Managerial Accounting Test 2

The following income statement is provided for Ramirez Company for the current year: Sales Rev (2,100un * $19.6/un): 41,160 COGS(var; 2,100un * $7.6/un): (15,960) COGS(fixed): (3,600) Gross Marg: 21,600 Administrative Sal: (5,600) Depreciation: (3,600) Supplies(2,100un * $1.6/un): (3,360) Net Income: 9,040 Contribution margin?

Tot Var Costs= VarCOGS+Supplies= (7.6+1.6)*2,100un= $19,320 Contrib Marg= Sales rev- Var Costs= 41,160- 19,320= $21,840

ServicePro provides two kinds of services. During the most recent accounting period, the two service lines produced the following operating results: NI service 1: 31,000 NI service 2: (3,500) Company wide facility-level costs: (7,000) each How will the company's income be affected without service 2

Total NI; 31,000+(3,500)= 27,500 Service 1 only; 31,000+(7,000)= 24,000 24,000- 27,500= (3,500) The company's income will decrease by $3,500 per year

T/F What is the differential revenue for this decision?

True

T/F The amount of net income determined for an accounting period will be the same regardless of whether the income statement is prepared under a contribution margin format used in managerial accounting or the product costing format use in financial accounting.

True

The following data pertains to activity and maintenance costs for two recent years: Year 1: Activity Level in units; 12,000, Maintenance cost; $15,000 Year 2: Activity Level in units; 9,000, Maintenance cost; $12,600 Year 3: Activity Level in units; 8,000, Maintenance cost; $12,000 Using the high-low method, the cost formula for maintenance would be:

Var cost= (15,000-12,000)/(12,000-8,000)= .75 Tot cost= fixed +var 15,000= Fixed + (12,000*.75) Fixed cost= 6,000 Cost equation= $6,000 plus $.75 per unit

Wu Company incurred $85,000 of fixed cost and $98,600 of variable cost when 2,900 units of product were made and sold. If the company's volume increases to 3,400 units (within relevant range), the total cost per unit will be:

Variable cost per unit= 98,600/2,900= $34 Volume increase: 3400*34=115,600 115,600+85,000(fixed cost)=200,600 Per unit: 255,000/3,400= $59 total cost per unit

At lunchtime, Pete's Chilly Dogs sells hot dogs, chips, and soft drinks from five portable hot dog carts stationed on busy street corners. The depreciation cost on the carts is $1,000 per year for each cart. The company buys supplies (hot dogs, chips, cups, napkins) as needed. The 5 cart operators are each paid $8,000 per year plus 5% of sales revenue. Relative to the number of hot dog carts, the depreciation cost is

Variable. The more hot dog carts in use the greater the total depreciation charge. Since the total amount of depreciation cost increases or decreases in proportion to the number of carts in service, it is a variable cost under these circumstances.

All of the following would be considered a fixed cost for a bottled water company except: Rent on warehouse facility Depreciation on its manufacturing equipment Wages for machine operators paid based on hours Property taxes on its factory building

Wages for machine operators paid based on hours

Sunk costs:

are not considered when evaluating new proposals.

The break-even point is the point at which

revenue is equal to the total of fixed plus variable cost.

Max bought a ticket to the championship baseball game for $120. Someone approaches him outside the stadium and offers him $265 for his ticket. If Max decides to go to the game, instead of selling his ticket, how much does it cost Max to go to the game?

$265 The opportunity cost of going to the game is the amount of revenue lost if the ticket is sold

Clean, Inc. cleans and waxes floors for commercial customers. The company is presently operating at less than capacity with equipment and employees idle at times. The company recently received an order from a potential customer outside the company's normal geographic service region for a price of $24,000. The size of the proposed job is 37,000 square feet. The company's normal service costs are as follows: Unit-level materials- $0.33 per square foot Unit-level labor- $0.40 per square foot Unit-level variable overhead- $0.23 per square foot Facility-level overhead- Allocated at $0.25 per square foot If the company accepts the special offer:

(.33+.40+.23)*37,000=35,520 24,000-35,520= -11,520 loss if the offer is accepted **fixed allocated costs are not relevant for the offer to be considered

Pierce Company's break-even point is 31,000 units. Its product sells for $25 and has a $17 variable cost per unit. What is the company's total fixed cost amount?

(25*31,000)- (17*31,000)- Fixed cost=0 775,000-527,000= 248,000

Pierce Company's break-even point is 20,000 units. Its product sells for $30 and has a $14 variable cost per unit. What is the company's total fixed cost amount?

