Question 1: Schickel Inc. regularly uses material B39U and currently has in stock 460 liters of the material for which it paid $3,128 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $5.95 per liter. New stocks of the material can be purchased on the open market for $6.45 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 760 liters of the material to be used in a job for a customer. The relevant cost of the 760 liters of material B39U is:
$6,450 $4,902 $4,672 $4,522
Solution:- Computation of Relevant cost Relevant cost = $6.45 per liter × 760 liters = $4,902
Question 2: Munafo Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 6,500 units of component VGI. Each unit of VGI requires 1 unit of material I57 and 5 units of material M97. Data concerning these two materials follow:
Material I57 is in use in many of the company's products and is routinely replenished. Material M97 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product VGI?
$174,850 $213,850 $171,925 $213,130
Solution:
Material I 57
# Required per unit 1×
Relevant price $9.40 =
Total $ 9.40
M 97 5× Total per unit relevant cost
$3.50 =
17.50 $26.90
Minimum acceptable price for 6,500 units of VGI = $26.90 per unit × 6,500 units = $174,850
Question 3 Winder Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 3,000 units of component QEA. Each unit of QEA requires 5 units of material F85 and 5 units of material E71. Data concerning these two materials follow:
Material F85 is in use in many of the company's products and is routinely replenished. Material E71 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product QEA? $141,750 $126,702 $145,965 $126,295
Solution:
F85.......
E71.......
Totall ne Tota need eded ed In Inve vent ntor ory y (3,000 × 5) = 15,000
(3,000 × 5) = 15,000
# of units to purchase on market
15,000 (15,000 − 13,680) = 1,320
13,680 Minimum acceptable price for 3,000 units of QEA Q EA ........................................................................................... ....... ............ ............ ............. ............ ............ ............. ............ ............ ............ .... ..
Relevant price
Total cost
$4.75
$ 71,250
$4.70 $3.60
6,204 49,248
$126, 6,7 70 2
Question 4: Motor Company manufactures 10,000 units of Part M-l each year for use in its production. The following total costs were reported last year:
M 97 5× Total per unit relevant cost
$3.50 =
17.50 $26.90
Minimum acceptable price for 6,500 units of VGI = $26.90 per unit × 6,500 units = $174,850
Question 3 Winder Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 3,000 units of component QEA. Each unit of QEA requires 5 units of material F85 and 5 units of material E71. Data concerning these two materials follow:
Material F85 is in use in many of the company's products and is routinely replenished. Material E71 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product QEA? $141,750 $126,702 $145,965 $126,295
Solution:
F85.......
E71.......
Totall ne Tota need eded ed In Inve vent ntor ory y (3,000 × 5) = 15,000
(3,000 × 5) = 15,000
# of units to purchase on market
15,000 (15,000 − 13,680) = 1,320
13,680 Minimum acceptable price for 3,000 units of QEA Q EA ........................................................................................... ....... ............ ............ ............. ............ ............ ............. ............ ............ ............ .... ..
Relevant price
Total cost
$4.75
$ 71,250
$4.70 $3.60
6,204 49,248
$126, 6,7 70 2
Question 4: Motor Company manufactures 10,000 units of Part M-l each year for use in its production. The following total costs were reported last year:
Valve Company has offered to sell Motor 10,000 units of Part M-l for $18 per unit. If Motor accepts the offer, some of the facilities presently used to manufacture Part M-l could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to Part M-l would be totally eliminated. Should Motor Company accept Valve Company's offer, and why?
Yes, because it would be $25,000 cheaper to buy the part. No, because it would be $15,000 cheaper to make the part. Yes, because it would be $10,000 cheaper to buy the part. No, because it would be $5,000 cheaper to make the part. part .
