inspection hours = $21 per inspection hour 2. $21 × 5,648 = $118,608 3. $118,608 / 10,000 High F units = $11.86

A company's operating income was $80,000 using variable costing for a given period. Beginning and ending inventories for that period were 46,000 units and 49,000 units, respectively. Ignoring income taxes, if the fixed factory overhead application rate was $10.00 per unit, what would operating income have been using full costing?

$110,000 = [(49,000 - 46,000) × $10] + $80,000

Lyman Company has the opportunity to increase annual credit sales $120,000 by selling to a new, riskier group of customers. The expenses of collecting credit sales are expected to be 5 percent of credit sales. The company's manufacturing and selling expenses are projected at 80% of sales, and its effective tax rate is 20%. If Lyman accepts this opportunity, its after-tax profits would increase by an estimated:

$14,400. 1. Incremental collection fees = 0.15 × increase in annual credit sales = 0.15 × $100,000 = $15,0002. Expected increase in after-tax profit = expected increase in pre-tax profit × (1 − t), where t = income tax rate = (increased revenue − increased collection fees − increased manufacturing & selling expenses) × (1 − 0.40) = [($100,000 − $15,000 − $70,000) × 0.60] = $15,000 × 0.60 = $9,000.

Techno Incorporated manufactures two models of cameras that can be used as cell phones, MPX, and digital camcorders. ModelAnnual Sales in UnitsHigh F10,000Great P16,000 Techno uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows: High FGreat PDirect materials$ 38.00$ 25.40Direct labor$ 17.52$ 13.14 Budget factory overhead: Engineering and Design2,409engineering hours$ 404,712Quality Control12,848inspection hours269,808Machinery33,726machine hours539,616Miscellaneous Overhead26,400direct labor hours134,904Total $ 1,349,040 Techno's controller had been researching activity-based costing and decided to switch to it. A special study determined Techno's two products have the following budgeted activities: High FGreat PEngineering and design hours9691,440Quality control inspection hours5,6487,200Machine hours20,28613,440Labor hours12,00014,400 Using activity-based costing, applied engineering and design factory overhead for the High F model per unit is: (Rounded to the nearest cent.) Multiple Choice $6.13. $11.86. $16.28. $32.46. $66.73.

$16.28 (1. $404,712 / 2,409 hours = $168 per engineering & design hour 2. $168 × 969 hours = $162,792 3. $162, 792 / 10,000 High F units = $16.28)

Grant's Western Wear is a retailer of western hats located in Atlanta, Georgia. Although Grant's carries numerous styles of western hats, each hat has approximately the same price and invoice purchase cost, as shown below. Sales personnel receive large commissions to encourage them to be more aggressive in their sales efforts. Currently the economy of Atlanta is really humming, and sales growth at Grant's has been great. However, the business is very competitive, and Grant has relied on its knowledgeable and courteous staff to attract and retain customers, who otherwise might go to other western wear stores. Also, because of the rapid growth in sales, Grant is finding it more difficult to manage certain aspects of the business, such as restocking of inventory and hiring and training new salespeople. Sales price$35.00Per-unit variable costs: Invoice cost17.50 Sales commissions4.50Total per-unit variable costs$22.00Total annual fixed costs: Advertising$25,000 Rent32,000 Salaries125,000Total fixed costs$182,000 The annual breakeven point in unit sales is calculated to be:

$182,000 ÷ ($35.00 − $22.00) = 14,000 units

Power Company manufactures a variety of drill bits. The company's plant is partially automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system: Overhead Cost PoolBudgeted OverheadCost DriverEstimated Cost Driver LevelMachine setups$ 120,000Number of setups120setupsMaterials handling104,400Number of barrels8,700barrelsQuality control264,000Number of inspections1,100inspectionsOther overhead cost144,000Number of machine hours12,000machine hoursTotal overhead$ 632,400 A current product order has the following requirements: Machine setups8setupsMaterials handling606barrelsQuality inspections80inspectionsMachine hours830machine hoursDirect labor hour336hours Using activity-based costing, how much quality control overhead is assigned to the order? Multiple Choice $8,000. $9,960. $11,108. $19,200. $45,933.

$19,200 (($264,000 / 1,100) × 80 inspections = $19,200)

Gold Shoes Company manufactures cleats for baseball shoes. It has outlined the following overhead cost drivers: Overhead Cost PoolCost DriverOverhead Cost Budgeted Level for Cost DriverBudgetedQuality ControlNumber of inspections$ 78,0001,200Machine TimeMachine hours188,000800Materials HandlingNumber of Batches1,20050Miscellaneous Overhead CostDirect labor hours59,0005,000 Gold Shoes Company has an order for cleats that has the following production requirements: Number of Inspections375Number of Machine hours220Number of Batches8Direct Labor Hours840 Using activity-based costing, applied materials handling factory overhead for the baseball cleat order is: Multiple Choice $338. $584. $192. $353. $686.

$192 (1. $1200 / 50 = $24 per batch 2. $24 × 8 batches = $192)

Cotton Company produces and sells socks. Variable costs are budgeted at $4 per pair, and fixed costs for the year are expected to total $90,000. The selling price is expected to be $6 per pair. The sales dollars required to make an after-tax profit (πA) for Cotton Company of $15,000, given an income tax rate of 40%, are calculated to be: Multiple Choice $336,000. $339,000. $342,000. $360,000. $345,000. Group Ends

$345,000 (Required unit sales = (F + πB)/contribution margin per unit = ($90,000 + ($15,000 / (1 − 0.40)) / ($6 − $4)/unit = ($90,000 + $25,000) / $2/unit = 57,500 units Required sales, in dollars = 57,500 units × $6/unit = $345,000)

In the current year, Comfy Couch Company expected to sell 12,000 leather sofas. Fixed costs for the year were expected to be $8,400,000; unit sales price was budgeted at $4,600; and unit variable costs were expected to be $2,200. Comfy Couch Company's margin of safety (MOS) in sales dollars is: Multiple Choice $36,200,000. $42,600,000. $33,300,000. $46,700,000. $39,100,000.

$39,100,000 (Break-even point, in sales dollars = Fixed costs/contribution margin ratio = $8,400,000 / [($4,600 − $2,200)/unit / $4,600/unit)] = $8,400,000/0.5217391 = $16,100,000 Margin of Safety (MOS) = Budgeted (planned) sales dollars − Breakeven sales dollars = (12,000 units × $4,600/unit) − $16,100,000 = $39,100,000.)

Sleepy Time is a retailer of luxury bed frames located in Los Angeles, California. Due to a recent industry-wide financial crisis, the CFO of Sleepy Time fears a significant drop in the firm's upcoming income stream. The CFO asked you to use the company financial information provided below. Sales price per unit$ 3,000.00Per-unit variable costs: Invoice cost2,218.80Sales commissions281.20Total per-unit variable costs$ 2,500.00Total annual fixed costs: Advertising$ 236,000Rent178,000Salaries386,000Total fixed costs$ 800,000 The annual breakeven point in dollars is: Multiple Choice $4,800,000. $4,500,000. $4,100,000. $4,600,000. $4,300,000. Group Ends

$4,800,000 ($800,000 / [($3,000 − $2,500)/unit / $3,000)/unit] = $800,000/0.166666667 = $4,800,000)

Techno Incorporated manufactures two models of cameras that can be used as cell phones, MPX, and digital camcorders. ModelAnnual Sales in UnitsHigh F10,000Great P16,000 Techno uses a volume-based costing system to apply factory overhead based on direct labor dollars. The unit prime costs of each product were as follows: High FGreat PDirect materials$ 38.00$ 25.40Direct labor$ 17.52$ 13.14 Budget factory overhead: Engineering and Design2,409engineering hours$ 404,712Quality Control12,848inspection hours269,808Machinery33,726machine hours539,616Miscellaneous Overhead26,400direct labor hours134,904Total $ 1,349,040 Techno's controller had been researching activity-based costing and decided to switch to it. A special study determined Techno's two products have the following budgeted activities: High FGreat PEngineering and design hours9691,440Quality control inspection hours5,6487,200Machine hours20,28613,440Labor hours12,00014,400 Using activity-based costing, total overhead per unit of Great P model is: (Rounded to the nearest cent.) Multiple Choice $42.61. $45.99. $61.32. $66.73. $168.00.

$42.61 (($404,712 / 2,409) × (1,440 / 16,000)) + (($269,808 / 12,848) × (7,200 / 16,000)) + (($539,616 / 33,726) × (13,440 / 16,000)) + (($134,904 / 26,400) × (14,440 / 16,000)) = $15.12 + $9.45 + $13.44 + $4.60 = $42.61

Power Company manufactures a variety of drill bits. The company's plant is partially automated. The budget for the year includes $432,000 payroll for 4,800 direct labor-hours. Listed below is cost driver information used in the product-costing system: Overhead Cost PoolBudgeted OverheadCost DriverEstimated Cost Driver LevelMachine setups$ 120,000Number of setups120setupsMaterials handling104,400Number of barrels8,700barrelsQuality control264,000Number of inspections1,100inspectionsOther overhead cost144,000Number of machine hours12,000machine hoursTotal overhead$ 632,400 A current product order has the following requirements: Machine setups8setupsMaterials handling606barrelsQuality inspections80inspectionsMachine hours830machine hoursDirect labor hour336hours Using activity-based costing, how much total overhead is assigned to the order? Multiple Choice $42,160. $43,740. $44,268. $44,432. $45,993.

$44,432 (($120,000 / 120) × 8) + (($104,400 / 8,700) × 606) + (($264,000 / 1,100) × 80) + (($144,000 / 12,000) × 830) = $8,000 + $7,272 + $19,200 + $9,960 = $44,432

Lamp Company has the following cost-volume-profit (CVP) data: Breakeven point, in units2,000Selling price per unit$ 625Total fixed costs$ 125,000 What is the variable cost per unit (rounded to two decimal places)?