(30 X 20,000)-(14 X 20,000)-Fixed costs= $0 Fixed costs= 320,000

Safety Products currently outsources an electrical switch that is a component in its sprinkler systems. The switches are purchased for $23 each. The company is considering making the switches internally and has conducted a study to determine the costs involved. The costs below are projected annual production costs: Unit-level material cost-$4 Unit-level labor cost-$3 Unit-level overhead-$2 Batch-level cost (6,000 units per batch)-$12,000 Product-level supervisory salaries-$41,000 Allocated facility-level costs-$27,000 Assume that the company needs 12,000 of the switches, which would be produced in two batches. Assume also that the company will still be operating within the relevant range. If Safety decides to make the parts under these conditions, the total relevant costs will be:

(4+3+2)*12,000= 108,000 108,000+ (12,000*2)+ 41,000= 173,000

Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $24 each. The company is considering making the switches internally at the following projected annual production costs: Unit-level material cost-$5 Unit-level labor cost-$4 Unit-level overhead-$3 Batch-level set-up cost (7,000 units per batch)-$33,000 Product-level supervisory salaries-$41,500 Allocated facility-level costs-$28,000 The company expects an annual need for 7,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $2,300 a month. If the company decides to make the parts, total costs will be:

(5+4+3)*7,000= 84,000 total variable costs 84,000+ 33,000+ 41,500+ (2,300*12)= 186,100 total costs of making switches 24*7,000= 168,000 cost to purchase 186,100-168,000= 18,100 loss if switches are made **** Allocated fixed costs are not considered

Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $39 each. The company is considering making the switches internally at the following projected annual production costs: Unit-level material cost-$8 Unit-level labor cost-$7 Unit-level overhead-$6 Batch-level set-up cost (7,000 units per batch)-$49,000 Product-level supervisory salaries-$49,500 Allocated facility-level costs-$44,000 The company expects an annual need for 7,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $3,900 a month. If the company decides to make the parts, total costs will be:

(8+7+6)*7,000= 147,000 total variable costs 147,000+ 49,000+ 49,500+ (3,900*12)= 292,300 total cost to make the switches 39*7,000= 273,000 273,000- 292,300= -19,300 loss if switches are made

During the current year, Fairview Corporation sold 100,000 units of its product for $20 each. The variable cost per unit was $12, and Fairview's margin of safety was 30,000 units. What was the amount of Fairview's total fixed costs?

100,000-30,000=70,000 break-even point 70,000*(20-12)=560,000

Wu Company incurred $97,200 of fixed cost and $111,600 of variable cost when 3,100 units of product were made and sold. If the company's volume increases to 3,600 units (within relevant range), the total cost per unit will be:

111,600/3,100=36/un 36*3,600=129,600 +97,200 fixed cost =226,800 /3,600 =63

For the last two years BRC Company had net income as follows: Year 1: 99,000 Year 2: 119,000 What was the percentage change in income from Year 1 to Year 2?

119,000-99,000= 20,000 20,000/99,000= .2020 = 20.20% increase

Zeus, Inc. produces a product that has a variable cost of $7 per unit. The company's fixed costs are $45,000. The product sells for $15 a unit and the company desires to earn a $21,000 profit. What is the volume of sales in units required to achieve the target profit? (Do not round intermediate calculations.)

15-7=8 contribution margin per un. 8/15=.533 contribution ratio 45,000+21,000= 66,000 66,000/.533= 123,827.39 required sales 123,827.39/15= 8,255.16 required units

At its $45 selling price, Atlantic Company has sales of $22,500, variable manufacturing costs of $6,000, fixed manufacturing costs of $2,000, variable selling and administrative costs of $3,000 and fixed selling and administrative costs of $2,000. What is the company's contribution margin per unit?

22,500-(6,000+3,000)=13,500 22,500/45=500un 13,500/500= 27 contribution margin per unit

During the current year, Winchester Company sold 83,000 units at a selling price of $25 per unit. Variable cost per unit was $13, and Winchester's net income for the year was $43,000. What was the amount of Winchester's fixed costs?

25-13=12 contribution margin 12*83,000= 996,000 996,000-43,000(NI)= 953,000

Newton Company currently produces and sells 6,000 units of a product that has a contribution margin of $8 per unit. The company sells the product for a sales price of $20 per unit. Fixed costs are $27,000. The company is considering investing in new technology that would decrease the variable cost per unit to $8 per unit and double total fixed costs. The company expects the new technology to increase production and sales to 16,000 units of product. What sales price would have to be charged to earn a $90,000 desired profit assuming the investment in technology is made?