Solution: Relevant cost of manufacturing: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($4 × 10,000) Relevant manufacturing cost
Net advantage (disadvantage): Relevant manufacturing cost savings Annual rental of manufacturing facilities given up if manufacture Part M-1 Cost Co st of pu purrch chas asin ing g th thee pa parrt ($1 $18 8 × 10 10,0 ,000 00)) Nett disadv Ne dvaantag agee of pu purrcha hassing part M-1
$ 20,000 55,000 45,000 40,000 $160,000
$1 60 , 000 15 , 000 ( 18 180, 0,00 000 0) ($ 5,0 ,00 00 )
Question 5: Sardi Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 17,000 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows: Direct materials
$ 8.20
Direct labor
8.30
Variable manufacturing overhead
1.20
Fixed manufacturing overhead
4.30
Unit product cost
$22.00
Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 70% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 2 minutes on the machine that is the company's current constraint. If the component were bought, this machine time would be freed up for use on another product that
requires 4 minutes on the constraining machine and that has a contribution margin of $7.00 per unit. When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?
$20.71 $25.50 $24.21 $22.00
Solution: Relevant cost per unit
$ 8.20 8.30 1.20
Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($4.30 × 0.70) Relevant manufacturing cost Add contribution margin lost Total
3.01 $20.7 1 3.5 0 $24.2 1
contribution margin lost = $7.00 ÷ 4 minutes = $1.75 per minute; minute; $1.75 per minute × 2 minutes minutes = $3.50 Question 6: Wood Carving Corporation manufactures three products. Because of a recent lack of skilled wood carvers, the corporation has had a shortage of available labor hours. The following per unit data relates to the three products of the corporation: Letter Openers
Elvis Statues
Candle Holders
Sales price
$30
$80
$42
Variable costs
$20
$40
$20
1
6
2
Labor hours required
Assume that Wood Carving only has 1,800 labor hours available next month. Also assume that Wood Carving can only sell 800 units of each product in a given month. What is the maximum amount of contribution margin that Wood Carving can generate next month given this labor hour shortage?
$12,000 $19,600
$19,000 $19,800
Solution:
Demand for wood carvers: Letter Openers Elvis Statues Candle Holders Labor-hours per unit 1 6 2 Monthly demand in units 800 800 800 Total hours required 800 4,800 1,600 Total time required for all products: 7,200 Optimal production plan: Selling price per unit Variable cost per unit Contribution margin per unit Labor-hours per unit Contribution margin per hour
Letter Openers $30.00 $20.00 $10.00 1 $10.00
Elvis Statues $80.00 $40.00 $40.00 6 $6.67
Candle Holders $42.00 $20.00 $22.00 2 $11.00
Rank in terms of profitability
2
3
1
200
0
800
Optimal production
Total hours available Less: hours required for 800 Candle Holders (800 × 2) Hours remaining Divided by hours required per Letter Opener Number of Letter Openers to produce Maximum contribution margin: Candle Holders (800 × $22) Letter Openers (200 × $10) Maximum contribution margin
1,800 1,600 200 ÷ 1 200
$17,600 2,000 $19,600
Question 7: Elly Industries is a multi-product company that currently manufactures 30,000 units of Part MR24 each month for use in production. The facilities now being used to produce Part MR24 have a fixed monthly cost of $150,000 and a capacity to produce 35,000 units per month. If Elly were to buy part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40% of their present amount. The variable production costs of Part MR24 are $11 per unit. If Elly Industries continues to use 30,000 units of Part MR24 each month, it would realize a net benefit by purchasing Part MR24 from an outside supplier only if the supplier's unit price is less than:
$14.00 $11.00 $16.00 $13.00
Solution:
Avoidable fixed costs ($150,000 × 0.60) Divided by 30,000 units Relevant fixed cost per unit Add variable production costs per unit Outside supplier price
$90,000 ÷30,000 $3 11 $14
Question 8: Elly Industries is a multi-product company that currently manufactures 30,000 units of Part MR24 each month for use in production. The facilities now being used to produce Part MR24 have a fixed monthly cost of $150,000 and a capacity to produce 35,000 units per month. If Elly were to buy part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40% of their present amount. The variable production costs of Part MR24 are $11 per unit. If Elly industries is able to obtain Part MR24 from an outside supplier at a unit purchase price of $15, the monthly usage at which it will be indifferent between purchasing and making Part MR24 is:
32,000 units 22,500 units 30,000 units 35,000 units
Solution:
. The total relevant cost per unit of making the part is composed of the variable production cost per unit ($11) plus the fixed cost per unit. Since the total cost must be equal to $15, then the fixed cost per unit must be $4 ($15 − $11). The fixed cost per unit is calculated as: Fixed cost per unit = Total relevant fixed costs ÷ Units to be produced Substituting: $4 = $90,000 ÷ Units to be produced Units to be produced = 22,500 Question 9: Ahron Company makes 80,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:
Direct materials Direct labor
$14.90 17.50
Variable manufacturing overhead Fixed manufacturing overhead Unit product cost
1.90 21.10 $55.40
An outside supplier has offered to sell the company all of these parts it needs for $46.60 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $560,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $13.60 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 80,000 units required each year?