$562.50 (At breakeven, total CM = total fixed costs, F Given the above data, we have (at the breakeven point): 2,000 units × ($625 − v)/unit = $125,000, where v = variable cost per unit. Therefore, variable cost per unit, v = ((2,000 units × $625/unit) − $125,000)/2,000 units = $1,125,000/2,000 units = $562.50)

Todweed Academy allocates certain costs to its three schools based various costs for the schools: School LowerSchool MiddleSchool UpperSchool Total # of grades 6 3 4 13 # of pupils 600 400 400 1,400 Tuition revenue $1,000,000 $1,200,000 $1,600,000 $3,800,000 # faculty 24 30 36 90 Marketing and administrative $1,400,000 Holiday party 400,000 Using revenue as an allocation base, the amount of marketing costs allocated to the Upper School is calculated to be:

$589,474 = $1,400,000 × ($1,600,000 ÷ $3,800,000)

Metal Company budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had the following manufacturing overhead: Overhead Cost PoolBudgeted Overhead CostBudgeted Level for Cost DriverOverhead Cost DriverMaterials handling$ 160,0003,200poundsWeight of materialsMachine setup13,260390setupsNumber of setupsMachine repair1,38030,000machine hoursMachine hoursInspections10,560160inspectionsNumber of inspections Requirements for Job #971 which manufactured 4 units of product: Direct labor20hoursDirect materials130poundsMachine setup30setupsMachine hours15,000machine hoursInspections15inspections Using activity-based costing, the materials handling overhead cost assigned to Job #971 is:

$6,500 (1. $160,000 / 3,200 pounds = $50 per pound of direct materials 2. $50 × 130 pounds = $6,500)

Metal Company budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had the following manufacturing overhead: Overhead Cost PoolBudgeted Overhead CostBudgeted Level for Cost DriverOverhead Cost DriverMaterials handling$ 160,0003,200poundsWeight of materialsMachine setup13,260390setupsNumber of setupsMachine repair1,38030,000machine hoursMachine hoursInspections10,560160inspectionsNumber of inspections Requirements for Job #971 which manufactured 4 units of product: Direct labor20hoursDirect materials130poundsMachine setup30setupsMachine hours15,000machine hoursInspections15inspections Using activity-based costing, overhead cost assigned to Job #971 for machine repair is: Multiple Choice $2,300. $990. $6,500. $690. $1,020.

$690. (1. $1,380 / 30,000 machine hours = $0.046 per machine hour 2. $0.046 × 15,000 machine hours = $690)

Smith Company has the opportunity to increase annual credit sales $100,000 by selling to a new, riskier group of customers. The expenses of collecting credit sales are expected to be 15 percent of credit sales. The company's manufacturing and selling expenses are projected at 70% of sales, and its effective income tax rate is 40%. If Smith accepts this sales opportunity, its after-tax profits would increase by an estimated:

$9,000 (1. Incremental collection fees = 0.15 × increase in annual credit sales = 0.15 × $100,000 = $15,000 2. Expected increase in after-tax profit = expected increase in pre-tax profit × (1 − t), where t = income tax rate = (increased revenue − increased collection fees − increased manufacturing & selling expenses) × (1 − 0.40) = [($100,000 − $15,000 − $70,000) × 0.60] = $15,000 × 0.60 = $9,000.)

Gold Shoes Company manufactures cleats for baseball shoes. It has outlined the following overhead cost drivers: Overhead Cost PoolCost DriverOverhead Cost Budgeted Level for Cost DriverBudgetedQuality ControlNumber of inspections$ 78,0001,200Machine TimeMachine hours188,000800Materials HandlingNumber of Batches1,20050Miscellaneous Overhead CostDirect labor hours59,0005,000 Gold Shoes Company has an order for cleats that has the following production requirements: Number of Inspections375Number of Machine hours220Number of Batches8Direct Labor Hours840 Using activity-based costing, applied miscellaneous factory overhead for the baseball cleat order based on direct labor hours is: Multiple Choice $8,745. $10,312. $10,489. $9,912. $8,456.

$9,912 (1. $59,000 / 5,000 direct labor hours = $11.80 per labor hour 2. $11.80 × 840 labor hours = $9,912)

Randall Company manufactures products to customer specifications. A job costing system is used to accumulate production costs. Factory overhead cost was applied at 125% of direct labor cost. Selected data concerning the past year's operation of the company are presented below. January 1December 31Direct materials$77,000$40,000Work in process66,00042,000Finished goods115,000100,000Other information Direct materials purchases $324,000Cost of goods available for sale 950,000Actual factory overhead costs 260,000 The cost of goods sold (before adjustment for under or overapplied overhead) is:

$950,000 - $100,000 = $850,000

$950,000 - $115,000 = $835,000

$950,000 - $115,000 = Cost of goods manufactured = $835,000$835,000 + $42,000 - $66,000 = $811,000

ABC Company listed the following data for the current year: Budgeted factory overhead$1,044,000Budgeted direct labor hours69,600Budgeted machine hours24,000Actual factory overhead1,037,400Actual labor hours72,600Actual machine hours23,600 If overhead is applied based on direct labor hours, the overapplied/underapplied overhead is:

($15 × 72,600) - 1,037,400 = $51,600 overapplied

Orange, Inc. has identified the following cost drivers for its expected overhead costs for the year: OverheadItemExpectedCostCostDriverExpectedQuantitySetup costs$50,000Number of setups250Ordering costs30,000Number of orders1,500Maintenance100,000Machine hours2,000Power 20,000Kilowatt hours4,000Total Overhead$200,000 Total direct labor hours budgeted = 2,000 hours.The following actual data applies to one of the products completed during the year:Product XDirect materials$5,000Number of setups5Direct labor$3,000Number of orders50Units completed100Machine hours50Direct labor hours100Kilowatt hours500If Orange, Inc. uses direct labor hours to assign overhead, the unit product cost for Product X will be:

1) $200,000 Expected Total Overhead ÷ 2,000 Budgeted Direct Labor Hours = $100 Overhead per Direct Labor Hour2) Total cost: [$5,000 + $3,000 + ($100 × 100 DL Hours)] ÷ 100 Units Completed = $180 unit product cost for Product X

Sleepy Time is a retailer of luxury bed frames located in Los Angeles, California. Due to a recent industry-wide financial crisis, the CFO of Sleepy Time fears a significant drop in the firm's upcoming income stream. The CFO asked you to use the company financial information provided below. Sales price per unit$ 3,000.00Per-unit variable costs: Invoice cost2,218.80Sales commissions281.20Total per-unit variable costs$ 2,500.00Total annual fixed costs: Advertising$ 236,000Rent178,000Salaries386,000Total fixed costs$ 800,000 The annual breakeven point in units is: Multiple Choice 1,600 units. 2,000 units. 3,400 units. 1,300 units. 2,600 units.

1,600 units.

Daley Company manufactures computer monitors. Following is a summary of its basic cost and revenue data: Per UnitPercentSales price$ 580100Variable costs34860contribution margin$ 23240 Assume that Daley Company is currently selling 700 computer monitors per month. Fixed costs are expected to be $96,000. Required: 1. Calculate Daley Company's degree of operating leverage (DOL) if 700 units are sold. 2. Define what is meant by the DOL. 3. Of what purpose/value is the DOL to decision makers?

1. Contribution margin$ 162,400/Operating income$ 66,400DOL$ 2.446 2. DOL is a measure of the extent to which operating profits (πB) change, from a given point, in response to changes in sales volume. In the present case, a DOL of 2.446 means that from the current sales level, each percentage change in sales volume (up or down) will result in a 2.446% change in operating profit (up or down). As such, DOL can be likened to an elasticity measure. Firms that have high levels of fixed costs in the cost structure (relative to variable costs) are riskier. This risk is reflected in the DOL. Everything else constant, firms with relatively high levels of fixed (versus variable) costs will have higher DOL at any given sales volume. 3. The DOL, as well as MOS and MOS %, are measures of risk that can be used in conjunction with short-term profit planning (i.e., CVP analysis).

The Subway Sandwich Shop, Incorporated is seeking to sell new franchises for its business. The company is in the process of developing a business plan to present to potential investors. Following are various projected cost data for a typical sandwich shop: Lease of store space$500/monthEquipment lease$500/monthLicense$240/yearAdvertising2.5% gross sales revenueRoyalty8% of gross sales revenueSalaries$2,000/monthUtilities$400/monthInsurance$1,500/year The average order (sandwich) sells for $4, with food cost of $2. Required: 1. What is the contribution of each order (sandwich) toward covering fixed expenses?2. What is the projected monthly breakeven point in units (round your answer up, to nearest whole unit)?3. A potential franchisee has a target before-tax profit (πB) of $2,000 per month. What level of sales (in units and in dollars, per month) must be achieved to meet the franchisee's profit goal (round up, to nearest whole unit)?4. This potential franchisee has a target after-tax profit (πA) of $1,800 per month. To achieve this profit objective, what level of sales (in units and in dollars, per month) must be achieved if the tax rate, t, is 35% (roundup to nearest whole unit)?5. What is the degree of operating leverage (DOL) of a typical sandwich shop at the volume level needed to achieve a targeted before-tax profit (i.e., an operating income) of $2,000 per month? Round your answer to 2 decimal places.6. From the sales volume level needed to achieve the monthly pre-tax profit (πB) goal of $2,000, what would be the percentage change in πB if sales increased by 5%?

