Cost Accounting - Exam 2 - Chapters 3 & 4

Dorcan Corporation manufactures and sells T-shirts imprinted with college names and slogans. Last year, the shirts sold for $7.50 each, and the variable cost to manufacture them was $2.25 per unit. The company needed to sell 20,000 shirts to break-even. The after tax net income last year was $5,040. Donnelly's expectations for the coming year include the following: (CMA adapted) The sales price of the T-shirts will be $9. Variable cost to manufacture will increase by one-third. Fixed costs will increase by 10%. The income tax rate of 40% will be unchanged. The selling price that would maintain the same contribution margin ratio as last year is:

$10 If variable cost increases by 1/3, then the selling price must also increase by 1/3 to maintain the same contribution margin ratio. $7.50 × 1.333 = $10.00. Last year's contribution margin ratio =. (selling price - variable cost per unit) / selling price per unit * 100 (7.50 - 2.25) / 7.50 * 1005.25 / 7.50 * 100 70%

Ortega Industries manufactures 15,000 components per year. The manufacturing cost of the components was determined to be as follows: (see image) Assume Ortega Industries could avoid $40,000 of fixed manufacturing overhead if it purchases the component from an outside supplier. An outside supplier has offered to sell the component for $34. If Ortega purchases the component from the supplier instead of manufacturing it, the effect on income would be a:

$10,000 increase. Make: $150,000 + $240,000 + $90,000 + $40,000 = $520,000. Buy: 15,000 × $34 = $510,000. Make $520,000 - Buy $510,000 = $10,000 increase.

Damon Industries manufactures 13,000 components per year. The manufacturing costs of the components was determined as follows: (see image) An outside supplier has offered to sell the component for $17. If Damon purchases the component from the outside supplier, the manufacturing facilities would be unused and could be rented out for $11,400. If Damon purchases the component from the supplier instead of manufacturing it, the effect on operating profits would be a:

$14,100 decrease. Make: $119,000 + $18,500 + $58,000 = $195,500 Buy: $13,000 × $17 = $221,000 - $11,400 = $209,600 Make $195,500 - Buy $209,600 = -$14,100 decrease in operating profits to buy

The Minton Company has gathered the following information for a unit of its most popular product: (see image) The above cost information is based on 5,900 units. A foreign distributor has offered to buy 2,900 units at a price of $19 per unit. This special order would not disturb regular sales. Variable shipping and other selling expenses would be an additional $1 per unit for the special order. If the special order is accepted, Minton's operating profits will increase by:

$14,500 [$19 − $7 − $3 − ($6 × 50%) − $1] × 2,900 = $5 × 2,900 = $14,500.

The Lamar Company manufactures wiring tools. The company is currently producing well below its full capacity. The Boston Company has approached Lamar with an offer to buy 11,000 tools at $1.76 each. Lamar sells its tools wholesale for $1.86 each; the average cost per unit is $1.84, of which $0.28 is fixed costs. If Lamar were to accept Boston's offer, what would be the increase in Lamar's operating profits?

$2,200 [$1.76 - ($1.84 - $0.28)] × 11,000 = $2,200.

Honeysuckle Manufacturing has the following data: (see image) If Honeysuckle has actual monthly sales of $1,500,000 and desires an operating profit of $50,000 per month, what is the margin of safety in sales dollars?

$266,667 ($60 − $33 − $9)/$60 = 30%; BE = ($250,000 + $120,000)/30% = $1,233,333.$1,500,000 − $1,233,333 = $266,667. Margin of safety in sales dollars: = Actual sales - Break even sales Actual sales = $1500000 Break even sales = Total fixed cost/Contribution margin Total fixed cost = $250000 + $120000 = $370000 Contribution margin = Contribution per unit/Sale price per unit Contribution per unit = $60 - $33 - $9 = $18 Contribution margin = $18/$60 = 30% Break even sales = $370000/30% = $1233333 Margin of safety = $1500000 - $1233333 = $266667

The following information relates to a product produced by Faulkland Company: (see image) Fixed selling costs are $1,000,000 per year. Variable selling costs of $4 per unit sold are added to cover the transportation cost. Although production capacity is 500,000 units per year, Faulkland expects to produce only 400,000 units next year. The product normally sells for $40 each. A customer has offered to buy 60,000 units for $30 each. The customer will pay the transportation company directly for the transportation charges on the units purchased. If Faulkland accepts the special order, the effect on operating profits would be a:

$420,000 $30 - ($10 + $7 + $6) = $7 × 60,000 = $420,000 increase. The selling costs do not need to be included because the customer will pay those directly to the transportation company.