27,000*2= 54,000 Tot var cost: 8*16,000=128,000 Tot costs: 54,000+128,000= 182,000 182,000+90,000= 272,000 total sales needed 272,000/16,000= $17 selling price

QRC Company is trying to decide which one of two alternatives it will accept. The costs and revenues associated with each alternative are listed below: Projected Rev Alt A: 205,000 Projected Rev Alt B: 290,000 What is the differential revenue for this decision?

290,000- 205,000= $85,000 of differential revenue

QRC Company is trying to decide which one of two alternatives it will accept. The costs and revenues associated with each alternative are listed below: Projected Rev; Alternative A= 230,000 Projected Rev; Alternative B= 340,000 What is the differential revenue for this decision?

340,000-230,000= 110,000

Green Manufacturing Company produces a product that has a variable cost of $30 per unit. Fixed costs amount to $240,000. The selling price of the product is $36. The contribution margin per unit is:

36-30= 6

Breezy Company is considering the replacement of equipment that has a current book value of $365,000. Breezy has an opportunity to sell the equipment for $265,000. The cost of replacing the old equipment with a new machine is $325,000. The cost of operating the new equipment is $30,000 per year less than the cost of operating the old equipment. The new equipment has a 5-year useful life. The amount of the sunk cost for this replacement decision is:

365,000 Sunk cost are costs which are already incurred and cannot be recovered. It is not relevant for decision making. The given case equipment value is 365,000 that is already incurred and not relevant for future decision making.

M and M, Inc. produces a product that has a variable cost of $3.20 per unit. The company's fixed costs are $36,400. The product is sold for $6 per unit and the company desires to earn a target profit of $11,200. What is the amount of sales that will be necessary to earn the desired profit? (Do not round intermediate calculations.)

6-3.2= 2.8 contribution margin per unit 2.8/6= .467 contribution margin ratio 36,400 (fixed)+ 11,200 (target)= 47,600/.467= 101,927.2 required sales in dollars 101,927.2/6= 16,987.87 required sales in units

Rocky Mountain Bottling Company produces a soft drink that is sold for a dollar. At production and sales of 800,000 units, the company pays $800,000 in production costs, half of which are fixed costs. At that volume, general, selling, and administrative costs amount to $140,000 of which $60,000 are fixed costs. What is the amount of contribution margin per unit?

800,000*.5= 400,000 variable cost 140,000-60,000= 80,000 variable cost 800,000-400,000-80,000= 320,000 320,000/800,000=.4 $0.4 contribution margin per unit

Burke Company has a break-even of $600,000 in total sales. Assuming the company sells its product for $40 per unit, what is its margin of safety in units if sales total $900,000?

900,000- Margin of Safety= 600,000 break-even point 300,000/40 cost per un.= 7,500 margin of safety in units

Derek's Drum Depot (DDD) wants to add a new line of drumsticks to its product line. The following data apply to the new drumsticks line. Budgeted sales- 30,000 sets per year Sales price- $5 per set Variable costs- $3 per set Fixed costs- $10,000 per set year The margin of safety for DDD is:

B/E point= Fixed cost/ Contrib Marg 10,000/(5-3)= 5,000 30,000-5,000= 25,000 25,000/30,000= 83.33%

Unistar Computers makes and sells a unique computer that is designed for a specific market. Cost information relating to that product is shown below: Sales Price- $1,500 per unit Variable Costs- $1,000 per unit Fixed Costs- $120,000 total Unistar expects to make and sell 300 computers. Based on this information, the margin of safety expressed in units is:

B/E point= Fixed costs/ Contribution Marg 120,000/(1,500-1,000)=240 B/E point Margin of Safety= Sales- B/E point 300-240= 60 units margin of safety

Green Manufacturing Company produces a product that has a variable cost of $30 per unit. Fixed costs amount to $240,000. The selling price of the product is $36. How many units of product must Green produce and sell to break even?

Break-even point (un.)= Fixed cost/ contribution margin per unit 36-30= 6CM 240,000/6= 40,000 units

The following income statement is provided for Grant, Inc. Sales Rev(2,300 @ 15.8/un): $36,340 Var Costs (2,300 @ 7.8/un): 17,940 Fixed costs: 5,400 Net Income: 13,000 What is this company's magnitude of operating leverage?