1. Sales price$ 4.00 Less: food cost2.00 Advertising Fee0.10($ 4.00 × 0.025)royalty0.32($ 4.00 × 0.08)Contribution margin$ 1.58per sandwich 2. Monthly fixed expenses = $500 + $500 + ($240/12) + $2,000 + $400 + ($1,500/12) = $3,545. Therefore, BE point, in units = F/contribution margin/unit = $3,545 / $1.58/unit = 2,244 (rounded up) 3. Required sales, in units = [Fixed costs (F) + desired pre-tax profit (πB)]/contribution margin per unit = ($3,545 + $2,000) / $1.58/unit = 3,510 per month (rounded up). Required sales in dollars, per month = 3,510 sandwiches × $4 per sandwich = $14,040. 4. Required monthly sales, in units = [Fixed costs (F) + (desired after-tax profit (πB) / (1 − t))]/contribution margin per unit = [$3,545 + ($1,800/0.65)]/$1.58 per unit = $6,314.2308 / $1.58/unit = 3,997 units (rounded up). Required monthly sales, in dollars = 3,997units × $4/unit = $15,988. 5. Degree of operating leverage (DOL) at the monthly sales volume needed to achieve a monthly before-tax profit of $2,000 = contribution margin/operating income = (3,510 units × $1.58/unit) / $2,000 = $5,545.80 / $2,000 = 2.77. 6. Percentage change in operating income = percentage change in sales volume × DOL = 0.05 × 2.77 = 13.9% increase in operating income.

Due to the sluggish economy, the Bi-Wheels Company has experienced some difficulty in selling its bicycles. The following data relate to the current year: Sales (9,000 units @ $100/unit)$ 900,000Less variable costs (9,000 @ $60/unit)540,000Contribution margin$ 360,000Less fixed costs400,000Net operating loss$ (40,000) Required: 1. Compute Bi-Wheels' annual breakeven point, in both units and dollars. Also, compute the contribution margin ratio. 2. The manager believes that a $40,000 increase in advertising would result in a $120,000 increase in annual sales. If the manager is right, what will be the net effect on the company's operating income (πB)? 3. Refer to the original data. The vice-president in charge of sales is certain that a 10% reduction in selling price in combination with a $30,000 increase in advertising will cause sales volume to increases by 50%. What effect would this strategy have on operating income (πB) of the company? 4. Refer to the original data. In the following year, Bi-Wheels saved $5 of total variable costs per bicycle by buying parts from a different manufacturer. However, Bi-Wheels' rent and insurance increased by $5,600. The store sold 11,000 bikes. What was its operating income (πB) for the year?

1. BE, in units = F/(p − v) = $400,000/($100 − $60)/unit = 10,000 units Contribution margin ratio = (selling price/unit − variable cost/unit)/selling price/unit = ($100 − $60)/$100 = 40% BE sales dollars = F/contribution margin ratio = $400,000/0.40 = $1,000,000 2. New level of sales = $900,000 + $120,000 = $1,020,000Expected total contribution margin: $1,020,000 × 40% (contribution margin ratio) =$ 408,000Present total contribution margin: $900,000 × 40% (contribution margin ratio) =360,000Incremental contribution margin =$ 48,000Less: incremental advertising (fixed) costs40,000Projected increase in operating income (πB)$ 8,000 Alternatively: (contribution margin ratio × increased sales $) − increased fixed costs = (0.4 × $120,000) − $40,000 = $8,000 increase in operating income 3. New contribution margin per unit = $90 − $60 = $30 Expected total contribution margin (CM): (9,000 units × 1.50 × $30/unit) =$ 405,000Present total CM: (9,000 units × $40/unit)360,000Incremental CM$ 45,000Less: incremental advertising (fixed) expense30,000Projected increase in operating income (πB)$ 15,000 4. Required sales, in units = [F + πB]/(p − v), where πB= operating income (pre-tax profit), p = selling price per unit, F = total fixed costs, and v = variable cost per unit: 11,000 = ($405,600 + πB)/($100 − $55) $45 × 11,000 = $405,600 + πB $495,000 = $405,600 + πB πB = $89,400

The controller for Ocean Sailboats Incorporated, a company which uses an automated process to make sailboats, established the following overhead cost pools and cost drivers: Overhead Cost PoolBudgeted OverheadCost DriverEstimated Cost Driver LevelMachine setups$ 250,500Number of setups500 setupsQuality control419,500Number of inspections2,500 inspectionsOther overhead cost180,000Number of machine hours20,000 machine hours A recent order for sailboats used: Machine setups50setupsQuality inspections305inspectionsMachine hours2,024machine hours Required: 1. What is the overhead rate per machine hour if the number of machine hours is used as a single cost driver under traditional costing system? 2. Utilizing traditional costing, how much overhead is assigned to the order based on machine hours as a single cost driver? 3. Utilizing ABC, how much total overhead is assigned to the order?

1. Overhead Cost PoolBudgeted OverheadMachine setups$ 250,500Quality control419,500Other overhead cost180,000Total estimated overhead$ 850,000Estimated machine hours÷20,000Overhead rate per machine hour$ 42.50 2. 2,024 machine hours × $42.50 per machine hour = $86,020 3. Overhead Cost poolBudgeted OverheadCost Driver LevelOverhead RateActual Cost DriversActual Overhead for OrderMachine setups$ 250,500500$ 501.0050$ 25,050Quality control419,5002,500167.8030551,179Other overhead cost180,00020,0009.002,02418,216Totals$ 850,000 $ 94,445

Winona Johnson is the president of Johnson Manufacturing, which manufactures coats. She is trying to decide whether to make 3,000 Type III coats or purchase them from a subcontractor to fill a special order that she just received. There are no marketing costs on the special order. Acceptance of the special order would not necessitate any premium pay for overtime work or additional fixed costs. The management accountant for Johnson Manufacturing has supplied the following data: Per-Unit Cost Data for Type III Coats: Sale Price$ 42Direct Materials15Direct Labor9Fixed Manufacturing Overhead3Variable Manufacturing Overhead6Variable Marketing Costs3Fixed Marketing Costs1Fixed Administrative Overhead2 Required: 1. At what purchase price per unit would Ms. Johnson be indifferent as to whether her firm manufactured the coats or purchased them from a subcontractor? 2. What strategic factors might influence Ms. Johnson's decision regarding this make-vs.-buy decision?

1. Relevant per-unit cost = incremental (avoidable) cost/unit: Direct Materials$ 15Direct Labor9Variable Manufacturing Overhead6 $ 30 The incremental (i.e., avoidable) cost per unit = $30.00. Therefore, at $30.00 per unit Johnson would be indifferent as to purchasing or manufacturing the coats. 2. Johnson might decide to use a sub-contractor to maintain a good relationship with the supplier. This relationship could be a competitive advantage as it would give Johnson a sub-contractor to rely on when special orders or seasonal demands require her to outsource her manufacturing again at some later date. In contrast, she might decide to manufacture the coats to keep her facility busy, because of concerns for quality, or employee morale.

TexFab manufactures two products, GT450 and GT600 that have the following sales and cost information. GT450GT600Total Amount%Amount%Amount%Sales$ 25,000100$ 75,000100$ 100,000100.0Variable costs20,0008037,5005057,50057.5Contribution margin$ 5,00020$ 37,50050$ 42,50042.5Fixed costs 20,000 Operating income $ 22,500 Round all dollar answers up, to the nearest whole number. Required: 1. What is the breakeven point in dollars if sales remain at the same sales mix reflected in the income statement presented above? 2. If the TexFab Company's sales mix becomes $50,000 of product GT450 and $50,000 of product GT600, what is the breakeven point in sales dollars? Prepare an income statement—in the format given above—for this scenario. 3. Why have the breakeven point and the amount of operating income (πB) changed?

1. Sales mix percentages, based on sales dollars: GT450, 25%; GT600 75%. Contribution margin ratios (from above): GT450 = 20%, GT600 = 50%. Therefore, the weighted-average contribution margin ratio = (0.25 × 0.2) + (0.75 × 0.5) = 0.425 (i.e., 42.5%). BE dollars = Fixed costs/weighted-average contribution margin ratio = $20,000/0.425 = $47,059 (rounded up) 2. The weighted-average contribution margin ratio is now 0.35 (i.e., [50% × 20%] + [50% × 50%]). Thus, the revised breakeven point in sales dollars is: = $20,000/0.35 = $57,143 (rounded up) Product GT450Product GT600TotalAmount Amount%Amount%Sales$ 50,000100$ 50,000100$ 100,000Variable costs40,0008025,0005065,000Contribution margin$ 10,00020$ 25,00050$ 35,000Fixed costs 20,000Operating income 15,000 3. Although total sales dollars remain constant ($100,000), the breakeven point changes because the sales mix changes. In (2), sales shifted to the product with the lower contribution margin ratio. As such, more sales are necessary to cover the same amount of fixed costs. Therefore, the breakeven point increases from $47,059 to $57,143, while the amount of operating income declines, from $22,500 to $15,000.

Joe Green Enterprises has met all production requirements for the current month and has an opportunity to produce additional units of product with its excess capacity. Unit selling prices and costs for three models of one of its product lines are as follows: No FrillsStandard OptionsSuperSelling price$ 35.00$ 45.00$ 65.00Direct materials10.0012.0014.00Direct labor (@$15/hour)7.5012.0021.00Variable Overhead4.006.4011.20Fixed Overhead3.005.005.00 Variable overhead is charged to products based on direct labor dollars, and fixed overhead is charged to products based on machine hours. Required: 1. If Joe Green Enterprises has excess machine capacity and can add more labor as needed (that is, neither machine capacity nor labor is a constraint), the excess production capacity should be devoted to producing which product or products? (Show calculations.) 2. If Joe Green Enterprises has excess machine capacity but a limited amount of labor time, the production capacity should be devoted to producing which product or products? (Show calculations.)