The operations of Bridgeton Corporation are divided into the Adams Division and the Carter Division. Projections for the next year are as follows: (see image) Operating income for Bridgeton Corporation as a whole if the Carter Division were dropped would be:

$49,000 $112,000 - $63,000 = $49,000

The following information pertains to Tiller Co: Sales: $ 800,000 Variable Costs 160,000 Fixed Costs 40,000 What is Tillers break-even point in sales dollars

$50,000 ($800,000 - 160,000)/800,000 = 80% $40,00/.80 = $50,000

The following information pertains to Tiller Co: Sales: $ 700,000 Variable Costs 210,000 Fixed Costs 41,300 What is Tillers break-even point in sales dollars

$59,000 ($700,000 - 210,000)/700,000 = 70% $41,300/.70 = $59,000

The Arthur Company manufactures kitchen utensils. The company is currently producing well below its full capacity. The Benton Company has approached Arthur with an offer to buy 10,000 utensils at $0.65 each. Arthur sells its utensils wholesale for $0.75 each; the average cost per unit is $0.72, of which $0.15 is fixed costs. If Arthur were to accept Benton's offer, what would be the increase in Arthur's operating profits?

$800 [$0.65 - ($0.72 - $0.15)] × 10,000 = $800

The following information relates to a product produced by Orca Company: (see image) Fixed selling costs are $1,000,000 per year. Although production capacity is 500,000 units per year, Orca expects to produce only 400,000 units next year. The product normally sells for $80 each. A customer has offered to buy 60,000 units for $60 each. The customer will pay the transportation charge on the units purchased. If Orca accepts the special order, the effect on operating profits would be a:

$840,000 increase. $60 − ($20 + $14 + $12) = $14 × 60,000 = $840,000 increase; the transportation costs do not need to be included since the customer pays for them.

Parton Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Parton's plant manager is considering making the headlights now being purchased from an outside supplier for $11.00 each. The Parton plant has idle equipment that could be used to manufacture the headlights. The design engineer estimates that each headlight requires $4.00 of direct materials, $3.00 of direct labor, and $6.00 of manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision. A decision by Parton Company to manufacture the headlights should result in a net gain (loss) for each headlight of: (CMA adapted)

.40 (see image for detailed info) *$6 − (40% × $6 = $2.40) = $3.60 The company should make the part rather than buy it from the outside supplier since it costs $0.40 less to make and the company has excess plant capacity. or 11.00 - 4.00 - 3.00 - (6.00 x .60) = .40

Dorcan Corporation manufactures and sells T-shirts imprinted with college names and slogans. Last year, the shirts sold for $7.50 each, and the variable cost to manufacture them was $2.25 per unit. The company needed to sell 20,000 shirts to break-even. The after tax net income last year was $5,040. Donnelly's expectations for the coming year include the following: (CMA adapted) The sales price of the T-shirts will be $10. Variable cost to manufacture will increase by one-third. Fixed costs will increase by 10%. The income tax rate of 40% will be unchanged. Based on a $10 selling price per unit, the number of T-shirts Dorcan Corporation must sell to break-even in the coming year is:

16,500 units FC (last year) = ($7.50 − 2.25) × 20,000 units = $105,000; FC (coming year) = $105,000 × 1.10 = $115,500 $115,500/($10 selling price − $3 VC ($2.25 × 1.333)) = 16,500 units.

Lamar has the following info: (see image) How many units must Lamar produce and sell in order to break-even?

22,500 units ($150,000 + $120,000)/($40 − $22 − $6) = 22,500 units.

Evergreen Corporation manufactures circuit boards and is in the process of preparing next year's budget. The pro forma income statement for the current year is presented below. (see image) The contribution margin ratio for the current year is:

49.3% $500,000 + $250,000 + $275,000 + $750,000 = $1,775,000 (total variable costs); ($3,500,000 − $1,775,000)/$3,500,000 = 49.3%.

Cost-volume-profit (CVP) analysis is a simple but powerful tool to assist management in making operating decisions. Which of the following does not represent a potential use of CVP analysis?

Aids in evaluating tax planning alternatives. CVP analysis addresses pricing and volume, but it does not address tax planning.

Which of the following statements regarding special orders is (are) true? (A) The primary decision for special orders is determining whether the differential revenue is greater than the differential costs associated with the order. (B) The differential analysis approach to pricing for special orders could lead to underpricing in the long-run because fixed costs are not included in the analysis.

Both A and B are true A) looks at the short-run, while (B) has a long-run view.

Cost A is a fixed cost, while B is a variable cost. During the current year, the volume of output has decreased. In terms of cost per unit of output, we would expect that:

Cost B has remained unchanged Variable cost per unit has remained constant, while fixed cost in total remains unchanged but has increased on a per unit basis.

At the break-even point, the total contribution margin equals total: (CPA adapted)

Fixed costs Correct: This statement defines break-even (e.g., contribution margin − fixed costs = zero).

Item I51 is used in one of Policy Corporation's products. The company makes 18,000 units of this item each year. The company's Accounting Department reports the following costs of producing Item 151 at this level of activity: (see image for solution) An outside supplier has offered to produce Item 151 and sell it to the company for $15.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the item was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $26,000 of these allocated general overhead costs would be avoided. If management decides to buy Item I51 from the outside supplier rather than to continue making the Item, what would be the annual impact on the company's overall net operating income?