$7.00 $55.40 $62.40 $48.80
Solution: Relevant cost per unit
Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($21.10 − $13.60) Relevant manufacturing cost
$14.9 0 17.50 1.90 7.50 $41.8 0
Maximum acceptable purchase price: Manufacturing cost savings ($41.80 × 80,000) Additional contribution margin Total benefit Number of units Benefit per unit Question 10:
$3,344,00 0 560,00 0 $3,904,00 0 80,000 $48.80
Younes Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as P06. Data concerning this product are given below:
The above per unit data are based on annual production of 4,000 units of the component. Direct labor can be considered to be a variable cost. The company has received a special, one-time-only order for 500 units of component P06. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. However, assume that Younes has no excess capacity and this special order would require 30 minutes of the constraining resource, which could be used instead to produce products with a total contribution margin of $10,000. What is the minimum price per unit on the special order below which the company should not go?
$67 $83 $103 $20
Solution:
Variable cost per unit on normal sales: Direct materials Direct labor Variable manufacturing overhead Variable selling expense Variable cost per unit on normal sales Variable cost per unit on special order: Normal variable cost per unit Reduction in variable selling expense. Opportunity cost of sales given up $10,000 ÷ 500) Variable cost per unit on special order
Question 11:
$38 1 8 4 $51
$51 ( 4) 20 $67
Elfving Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 80,000 units per month is as follows: Direct materials
$37.50
Direct labor
$6.00
Variable manufacturing overhead
$1.00
Fixed manufacturing overhead
$11.50
Variable selling & administrative expense
$1.80
Fixed selling & administrative expense
$8.00
The normal selling price of the product is $71.10 per unit. An order has been received from an overseas customer for 1,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.50 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer? $5.30 $6.80 $7.40 $24.80
Solution: Variable cost per unit on normal sales:
$37.5 0 6.00 1.00 1.80 $46.3 0
Direct materials Direct labor Variable manufacturing overhead Variable selling & administrative expense Variable cost per unit on normal sales Selling price for normal sales Variable cost per unit Unit contribution margin
$71.10 46.30 $24.80
Question 12: Elfving Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 80,000 units per month is as follows: Direct materials
$37.50
Direct labor
$6.00
Variable manufacturing overhead
$1.00
Fixed manufacturing overhead
$11.50
Variable selling & administrative expense
$1.80
Fixed selling & administrative expense
$8.00
The normal selling price of the product is $71.10 per unit. An order has been received from an overseas customer for 1,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.50 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 400 units for regular customers. The minimum acceptable price per unit for the special order is closest to:
$54.72 $56.00 $71.10 $65.80
Solution:
Variable cost per unit on normal sales: Direct materials Direct labor Variable manufacturing overhead Variable selling & administrative expense Variable cost per unit on normal sales
$37.5 0 6.00 1.00 1.80 $46.3 0
Lost contribution margin: Selling price for normal sales Variable cost per unit on normal sales Contribution margin per unit Number of units cut back in production Total lost contribution margin Number of units in special order Lost contribution margin per unit
$71.1 0 46.3 0 $24.8 0 400 $9,92 0 1,000 $9.92
Variable cost per unit on special order: Normal variable cost per unit Add opportunity cost for lost contribution margin Reduction in variable selling and administrative expense. Variable cost per unit on special order
$46.30 9.92 (1.50) $54.72
Question 13: Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow: - Sales are budgeted at $290,000 for November, $310,000 for December, and $210,000 for January. - Collections are expected to be 65% in the month of sale, 33% in the month following the sale, and 2% uncollectible. - The cost of goods sold is 80% of sales. - The company purchases 70% of its merchandise in the month prior to the month of sale and 30% in the month of sale. Payment for merchandise is made in the month following the purchase. - Other monthly expenses to be paid in cash are $21,100. - Monthly depreciation is $21,000. - Ignore taxes.