1. When there is no limit on production capacity the super model should be manufactured since it has the highest contribution margin per unit. No FrillsStandard OptionsSuperSelling price$ 35.00$ 45.00$ 65.00Direct materials10.0012.0014.00Direct labor (@$15/hour)7.5012.0021.00Variable Overhead4.006.4011.20Total Variable Cost$ 21.50$ 30.40$ 46.20Contribution Margin/Unit$ 13.50$ 14.60$ 18.80 2. When labor is in short supply, the No Frills Model should be manufactured since it has the highest contribution margin per direct labor hour. See below. No FrillsStandard OptionsSuperContribution Margin$ 13.50$ 14.60$ 18.80Labor Hours Required0.50.801.4Contribution Margin/hour$ 27.00$ 18.25$ 13.43

Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had the following manufacturing overhead: Overhead Cost PoolBudgeted Overhead CostBudgeted Level for Cost DriverOverhead Cost Driver Materials handling$160,0003,200 poundsWeight of materialsMachine setup13,200390 setupsNumber of setupsMachine repair1,38030,000 machine hoursMachine hoursInspections10,560160 inspectionsNumber of inspections Requirements for Job #971 which manufactured 4 units of product:Direct labor20 hoursDirect materials130 poundsMachine setup30 setupsMachine hours15,000 machine hoursInspections15 inspectionsUsing ABC, overhead cost assigned to Job #971 for machine repair is:

1. $1,380 ÷ 30,000 machine hours = $.046 per machine hour2. $.046 × 15,000 machine hours = $690

Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had the following manufacturing overhead: Overhead Cost PoolBudgeted Overhead CostBudgeted Level for Cost DriverOverhead Cost Driver Materials handling$160,0003,200 poundsWeight of materialsMachine setup13,200390 setupsNumber of setupsMachine repair1,38030,000 machine hoursMachine hoursInspections10,560160 inspectionsNumber of inspections Requirements for Job #971 which manufactured 4 units of product: Direct labor20 hoursDirect materials130 poundsMachine setup30 setupsMachine hours15,000 machine hoursInspections15 inspections Using ABC, overhead cost assigned to Job #971 for inspections is:

1. $10, 560 ÷ 160 inspections = $66 per inspection2. $66 × 15 inspections = $990

Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had the following manufacturing overhead: Overhead Cost PoolBudgeted Overhead CostBudgeted Level for Cost DriverOverhead Cost Driver Materials handling$160,0003,200 poundsWeight of materialsMachine setup13,200390 setupsNumber of setupsMachine repair1,38030,000 machine hoursMachine hoursInspections10,560160 inspectionsNumber of inspections Requirements for Job #971 which manufactured 4 units of product: Direct labor20 hoursDirect materials130 poundsMachine setup30 setupsMachine hours15,000 machine hoursInspections15 inspections Using ABC, overhead cost assigned to Job #971 for machine setup is:

1. $13,260 ÷ 390 set-ups = $342. $34 × 30 setups = $1,020

Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had the following manufacturing overhead: Overhead Cost PoolBudgeted Overhead CostBudgeted Level for Cost DriverOverhead Cost Driver Materials handling$160,0003,200 poundsWeight of materialsMachine setup13,200390 setupsNumber of setupsMachine repair1,38030,000 machine hoursMachine hoursInspections10,560160 inspectionsNumber of inspections Requirements for Job #971 which manufactured 4 units of product: Direct labor20 hoursDirect materials130 poundsMachine setup30 setupsMachine hours15,000 machine hoursInspections15 inspections Using ABC, the materials handling overhead cost assigned to Job #971 is:

1. $160,000 ÷ 3,200 pounds = $50 per pound of direct materials2. $50 × 130 pounds = $6,500

Versailles Manufacturing Company spent $380,000 in 2018 to inspect incoming components. Of the $380,000, $250,000 is fixed appraisal costs. The variable inspection cost is $0.25 per component. It takes four components for each finished product. Internal failure costs average $90 per failed unit of finished goods. In 2018, three percent of all completed items had to be reworked. External failure costs average $250 per failed unit. The company's average external failures are five percent of units sold. The company manufactures all units as ordered and carries no materials inventories. Seeking to decrease its total cost of quality (COQ), Versailles contracted Quality Consultants, Inc. (QCI) to study ways to improve product quality and to reduce costs. Upon completion of the study, QCI recommended automatic inspection equipment that requires a $70,000 annual cost for training and $230,000 for equipment rental and maintenance. The new equipment will eliminate $60,000 of the fixed appraisal costs, reduce the amount of unacceptable product units in the manufacturing process by 15 percent, and cut product failures by 33%. The company paid the consulting firm $130,000 in early January 2019 for the project. Versailles expects no changes in its operating level in the foreseeable future.What is the current 2018 total Cost of Quality (COQ)?

1. $380,000 = current total inspection cost.2. Revised inspection cost = $380,000 − $250,000 = $130,000.3. Current number of components inspected = $130,000 ÷ $0.25 = 520,000 components.4. 520,000 components ÷ 4 components per finished unit = 130,000 finished units.5. (130,000 finished units × 0.03) = 3,900 finished products with internal failures.6. 3,900 × $90 = $351,000 internal failure costs in 2018.7. (130,000 × 0.05) = 6,500 finished products with external failures.8. (6,500 × $250) = $1,625,000 external failure costs in 2018.9. Total 2018 current COQ = $380,000 + $351,000 + $1,625,000 = $2,356,000

Wings Co. budgeted $555,600 manufacturing direct wages, 2,315 direct labor hours, and had the following manufacturing overhead: Overhead Cost PoolBudgeted Overhead CostBudgeted Level for Cost DriverOverhead Cost Driver Materials handling$160,0003,200 poundsWeight of materialsMachine setup13,200390 setupsNumber of setupsMachine repair1,38030,000 machine hoursMachine hoursInspections10,560160 inspectionsNumber of inspections Requirements for Job #971 which manufactured 4 units of product:Direct labor20 hoursDirect materials130 poundsMachine setup30 setupsMachine hours15,000 machine hoursInspections15 inspectionsIf Wings uses a volume-based overhead rate based on direct labor hours, the manufacturing overhead for Job #971 is:

1. ($160,000 + $13,260 + $1,380 + $10,560) ÷ 2,315 budgeted hours = $80 per direct labor hour2. $80 × 20 Direct labor hours = $1,600 = Manufacturing overhead for Job #971

1. ($70,000 + $230,000) = $300,000 = total cost for new automatic inspection equipment.2. Projected savings in fixed appraisal costs = $60,000 (given).3. Therefore, appraisal costs are projected to increase by $300,000 − $60,000 = $240,000 increase.

Bradbo owned two adjoining restaurants, the Pork Palace and the Chicken Hut. Each restaurant was treated as a profit center for performance evaluation purposes. Although the restaurants had separate kitchens, they shared a central baking facility. The principal costs of the baking area included materials, supplies, labor, and depreciation and maintenance on the equipment.Bradbo allocated the monthly costs of the baking facility to the two restaurants based on the number of tables served in each restaurant during the month using dual allocation and equal sharing of fixed costs. In April, the costs were $32,500, of which $14,000 were fixed. The Pork Palace served 7,000 tables, while the Chicken Hut served 3,000 tables.The amount of joint cost that should have been allocated to the Pork Palace in April is calculated to be:

1. 7,000 ÷ 7,000 + 3,000) = 70%2. ($14,000 ÷ 2) + [70% × ($32,500 - $14,000]) = $19,950

Omaha Plating Corporation is considering purchasing a machine for $1,200,000. The machine is expected to generate a constant after-tax income of $80,000 per year for 15 years. The firm will use straight-line (SL) depreciation for the new machine over 10 years with no residual value.What is the payback period for the new machine?

1. Annual depreciation expense = ($1,200,000 - $0) ÷ 10 years = $120,0002. After-tax cash flow = after-tax income + non-cash expenses (depreciation)3. After-tax cash flow = $80,000 (given) + $120,000 = $200,0004. Payback (in years) = $1,200,000 ÷ $200,000 = 6 years

Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with an assumed residual (salvage) value of $50,000 and no gain on sale of the equipment at the end of it's life. Quip's combined income tax rate, t, is 40%.Management requires a minimum after-tax rate of return of 10% on all investments. What is the estimated net present value (NPV) of the proposed investment (rounded to the nearest hundred)? (The PV annuity factor for 10%, 5 years, is 3.791 and for 4 years it is 3.17. The present value $1 factor for 10%, 5 years, is 0.621.) Assume that after-tax cash inflows occur at year-end.

1. Annual depreciation expense = ($300,000 − $50,000) ÷ 5 years = $50,000/year2. Annual pre-tax income = Sales - depreciation expense - cash expenses = $200,000 - $50,000 - $80,000 = $70,0003. Annual income tax expense (cash outflow) = 0.40 × $70,000 = $28,0004. Annual after-tax cash inflow = annual pre-tax income + depreciation - income tax expense = $70,000 + $50,000 - $28,000 = $92,0005. PV of future after-tax cash inflows = $92,000 × 3.791 = $348,7726. PV of future after-tax cash inflow, residual value in year 5 = $50,000 × 0.621 = $31,050 (if disposal value = NBV at time of disposal, the income tax effect on the sale/disposal will be zero).7. PV of after-tax cash inflows = $348,772 + $31,050 = $379,822. (Alternatively, PV of after-tax cash inflows, 4 years = $92,000 × 3.17 = $291,640 + PV of after-tax cash inflow, year 5 = $142,000 × 0.621 = $88,182. Total PV of after-tax cash inflows = $291,640 + $88,182 = $379,822.)8. NPV = $379,822 - $300,000 = $79,822 ($79,800 rounded to nearest hundred)

Staley Co. manufactures computer monitors. The following is a summary of its basic cost and revenue data: Per UnitPercentSales price$525100Variable costs30057Unit contribution margin$22543 Assume that Staley Co. is currently selling 500 computer monitors per month and monthly fixed costs are $75,000.Staley Co.'s margin of safety ratio (MOS%) if 500 units are sold would be (round intermediate calculation up to nearest whole number of units):

1. Break-even point, in units = Fixed costs ÷ contribution margin per unit = $75,000 (given) ÷ $225/unit (given) = 333 units (rounded up)2. MOS% = MOS (in units) ÷ Actual (or budgeted) sales, in units = (500 - 334) units ÷ 500 units = 166 units ÷ 500 units = 33.2%

Bryan Inc. produces a specialty top-quality juice machine. The product, the JM50, requires four processes to be completed. Specifically, these processes are exterior construction, pulp filter insertion, painting, and packaging. Each process is performed at separate workstations with different completion rates:Exterior construction can manufacture 100,000 juicer exteriors per day.Pulp filter insertion can install 25,000 filters every 6 hours.Painting can decorate 3,000 juicers every half hour.Packaging can package 5,000 juicers per hour.The plant operates 24/7, 24 hours a day every day of the week.Which function(s) is/are the bottleneck(s)?