Contrib Marg= Sales-Var Costs= 36,340-17,840= 18,500 Operating Leverage= Contrib Marg/ Net Income= 1,42

Boland Company sells a product that is priced at $20 per unit. The per unit contribution margin is equal to 25 percent of the sales price. If fixed costs amount to $55,000 and the company has a desired profit of $20,000, the number of units that must be sold to earn the desired profit is

Contribution margin per unit= 20*.25= 5 per unit Desired unit= (fixed cost+ Desired profit)/ Contrib Marg per un (55,000+20,000)/5= 15,000 units

Wu Company incurred $146,200 of fixed cost and $163,400 of variable cost when 3,800 units of product were made and sold. If the company's volume doubles (within relevant range), the total cost per unit will:

Decrease

T/F: An outsourcing decision typically affects only product-level costs.

False

At lunchtime, Pete's Chilly Dogs sells hot dogs, chips, and soft drinks from five portable hot dog carts stationed on busy street corners. The depreciation cost on the carts is $1,000 per year for each cart. The company buys supplies (hot dogs, chips, cups, napkins) as needed. The 5 cart operators are each paid $8,000 per year plus 5% of sales revenue. Relative to the number of customers at a particular hot dog stand, the depreciation cost is

Fixed

Omega Company has sales of $300,000 and cost of goods sold of $200,000. The cost of goods sold is a variable cost. The Company incurred $20,000 of fixed operating expenses and $40,000 of variable operating expenses. Based on this information

Gross Margin Technique::: Sales (300,000)- COGS (200,000)= 100,000 Gross Margin Contribution Margin Technique::: Sales (300,000)- COGS (200,000)- Variable OE (40,000)= 60,000CM

Mountain Gear has been using the same machines to make its name brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $320,000. The old machines presently have a book value of $132,000 and a market value of $24,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $220,000 and have operating expenses of $18,000 a year. The new machines are expected to have a five-year useful life and no salvage value. The operating expenses associated with the old machines are $42,000 a year. The new machines are expected to increase quality, justifying a price increase, and thereby increasing sales revenue by $22,000 a year.

Net purchase value; 220,000- 24,000= 196,000 Net operating expense; (22,000-18,000)*5= 20,000 Total expense= 196,000-20,000= 176,000 Old machine operating cost: 42,000*5= 210,000 210,000- 176,000= 34,000 better off over five-year period if new machines are purchased

Jack currently works for a law firm full time and earns $60,000 a year. He is thinking of quitting his job to pursue a medical degree. Medical school will cost him $100,000 per year. If Jack quits his job and goes to medical school, the salary he currently earns would be considered what type of cost?

Opportunity cost

Pilot Motors Corporation is an automobile manufacturer. The company produces its own motors, tires, and other automobile parts. Pilot has the opportunity to purchase tires from another manufacturer instead of producing the tires in its own facility. This type of decision is typically known as a(n):

Outsourcing decision

Select the correct statement regarding relevant costs and revenues. Relevant costs are also known as unavoidable costs. Relevant costs are only those that are based on past experience. Relevant revenues must differ between the alternatives. Correct All of the above.

Relevant revenues must differ between the alternatives

The following information is provided for Southall Company: Sales Rev: 310,000 Var manufacturing costs: 105,000 Fixed manufacturing cost: 55,000 Var selling and administrative costs: 50,000 Fixed selling and administrative costs: 45,000

Sales rev- tot variable costs= contribution margin 310,000-105,000-50,000= 155,000

Which of the following formulas is used to determine the margin of safety?

Sales-Break-even point= Margin of Safety

Clean, Inc. cleans and waxes floors for commercial customers. The company is presently operating at less than capacity with equipment and employees idle at times. The company recently received an order from a potential customer outside the company's normal geographic service region for a price of $21,000. The size of the proposed job is 34,000 square feet. The company's normal service costs are as follows: Unit-level materials-$0.30 per square foot Unit-level labor-$0.37 per square foot Unit-level variable overhead-$0.20 per square foot Facility-level overhead- Allocated at $0.22 per square foot If the company accepts the special offer:

Special offer; (.3+.37+.2)*34,000= 29,580- 21,000= 8,580 loss on job

Select the correct statement regarding fixed costs: Because they do not change, fixed costs should be ignored in decision making. The fixed cost per unit decreases when volume increases. The fixed cost per unit increases when volume increases. The fixed cost per unit does not change when volume decreases.

The fixed cost per unit decreases when volume increases.