Net operating income would decline by $119,800 per year.

Item I51 is used in one of Policy Corporation's products. The company makes 18,000 units of this item each year. The company's Accounting Department reports the following costs of producing Item 151 at this level of activity: (see image) An outside supplier has offered to produce Item 151 and sell it to the company for $15.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the item was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $26,000 of these allocated general overhead costs would be avoided. If management decides to buy Item I51 from the outside supplier rather than to continue making the Item, what would be the annual impact on the company's overall net operating income?

Net operating income would decline by $119,800 per year. see next card for image with explanation

Item N29 is used by Tyner Corporation to make one of its products. A total of 11,000 units of this item are produced and used every year. The company's Accounting Department reports the following costs of producing Item N29 at this level of activity (see image for solution) An outside supplier has offered to make Item N29 and sell it to the company for $21.20 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be avoided. The special equipment used to make the Item was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the items were purchased instead of produced internally. In addition, the space used to make Item N29 could be used to make more of one of the company's other products, generating an additional segment margin of $29,000 per year for that product. What would be the impact on the company's overall net operating income of buying Item N29 from the outside supplier?

Net operating income would decline by $32,600 per year.

Item N29 is used by Tyner Corporation to make one of its products. A total of 11,000 units of this item are produced and used every year. The company's Accounting Department reports the following costs of producing Item N29 at this level of activity (see image) An outside supplier has offered to make Item N29 and sell it to the company for $21.20 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be avoided. The special equipment used to make the Item was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the items were purchased instead of produced internally. In addition, the space used to make Item N29 could be used to make more of one of the company's other products, generating an additional segment margin of $29,000 per year for that product. What would be the impact on the company's overall net operating income of buying Item N29 from the outside supplier?

Net operating income would decline by $32,600 per year. see next card for image with explanation

Which of the following statements regarding differential costs is (are) false? (A) The full-cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product's cost. (B) When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs.

Only A The full-cost fallacy is when fixed costs are included.

Tower Company manufactures and sells a single product with a positive contribution margin. If the selling price and the variable cost per unit both increase 5% and fixed costs do not change, what is the effect on the contribution margin per unit and the contribution margin ratio? CM per unit CM ratio A. No change No change B. Increase Increase C. Increase No change D. Increase Decrease

Option C The contribution margin per unit increases and there is no change in the contribution margin ratio. See image for detailed explanation

Which of the following would not cause the break-even point to change?

Sales volume increases Volume changes do not affect the break-even point.

In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component? (CMA adapted)

Straight-line Depreciation. Straight-line depreciation is a fixed cost since it is the same amount each period.

The price based on customers' perceived value for the product and the price that competitors charge is the:

Target price A target price is the estimated price for a product or service that potential customers will be willing to pay.

Which of the following costs are irrelevant for a special order that will allow an organization to utilize some of its present idle capacity?

Unavoidable fixed overhead Unavoidable fixed costs will be incurred whether the special order is undertaken or not.

Darren Company produces three products with the following costs and selling prices: (see image) If Darren has a limit of 20,000 direct labor hours but no limit on units sold or machine hours, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:

Y,Z,X X 16/4 = 4 Y 14/2 = 7 Z 15/3 = 5

A company's break-even point will not be changed by:

a change in the income tax rate Income taxes do not affect the break-even point; taxes are based on before tax profit.

A company's break-even point will not be changed by:

a change in the number of units produced and sold. Volume changes do not affect the break-even point.

A company's break-even point will not be increased by:

an increase in the number of units produced and sold. Units sold do not affect the break-even point; instead, they indicate where we are on the revenue curve and the margin of safety.

A company's break-even point will not be increased by:

an increase in the number of units produced and sold. Volume changes do not affect the break-even point.

The difference between total sales in dollars and total variable costs is called

contribution margin contribution margin = total sales - total variable costs

Operating leverage refers to the extent to which an organization's cost structure is made up of:

fixed costs Operating leverage is determined by the cost structure of the organization, the amount of the fixed versus variable costs.

The amount by which a company's sales can decline before losses are incurred is called the:

margin of safety This is a basic description for margin of safety.

The practice of setting prices highest when the quantity demanded for the product approaches capacity is:

peak-load pricing Peak-load pricing is the practice of setting prices highest when the quantity demanded for the product approaches the physical capacity to produce it.

Break-even analysis assumes that:

the average variable cost per unit is constant.

When there is a production constraint, a company should emphasize the products with:

the highest contribution margin per unit of the constrained resource. To maximize profits, the alternatives must be selected in order of the highest contribution margin per unit of the constrained resource.

If there is excess capacity, the minimum acceptable price for a special order must cover:

variable and incremental fixed costs associated with the special order. The differential costs must be covered. There are no opportunity costs since there is excess capacity.