1. Exterior: 100,000 × 30 = 3m2. Pulp filter: 25,000 × 24 ÷ 6 × 30 = 3m3. Painting: 24 ÷ .5 × 3,000 × 30 = 4,320,0004. Packaging: 24 × 5,000 × 30 = 3.6m Exterior construction and pulp filter insertion.

Versailles Manufacturing Company spent $380,000 in 2018 to inspect incoming components. Of the $380,000, $250,000 is fixed appraisal costs. The variable inspection cost is $0.25 per component. It takes four components for each finished product. Internal failure costs average $90 per failed unit of finished goods. In 2018, three percent of all completed items had to be reworked. External failure costs average $250 per failed unit. The company's average external failures are five percent of units sold. The company manufactures all units as ordered and carries no materials inventories. Seeking to decrease its total cost of quality (COQ), Versailles contracted Quality Consultants, Inc. (QCI) to study ways to improve product quality and to reduce costs. Upon completion of the study, QCI recommended automatic inspection equipment that requires a $70,000 annual cost for training and $230,000 for equipment rental and maintenance. The new equipment will eliminate $60,000 of the fixed appraisal costs, reduce the amount of unacceptable product units in the manufacturing process by 15 percent, and cut product failures by 33%. The company paid the consulting firm $130,000 in early January 2019 for the project. Versailles expects no changes in its operating level in the foreseeable future.How much do you expect total external failure costs to change?

1. No. of finished units with external failures in 2018 = 130,000 × 0.05 = 6,500.2. No. of finished units with external failures projected for 2019 = 6,500 x (1-.33) = 4,355.3. Projected external failure costs in 2019 = 4,355 × $250 = $1,088,750.4. Actual external failure costs in 2018 = 6,500 × $250 = $1,625,0005. Anticipated change in total external failure costs in 2019 = $1,625,000 − $1,088,750 = $536,250 decrease

Versailles Manufacturing Company spent $380,000 in 2018 to inspect incoming components. Of the $380,000, $250,000 is fixed appraisal costs. The variable inspection cost is $0.25 per component. It takes four components for each finished product. Internal failure costs average $90 per failed unit of finished goods. In 2018, three percent of all completed items had to be reworked. External failure costs average $250 per failed unit. The company's average external failures are five percent of units sold. The company manufactures all units as ordered and carries no materials inventories. Seeking to decrease its total cost of quality (COQ), Versailles contracted Quality Consultants, Inc. (QCI) to study ways to improve product quality and to reduce costs. Upon completion of the study, QCI recommended automatic inspection equipment that requires a $70,000 annual cost for training and $230,000 for equipment rental and maintenance. The new equipment will eliminate $60,000 of the fixed appraisal costs, reduce the amount of unacceptable product units in the manufacturing process by 15 percent, and cut product failures by 33%. The company paid the consulting firm $130,000 in early January 2019 for the project. Versailles expects no changes in its operating level in the foreseeable future.How much are internal failure costs projected to change?

1. No. of finished units with internal failures in 2018 = 130,000 finished units × 0.05 = 3,900.2. No. of finished units with internal failures in 2019 = 3,900 × (1 − 0.15) = 3,315.3. Projected internal failure costs in 2019 = 3,315 × $90 = $298,350.4. Internal failure costs in 2018 = 3,900 × $80 = $351,000.5. Projected change in internal failure costs = $351,000 − $298,350 = $52,650 decrease

Tyson Company has a pre-tax net cash inflow of $899,879. The company can claim depreciation expense of $312,000 this year. The company is subject to a combined income tax rate of 34%. What is the after-tax cash flow for the year?

1. Taxable income = Pre-tax net cash inflow - Depreciation expense = $899,879 - $312,000 = $587,8792. Tax liability = Taxable income × t, where t = income tax rate3. Tax liability = $587,879 × 0.34 = $199,8794. After-tax cash flow = pre-tax net cash inflow - tax liability = $899,879 - $199,879 = $700,000

1. Total 2018 Cost of Quality (COQ) = $2,356,000.2. Anticipated change in total external failure costs = −$52,650.3. Anticipated change in total internal failure costs = −$536,250.4. Anticipated change in total appraisal costs = +$240,000.5. Anticipated change in total prevention costs = +$130,000.6. 2019 Estimated net change in total COQ = −52,650 − 536,250 + 240,000 + 130,000 = −$218,9007. 2019 COQ = $2,137,100

The controller for Warner Manufacturing is trying to implement some of the characteristics of a just-in-time (JIT) inventory system. She has accumulated data on Warner's present inventory system and obtained some projections and estimates of what the results of a JIT system would be. Annual direct material requirements are estimated as 360,000 units. Estimated per-unit costs for various order sizes are presented below: Order sizePer unit cost100,000 + units$ 23.0075,000 + units23.2550,000 + units23.5025,000 + units24.00less than 25,00025.00 The inventory holding cost is estimated at $0.75 per unit, per month. Warner currently purchases 120,000 units every four months. Under a JIT system Warner would purchase 30,000 units every month. The monthly inventory schedule and the controller's estimate for a JIT system are provided below: MonthCurrent System: Average Inventory BalanceJIT System: Average Inventory BalanceJanuary105,00015,000February75,00015,000March45,00015,000April15,00015,000May105,00015,000June75,00015,000 (Assume the above trend continues throughout the rest of the year.) Required: Which system should Warner use, and why? Show calculations in support of your recommendation.

1.Annual inventory purchase costs: Current System: 360,000 units × $23 per unit = $8,280,000 per year JIT System: 360,000 units × $24 per unit = $8,640,000 per year Difference = $8,640,000 − $8,280,000 = $360,000 per year, in favor of the current system 2.Annual inventory holding costs: Current System: Inventory Balance for 4 months = 105,000 + 75,000 + 45,000 + 15,000 = 240,000 units. (Note: 105,000 = average of beginning and ending inventory for first month, etc.). Inventory units on hand over the year = 240,000 × 3 = 720,000. Therefore, annual inventory holding cost = 720,000 × $0.75 = $540,000. JIT System: Inventory on hand over the year = 15,000 × 12 = 180,000. Therefore, annual inventory holding cost = 180,000 × $0.75 = $135,000. Annual Cost Difference = $540,000 − $135,000 = $405,000 in favor of the JIT system. 3.JIT Summary: Considering the joint effect of inventory purchase costs and inventory holding costs, Warner would save $45,000 ($405,000 − $360,000) per year if the JIT system were used.

Zap Video Inc. produces two basic types of video games, Clash and Slash. Pertinent data follow: Clash Slash Sales price (per unit) $240 $168 Costs (per unit): Direct materials 67 31 Direct labor 36 60 Variable factory overhead (@ $15 per DLH) 60 30 Allocated fixed factory overhead (based on DLHs) 24 12 Marketing expenses (all variable) 35 24 Total costs 221 157 Operating income (per unit) $18 $11 There is insufficient labor capacity in the plant to meet the combined demand for both Clash and Slash.Both products are produced through the same production departments.In view of the labor shortage, which of the two products is most profitable, and how much is the contribution margin, per direct labor hour?

1.At $15 per hour for variable overhead, we infer that it takes 4 labor hrs. to produce a unit of Clash and 2 labor hours to produce a unit of Slash2.Contribution margin per unit: Clash = $18 + $24 = $42; Slash = $11 + $12 = $233.Therefore, the contribution margin per direct labor hour: Clash: $42 per unit ÷ 4 labor hours/unit = $10.50; Slash = $23 ÷ 2 labor hours/unit = $11.50.4.Thus, Slash is more profitable on a per-direct-labor-hour basis. Slash, $11.50.

The following unit cost information pertains to the trumpet division of WGN Music Company and is based on monthly demand and sales of 100 units: Variable manufacturing costs: Direct materials$ 130Direct labor180Variable factory overhead70Fixed factory overhead: Depreciation50Rent for equipment20Other20Total manufacturing cost$ 470Variable selling costs28Fixed selling costs43Total (full) product cost$ 541 Assume that the Trumpet Division is evaluating whether to accept a special order for 10 trumpets at $500 per unit. Required: 1. Calculate total relevant cost per unit for each unit in the special-sales order. 2. Should WGN accept the special order? Why or why not? (Show details.)

1.Relevant cost/unit = incremental cost/unit: Direct materials$ 130Direct labor180Variable factory overhead70Variable selling costs28Total relevant cost/unit$ 408 2.Yes, accept the special order because the relevant cost of $408 is less than the special-order price of $500 per unit.

Shock Company manufactures computer monitors. The following is a summary of its basic cost and revenue data: Per UnitPercentSales price$ 480100Variable costs31265Unit contribution margin$ 16835 Assume that Shock Company is currently selling 600 computer monitors per month and monthly fixed costs are $80,000. What is Shock Company's margin of safety (MOS), in units, if 600 units are sold and all costs and revenues are as budgeted? (Round intermediate calculation up to nearest whole number of units.) Multiple Choice 123. 242. 128. 141. 214. Group Ends

123 (Break-even point, in units = Fixed costs/contribution margin per unit = $80,000 (given) / $168/unit (given) = 477units (rounded up) Margin of Safety (MOS) = Budgeted sales (units) − Breakeven sales (units) = 600 − 477 = 123 units)

Sand and Sea Resorts owns and operates two resorts in a coastal town. Both resorts are located on a barrier island that is connected to the mainland by a high bridge. One resort is located on the beach and is called the Crystal Coast Resort. The other resort is located on the inland waterway which passes between the town and the mainland; it is called the Harborview Resort. Some key information about the two resorts for the current year is shown below. Harborview Crystal Coast Total Revenue (000s) $3,500 $6,500 $10,000 Square feet 75,000 225,000 300,000 Rooms 60 140 200 Assets (000s) $100,000 $400,000 $500,000 Revenue/room $90 $120 The nontraceable operating costs of the resort amount to $4,000,000. By careful study, the management accountant at Sand and Sea has determined that, while the costs are not directly traceable, the total of $4 million could be fairly allocated to the four cost drivers as follows. Cost Driver Amount Allocated Revenue $200,000 Square feet 100,000 Rooms 600,000 Assets (000s) 3,100,000 What is the operating profit of the Crystal Coast Resort, using revenue as an allocation base?

3,900,000

Birdie Corporation is the maker of high-quality golf bags. The company currently has three different lines of bags, which it sells to sporting goods stores and golf shops throughout the world. Birdie sells a constant mix of 4 small bags for each medium-sized bag and 5 medium bags for each large-sized bag. Total fixed costs for the year are expected to be $2,027,562. (Note: round all decimals to three places; round final answers up to nearest whole number.) SmallMediumLargeSelling price per bag$ 100$ 150$ 250Variable cost per bag$ 60$ 95$ 160 The breakeven point in units (for the year) would be: Multiple Choice 32,400 small; 8,100 medium; 1,620 large. 34,808 small; 8,702 medium; 1,741 large. 37,010 small; 9,250 medium; 1,850 large. 38,505 small; 9,625 medium; 1,925 large. None of the answer choices are correct.

34,808 small; 8,702 medium; 1,741 large (Contribution margin per unit for small, medium, large bags (respectively) = $40, $55, $90 Sales mix (based on physical units): small, medium, large: 20, 5, 1 (that is, 4 × 5, 5, 1) Weighted-average contribution margin per unit = [(20/26) × $40/unit] + [(5/26) × $55/unit] + [(1/26) × $90/unit] = [0.769231 × $40/unit] + [0.192308 × $55/unit] + [0.038462 × $90/unit] = $30.769 + $10.577 + $3.462 = $44.808/unit. Breakeven in units (total) = Fixed costs/weighted-average contribution margin per unit = $2,027,562 / $44.808/unit = 45,250. Breakdown of total breakeven units: Small = [45,250 units × (20/26)] = 34,808 units; Medium = [45,250 units × (5/26)] = 8,702; Large = [45,250 units × (1/26)] = 1,741 units.)

Tommy's Towels sells three items (which it purchases from a supplier): bath towels, hand towels, and washcloths in a 4:3:2 mix (thus, a batch of 9 towels has 4 bath towels, 3 hand towels, and 2 washcloths). Each bath towel sells for $10 and costs $4, each hand towel sells for $5 and costs $2; and each washcloth sells for $2.50 and costs $1. The shop's annual fixed expenses are $324,000, and the income tax rate, t, is 40%. How many bath towels must the firm sell at the breakeven point?

36,000 BathHandWashTotalMix4329CM$ 6.00$ 3.00$ 1.50 $ 24.009.00$ 3.00$ 36.00 Weighted-average contribution margin per unit = $36.00/9 units = $4.00/unit Total breakeven units = Fixed costs/weighted-average contribution margin/unit = $324,000 / $4.00/unit = 81,000 units Breakeven for bath towels = 81,000 units × (4/9) = 36,000 units

During the current year, Mute Corporation expected to sell 24,000 telephone switches. Fixed costs for the year were expected to be $12,144,000, the unit sales price was budgeted at $3,200, and unit variable costs were budgeted at $1,440. Mute's margin of safety ratio (MOS %) is: Multiple Choice 71.25%. 87.00%. 70.25%. 92.50%. 76.15%.

71.25% (Break-even, in dollars = 6,900 units × $3,200/unit = $22,080,000 (or, $12,144,000 / [($3,200 − $1,440)/unit / $3,200/unit] = $12,144,000/0.55 = $22,080,000). Therefore, margin of safety (MOS) in dollars = (24,000 units × $3,200/unit) − $22,080,000 = $54,720,000. MOS % = MOS/Budgeted sales dollars = $54,720,000/(24,000 budgeted units × $3,200 budgeted selling price per unit) = $54,720,000/$76,800,000 = 71.25%)

The ideal criterion for choosing an allocation base for overhead is:

A cause-and-effect relationship.

Which type of firm would choose a high-fixed-costs structure to exploit an advantage? Multiple Choice A firm with a weak position in its market. A firm that just entered the market. A firm that needs to increase sales. A firm with a dominant position in its market. No firm should choose a high-fixed-costs structure.

A firm with a dominant position in its market.

In situations when management must decide on accepting or rejecting one-time-only special orders, where there is sufficient capacity, which one of the following would not be relevant to the decision? Multiple Choice Absorption (that is, full product) cost. Differential costs. Direct costs. Variable costs. Incremental costs.

Absorption (that is, full product) cost.

Which one of the following is not a recommendation for a successful implementation of Activity-Based Costing/M?

All of these answer choices are features of successful Activity-Based Costing/M implementations.

In making a decision whether to accept or reject a "special sales order," managers need critical information about:

Alternative uses of existing capacity

The use of gross book value (GBV) for measuring the level of investment in depreciable assets (for purposes of calculating return on investment, ROI) is preferred by those who value the objectivity of:

An historical cost number.

Applied overhead = 1.25 × direct labor, so find direct labor as follows:Direct labor and overhead = $450,000 = $835,000 + $42,000 - $66,000 - $361,000Direct labor + overhead = (1.0 × direct labor) + (1.25 × direct labor) = $450,000[$450,000 ÷ 2.25] = $200,000 = Direct labor$450,000 - $200,000 = $250,000 = overheadOr, direct labor × 1.25 direct labor = overhead$200,000 × 1.25 = $250,000Underapplied overhead = $260,000 - $250,000 = $10,000 underapplied

In a sell-or-process-further decision, joint production costs: Multiple Choice Are irrelevant to the decision. Should be allocated to outputs based on relative sales dollars. Should be allocated to outputs based on relative physical units. Cannot be allocated to products for financial reporting purposes. Usually are traceable to individual products/outputs.

Are irrelevant to the decision.

A unit of an organization is referred to as a profit center if it has:

Authority to make decisions affecting the major determinants of profit, including the power to choose its markets and sources of supply.

More accurate and informative product costs describes which ebenfit of activity-based costing?

Better profitability measures.

During the current year, OutlyTech Corp. expected to sell 24,000 telephone switches. Fixed costs for the year were expected to be $12,000,000, the unit sales price was budgeted at $3,075, and unit variable costs were budgeted at $1,575.OutlyTech's margin of safety (MOS) in units is (rounded up to nearest whole number):

Break-even, in units = $12,000,000 ÷ ($3,075 − $1,575) per unit = 8,000 unitsTherefore, margin of safety (MOS) = 24,000 units - 8,000 units = 16,000 units

What can the weighted average contribution margin ratio be used for?

Breakeven and profit planning for sales volume expressed in dollars (Y) rather than units (Q).

By not distinguishing between direct and indirect costs in their performance reporting, many companies:

Can cause poor decision-making.

The balanced scorecard can be made more effective by developing it at a detail level so that employees:

Can see how their actions contribute to the success of the firm.

Which of the following is the primary user of management accounting information regarding business units?

Company management.

The difference between sales price per unit and variable cost per unit is the:

Contribution margin per unit (cm).

The following cost information pertained to the Violin Division of Stringing Music Co. and was based on monthly demand and sales of 100 units: Per-Unit Costs Variable production costs: Direct materials $130 Direct labor 145 Variable factory overhead 55 Fixed production costs: Depreciation (equipment) 15 Factory rent 48 Other 12 Total production cost $405 Variable selling & administrative costs $26 per unit Fixed selling & administrative costs $36 per unit Given a normal selling price per unit of $740, what is the contribution margin per unit sold for recurring (i.e., normal) sales?

Contribution margin per unit on normal (i.e., recurring) sales = Selling price per unit - Variable cost per unit = $750 (given) - Variable production cost per unit - Variable selling and administrative cost per unit = $750 − ($120 + $150 + $60) − $24 = $750 − $330 − $24 = $396

Which of the following is an example of an indirect cost?

Cost of downtime

The cost of goods that were finished and transferred out of work-in-process during the current period is:

Cost of goods manufactured.

Cost Pools and Cost Drivers: Based on a recent study of its manufacturing operations Johnston Manufacturing Corporation has identified six resource consumption cost drivers. These cost drivers and their budgeted activity levels for the coming year are: Cost DriverActivity LevelNumber of purchase orders6Number of production runs (2,500 units per production run)40Machine-hours100,000Factory space (square feet)24,000Units of production100,000Engineering hours20,000 The firm has budgeted the following costs for the year: Engineering design$ 600,000Depreciation-building50,000Depreciation-machine40,000Electrical power (for factory building)6,000Electrical power (for machining)30,000Insurance20,000Property taxes15,000Machine maintenance-labor11,000Machine maintenance-materials9,000Natural gas (for heating)8,000Inspection of finished goods7,000Setup wages20,000Receiving10,000Inspection of direct materials on receiving3,000Purchasing20,000Custodial labor51,000 With the exception of the factory space cost pool, which uses machine-hours as the activity consumption cost driver, other cost pools have identical resource and activity consumption cost drivers. Required: 1. Identify the most appropriate activity cost pool for each of the cost items and cost driver for each activity cost pool you identified. 2. Johnston has received a request to quote the price for 4,000 units of a new product. The production will require 100 engineering-hours and 4,250 machine-hours. What is the manufacturing overhead per unit the firm should use in determining the price?

Cost pool 1: Cost driver: Number of purchase orders Receiving$ 10,000Inspection of direct materials3,000Purchasing20,000Total$ 33,000Cost pool 2: Cost driver: Number of production runs Setup wages$ 20,000Cost pool 3: Cost driver: Machine hours Depreciation, machine$ 40,000Electrical power (machining)30,000Machine maintenance - labor11,000Machine maintenance - materials9,000Total$ 90,000Cost pool 4: Cost driver: Factory space Depreciation, building$ 50,000Electrical power (factory building)6,000Insurance20,000Property taxes15,000Natural gas (for heating)8,000Custodial labor51,000Total$ 150,000 Note: However, the problem indicated that the firm uses machine hours as the base for assigning facility-level costs. An alternative solution is to combine cost pools 3 and 4. Cost pool 5: Cost driver: production (in units) Inspection of finished goods$ 7,000Cost pool 6: Cost driver: engineering hours Engineering design$ 600,000 2. Overhead Rates: Cost pool 1:Total cost$ 33,000 Number of purchase orders6 Cost per purchase order$ 5,500Cost pool 2:Total cost$ 20,000 Number of production runs40 Cost per production run$ 500Cost pool 3:Total cost$ 90,000 Number of machine hours100,000 Cost per machine hour$ 0.90Cost pool 4:Total cost$ 150,000 Number of machine hours100,000 Cost per machine hour$ 1.50Cost pool 5:Total cost$ 7,000 Number of units100,000 Cost per unit$ 0.07Cost pool 6:Total cost$ 600,000 Total engineering hours20,000 Cost per engineering hour$ 30.00 Manufacturing overhead: Unit level: Cost pool 3 -Cost per machine hour$ 0.90 Number of machine hours× 4,250$ 3,825Cost pool 5 -Cost per unit$ 0.07 Number of units× 4,000280 Batch level: Cost pool 2 -Cost per production run$ 500 Number of production runs (4,000 units ÷ 2,500 = 1.6)× 1.6800 Product-level level: Cost pool 1 -Cost per purchase order$ 5,500 Cost pool 6 -Number of purchase orders× 15,500 Cost per engineering hour$ 30 Number of engineering hours× 1003,000 Facility-level level*: Cost pool 4 -Cost per machine hour$ 1.50 Number of machine hours× 4,2506,375Total manufacturing overhead $ 19,780Number of units ÷ 4,000Manufacturing overhead per unit $ 4.945 * There are at least one alternative activity consumption drivers for assigning facility-level cost besides number of machine hours (shown below): Based on machine hours: Total facility-level cost (Cost pool 4)$ 150,000Number of machine hours100,000Cost per machine hour$ 1.50 Alternatively, the firm may use number of units to assign facility-level cost. Based on number of units: Total facility-level cost (Cost pool 4)$ 150,000Units of production100,000Cost per unit$ 1.50 Unit level: Cost pool 3$ 3,825Cost pool 5280 Batch level: Cost pool 2800 Product-level level: Cost pool 15,500Cost pool 63,000 Facility-level level: Cost pool 4 - Cost per unit$ 1.50 Number of units× 4,0006,000Total manufacturing overhead $ 19,405Number of units ÷ 4,000Manufacturing overhead per unit $ 4.85125

What is the definition of a sunk cost? Multiple Choice Cost that if incurred will make a company go bankrupt. Costs that have been incurred in the past or committed for the future. Costs that have been incurred in the past only. Costs that are committed for the future only. Costs that are relevant to decision making.

Costs that have been incurred in the past or committed for the future.

The cost to process monthly statements is an example of a:

Customer-sustaining cost.

Target costing determines the desired cost for a product upon the basis of a given competitive price such that the product will:

Earn a desired profit.

The predetermined factory overhead rate includes:

Estimated total amount of cost driver.

Which of the following is a benefit of activity-based costing?

Facilitate better product pricing decisions.

Zhender Inc. manufactures hair brushes that sell at wholesale for $2.70 per unit. Budgeted production in 2018 was 3,200 units. There was no beginning inventory in 2018. The following data summarized the 2018: 2018 Units sold 2,600 Units produced 3,200 Costs: Variable factory overhead per unit $0.70 Fixed factory overhead $1,600 Variable marketing per unit $0.65 Fixed Selling and Administrative $700 Full costing operating income for 2018 is calculated to be:

Full CostingSales $7,020COGS:COGM (units x (var cost per unit + fix cost per unit): 3,200 x ($.70 + $.50) = $3,840Ending Inv: 250 x 1.20 = $300COGS: $3,540 Gross Margin: $3,480 ($7,020 - $3,540) SG&AVar: $1,690 (2,600 x .65)Fix $700 Op Inc: $1,090 Variable CostingSales $7,020COGS:COGM (units x (var cost per unit): 3,200 x $.70 = $2,240Ending Inv: 250 x .70 = $175COGS: $2,065Var: $1,690 (2,600 x .65) Contribution Margin: $3,265 ($7,020 - $2,065 - $1,690) SG&AFix $700Op Inc: $965

Calculating the margin of safety (MOS) measure will help a firm answer which of the following questions?

How much revenue can we lose before we drop below the breakeven point?

How does a contribution income statement differ from a conventional income statement?

In the contribution income statement, variable costs are subtracted from sales to get total contribution margin.

The main objective of value chain analysis is to identify stages of the value chain where the firm can:

Increase value to the customer or reduce cost in some way.

A cost is relevant for decision making if it:

Is a future cost that will differ between alternatives You Answered

The balanced scorecard:

Is forward looking, stressing nonfinancial measures that can lead to benefits in the future.

A relatively low margin of safety ratio (MOS%) for a product is usually an indication that the product:

Is riskier than a product with a higher margin of safety ratio.

How will unit (average) cost of manufacturing (materials, labor and overhead) usually change if the production level rises?

It will decrease, but not in direct proportion to the production increase.

The major problem with relevant cost determination is that it fails to recognize the:

Long-term nature of most product-related decisions

The major problem with relevant cost determination is that it fails to recognize the:

Long-term nature of most product-related decisions.

When a firm has surplus capacity (that is, no resource constraints), relevant costs for decision-making (for example, determining short-term product mix) will, relative to the situation where the firm faces one or more resource constraints, be: Multiple Choice Lower. The same. Greater. It varies—that is, it is impossible to tell without further information.

Lower.

The common factor among control systems in hiring practices, promotion policies, and strategic performance measurement is:

Management sets expectations for desired employee performance.

Scott Cameras produces digital cameras and have decided to switch from a volume-based system to an activity-based system. Scott produced 100,000 digital cameras in the most recent quarter and has determined that their total activity costs were: $3,000,000 of materials cost, $500,000 of labor costs, $50,000 of inspection costs, and $500,000 of packaging costs. It takes 30 minutes of labor to produce each camera, inspections are done for 20% of all cameras produced, and cameras are packaged individually.

Materials Cost = $3,000,000 / 100,000 = $30 per camera Labor Cost = $500,000 / (100,000 × 0.5) = $10 per camera Inspection Cost = $50,000 / (100,000 × 0.2) = $2.50 per camera inspected Packaging Cost = $500,000 / 100,000 = $5 per camera

The internal rate of return (IRR) for an investment:

May produce different results than the net present value method (NPV) in evaluating projects with different useful lives

Many cost functions are __________ in nature when considered over the entire range of possible output levels.

Nonlinear.

Plainfield Company manufactures part G for use in its production cycle. The full cost per unit for each of 10,000 units of part G are as follows: Direct materials $3 Direct labor 15 Variable overhead 6 Fixed overhead 8 $32 Verona Company has offered to sell Plainfield 10,000 units of part G for $30 per unit. If Plainfield accepts Verona's offer, the released facilities could be used to save $45,000 in relevant costs in the manufacture of part H. In addition, $5 per unit of the fixed overhead applied to part G would be eliminated. Which alternative is more desirable and by what amount? Alternative Amount A) Manufacture $10,000 B) Manufacture $15,000 C) Buy $35,000 D) Buy $65,000 E) Buy $10,000

Option C 1. Relevant cost to manufacture = Incremental (i.e., avoidable) variable cost per unit × number of units = (direct materials cost/unit + direct labor cost/unit + variable overhead cost/unit) × 10,000 units = ($3 + $15 + $6)/unit × 10,000 units = $24/unit × 10,000 units = $240,0002. Relevant cost to buy = external purchase cost less avoidable fixed costs = ($30/unit × 10,000 units) − $45,000 − ($5/unit × 10,000 units) = $205,0003. Buy has lower cost: $240,000 − $205,000 = $35,000Note: the relevant cost to make could also be defined as incremental variable cost + incremental fixed cost = $240,000 + ($45,000 + [$5/unit × 10,000 units]) = $240,000 + $95,000 = $335,000. Relevant cost to purchase = $30/unit × 10,000 units = $300,000. Difference = $335,000 − $300,000 = $35,000 in favor of purchasing externally.

The value-chain analysis used regarding the "make-or-buy decision" often leads a firm to make use of:

Outsourcing options.

Which one of the following is the amount of factory overhead applied that exceeds the actual factory overhead cost?

Overapplied overhead.

The total manufacturing cost consists of the costs for materials used, labor, and ________.

Overhead cost

The process by which managers at all levels in the firm gain information about the performance of tasks within the firm and judge that performance against pre-established criteria is:

Performance measurement.

Listed below are selected line items from the Cost of Quality (COQ) report for Watson Products for last month: Category Amount Rework $700 Equipment maintenance 1,100 Product testing 800 Product repair 700 Office maintenance 300 What was Watson's total prevention and appraisal cost for last month?

Prevention cost = $1,100 (Equipment maintenance); Appraisal cost = $800 (Product testing). Total of Prevention + Appraisal cost = $1,100 + $800 = $1,900.

An activity that is performed to support the production of a new custom-order product is a:

Product-level activity.

Engineering change orders, maintenance of equipment used in manufacturing, and product design costs are examples of:

Product-level costs.

"Outsourcing" a cost center is often done to:

Reduce cost and obtain strategic focus.

Which of the following items is not useful for addressing risk and uncertainty in cost-volume-profit (CVP) analysis? Multiple Choice Regression analysis Sensitivity analysis What-if analysis Monte Carlo Simulation (MCS) analysis Decision trees and decision tables

Regression analysis

Quirch Inc. manufactures machine parts for aircraft engines. The CEO, Chucky Valters, was considering an offer from a subcontractor that would provide 2,400 units of product PQ107 for Valters for a price of $150,000. If Quirch does not purchase these parts from the subcontractor it must produce them in-house with the following unit costs: Cost per Unit Direct materials $32 Direct labor 17 Variable overhead 10 In addition to the above costs, if Quirch produces part PQ107, it would also have a retooling and design cost of $9,400. The difference between the relevant costs of producing 2,400 units of product PQ107 and buying the same number of units is $_______

Relevant Costs = Incremental Costs = Incremental Variable Costs + Incremental Fixed Costs = [(2,400 units × $31/unit) + (2,400 units × $19/unit) + (2,400 units × $8/unit)] + $9,800 = $149,000 = $1,000 cheaper to purchase

Motor Corporation manufactures machine parts for boat engines. The CEO, James Hamilton, is considering an offer from a subcontractor who would provide 3,000 units of product AB100 for Hamilton at a price of $230,000. If Motor Corp. does not purchase these parts from the subcontractor it must produce them in-house with the following per-unit costs: Direct materials$ 40Direct labor25Variable overhead15Allocated fixed overhead4 In addition to the above costs, if the company produces part AB100, it would incur incremental fixed overhead costs of approximately $10,000. Required: What would be the impact on short-term operating income if the company were to accept the offer from the subcontractor? Show calculations to support your answer.

Relevant cost = incremental (avoidable) costs: Direct materials$ 40Direct labor25Variable overhead15Total variable cost per unit$ 80Units to be produced× 3,000Total variable production costs$ 240,000Incremental fixed overhead10,000Total relevant costs of producing the units$ 250,000 Short-term operating income would increase by $20,000 if the offer is accepted, as follows: Total relevant costs of producing the units$ 250,000Amount of special offer(230,000)Advantage of accepting the offer$ 20,000

Management accountants can help support the quality initiatives of management by supplying decision makers with relevant financial information regarding these initiatives. Which of the following statements is true regarding costs that are relevant for decision making within this context?

Relevant costs are future costs that differ across the decision alternatives.

The range of the cost driver in which the actual value of the cost driver is expected to fall is called the:

Relevant range.

The theory of constraints (TOC) emphasizes which of the following?

Removing bottlenecks from the production process.

Consider the following data from two divisions of a company, P and Q: DivisionalPQSales$1,500,000 $1,000,000 Operating Income$600,000 $450,000 Investment$4,000,000 $2,750,000 If the minimum rate of return is 11%, what is Division P's residual income (RI)?

Residual Income = Operating Income − Imputed Capital Charge = $600,000 − (0.11 × $4,000,000) = $600,000 − $440,000 = $160,000

A company's management accountant is trying to improve the way costs are allocated within the company. Currently, several corporate expenses are grouped together and labeled "overhead." If the accountant wanted to use activity-based costing (ABC) to help solve the problem, what should she do?

She should try to trace the departments' costs to their cost objects, and then charge each department based on those cost relationships.

Non-financial measures of operations include all the following except:

Stock price.

SWOT analysis, a valuable analysis tool, stands for:

Strengths - Weaknesses - Opportunities - Threats.

When investments in facilities are shared by different subunits in a firm, allocation of the cost of these common facilities to sharing units should be determined by:

The relative amount of use of the facilities, or demand for the facilities, by the various investment centers in the organization.

In performing activity analysis during the design of an activity-based costing (ABC) system, the management accountant studies:

The resources, activities, and cost drivers in the operation.

Cost-volume-profit (CVP) analysis for revenue planning determines:

The revenue required to achieve a desired profit level

Over the past three decades, the cost structure for a typical manufacturing firm has shifted dramatically from labor and material as the primary costs in the 1970s, with overhead now the major cost category in the 2000s. What are the implications of this cost-structure shift for strategic relevant cost analysis?

The shift from variable to fixed cost in manufacturing impacts the effective use of strategic relevant cost analysis. Strategy has long-range perspectives based on projections and competitive analysis, just the reverse of relevant cost analysis, which has a short-term focus and deals with factual, objective data. As cost structures shift from variable (material and labor) to fixed (overhead), the perspective must be longer-range and more strategic, rather than the short-range perspective of relevant cost analysis. In addition, many factors other than short-term data require a longer perspective when using relevant cost analyses, because these subjective factors impact the firm's long-term profitability.

When deciding whether to discontinue a segment of a business, managers should focus on: Multiple Choice The amount of operating income per unit produced by the segment. The amount of contribution margin per direct labor hour in the segment. How corporate-level administrative costs would be redistributed if the segment were eliminated. The cost of equipment from the segment that could go idle if the segment were discontinued. The total contribution margin generated by the segment relative to any traceable (avoidable) fixed costs associated with the segment.

The total contribution margin generated by the segment relative to any traceable (avoidable) fixed costs associated with the segment. Correct

Feel the Difference, Incorporated manufactures bath and beauty products such as soaps, skin creams, lotions, and other products primarily for people with dry and sensitive skin. It has just introduced a new line of product that removes the spotting and wrinkling in skin associated with aging. It sells these products in pharmacies and department stores at prices slightly higher than those of other brands because of Feel the Difference's excellent reputation for quality and effectiveness. Feel the Difference currently has very low utilization of plant capacity. Two years ago, in anticipation of rapid growth, the company opened a new large manufacturing plant, which has yet to be utilized more than 50 percent. Partly for this reason, Feel the Difference has sought new partners and was able, with the help of financial analysts, to locate suitable business partners. The first potential partner identified in this search was a large supermarket chain, All-Mart, which is interested in the partnership because it wants Feel the Difference to manufacture an age cream to sell in its stores. The product would be essentially the same as the Feel the Difference product but would be packaged in the All-Mart brand name. The agreement would pay Feel the Difference $2.00 per unit and would allow All-Mart a limited right to advertise the product as manufactured for All-Mart by Feel the Difference. Feel the Difference's CFO has made some calculations and has determined that the direct materials, direct labor, and other variable costs needed for the All-Mart order would be about $1.00 per unit as compared to the full cost of $2.50 (materials, labor, and overhead) for the equivalent Feel the Difference product. Required: Based on a relevant-cost analysis, should Feel the Difference accept the proposal from All-Mart? Beyond short-term financial considerations, what strategic considerations bear on the decision?

To begin the analysis, the Feel the Difference CFO should recognize that the $2.50 full cost for its product includes an allocation of $1.50 of irrelevant fixed overhead. Only the variable costs of $1.00 per unit are relevant (because they are incremental to the decision). From this standpoint, the sales to All-Mart makes good sense, since there would be a contribution of $1.00 ($2.00 price less $1.00 relevant cost) per unit sold. Moreover, sales to All-Mart would utilize Feel the Difference's available capacity. If these sales were to continue for the long term, then average fixed costs would be reduced and Feel the Difference's profitability would be improved in the long term as well. However, the sales to All-Mart could be a potentially serious strategic mistake for Feel the Difference. Feel the Difference's reputation is built upon quality and product excellence, features which give it a clear differentiation in the market. To sell its products in a supermarket, even under another brand name, would cheapen the image of all Feel the Difference products, and cause it to lose market share in its usual distribution channels, the pharmacies and department stores. This is especially true given that All-Mart has the limited right to market the product as manufactured by Feel the Difference. How limited is that right? Feel the Difference could be trading a short-term gain for a potential long-term disaster in this deal with All-Mart. It should look for business partners that are more in line with its strategy.

Especially for projects with long lives, estimation of revenues (or benefits), costs, and cash flows of a capital investment project is a difficult task principally because of:

Uncertainty about future events.

An activity that is performed for each unit of production is a(n):

Unit-level activity

An activity that is performed for each unit of production is a(n):

Unit-level activity.

In an organization that makes furniture, which of the following is a high value-added activity?

Using direct materials in production.

A composite of the cost of various sources of funds comprising a firm's capital structure is its:

Weighted-average cost of capital (WACC).

Stylish Sitting is a retailer of office chairs located in San Francisco, California. Due to increased market competition, the CFO of Stylish Sitting has grown worried about the firm's upcoming income stream. The CFO asked you to use the company financial information provided below. Sales price$85.00Per-unit variable costs Invoice cost52.00 Sales commissions15.00Total per unit variable costs$67.00Total annual fixed costs: Advertising$85,000 Rent90,000 Salaries250,000Total annual fixed costs$425,000 If 40,000 office chairs were sold, Stylish Sitting's operating income (π B) would be:

[($85 − $67) × 40,000] − $425,000 = $295,000.Also: = ($85 − $67)/unit × (40,000 − 23,611) units = $18/unit × 16,389 units = $295,000

The major limitation of volume-based costing systems is the use of volume-based:

rates

If after-tax income of Grey Division, adjusted for economic value, is 15% of sales, capital employed is $5,000,000 (adjusted for equity-equivalents), the divisional cost of capital (discount rate) is 8%, and sales are $12,000,000, then Economic Value Added (EVA®) is:

$1,400,000

Music Corporation recorded sales of $2,235,245 for the most recent year. The company's breakeven sales point (in dollars) is $1,650,000, and its margin of safety ratio (MOS%) at the current sales level is 26%. What sales (in dollars) would be needed to increase the company's MOS% to 38%?

$2,661,290 (Solve the following equation, where X = required sales, in dollars: (X − $1,650,000)/X = 0.38; X = $2,661,290)

$77,000 + $324,000 - $40,000 = $361,000

The sales and cost data for two companies in the transportation industry are as follows: X CompanyY CompanyAmountPercentAmountPercentSales$ 120,000100$ 120,000100Variable costs72,0006036,00030Contribution margin48,0004084,00070Fixed costs36,000 72,000 Operating income (πB)$ 12,000 $ 12,000 X Company's degree of operating leverage (DOL) at the current sales volume level is calculated to be: Multiple Choice 4.00 5.00 7.00 6.00 3.00

4.00 (Contribution margin (CM)/Operating income (πB) = $48,000/$12,000 = 4.00)

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