Expected cash collections in December are:
$310,000 $297,200 $201,500 $95,700 Solution :- Computation of Expected cash collections in December
December sales ($310,000 × 65%) November sales ($290,000 × 33%) Total
$201,500 95,700 $297,200
Question 14: Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow: - Sales are budgeted at $290,000 for November, $310,000 for December, and $210,000 for January. - Collections are expected to be 65% in the month of sale, 33% in the month following the sale, and 2% uncollectible. - The cost of goods sold is 80% of sales. - The company purchases 70% of its merchandise in the month prior to the month of sale and 30% in the month of sale. Payment for merchandise is made in the month following the purchase. - Other monthly expenses to be paid in cash are $21,100. - Monthly depreciation is $21,000. - Ignore taxes.
The cost of December merchandise purchases would be:
$192,000 $248,000 $232,000 $117,600 Solution ;- Computation of cost of December merchandise purchases
Cost of Goods Particulars Sales Sold November $290,000 $232,000 December $310,000 $248,000 January $210,000 $168,000 Merchandise purchases = Ending inventory + Cost of goods sold − Beginning inventory =
($168,000 × 70%) + $248,000 − ($248,000 × 70%) = $117,600 + $248,000 − $173,600 = $192,000
Question 15: Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow: - Sales are budgeted at $290,000 for November, $310,000 for December, and $210,000 for January. - Collections are expected to be 65% in the month of sale, 33% in the month following the sale, and 2% uncollectible. - The cost of goods sold is 80% of sales. - The company purchases 70% of its merchandise in the month prior to the month of sale and 30% in the month of sale. Payment for merchandise is made in the month following the purchase. - Other monthly expenses to be paid in cash are $21,100. - Monthly depreciation is $21,000. - Ignore taxes.
December cash disbursements for merchandise purchases would be: $192,000 $248,000 $117,600 $243,200 Solution:- computation of December cash disbursements for merchandise purchases
Particulars November
Sales $290,000
Cost of Goods Sold $232,000
December $310,000 $248,000 January $210,000 $168,000 December cash disbursements = 70% of December Cost of Goods Sold + 30% of November Cost of Good Sold = (70% × $248,000) + (30% × $232,000) = $173,600 + $69,600 = $243,200 Question 16: Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow: - Sales are budgeted at $290,000 for November, $310,000 for December, and $210,000 for January. - Collections are expected to be 65% in the month of sale, 33% in the month following the sale, and 2% uncollectible. - The cost of goods sold is 80% of sales. - The company purchases 70% of its merchandise in the month prior to the month of sale and 30% in the month of sale. Payment for merchandise is made in the month following the purchase. - Other monthly expenses to be paid in cash are $21,100. - Monthly depreciation is $21,000. - Ignore taxes.
The excess (deficiency) of cash available over disbursements for December would be:
$46,600 $19,200 $32,900 $13,700
Solution:- Computation of
excess (deficiency) of cash available over disbursements for December
Cash collections − Cash disbursements − Other monthly expenses
= $297,200 − $243,200 − $21,100 = $32,900
Question 17: Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow: - Sales are budgeted at $290,000 for November, $310,000 for December, and $210,000 for January. - Collections are expected to be 65% in the month of sale, 33% in the month following the sale, and 2% uncollectible. - The cost of goods sold is 80% of sales. - The company purchases 70% of its merchandise in the month prior to the month of sale and 30% in the month of sale. Payment for merchandise is made in the month following the purchase. - Other monthly expenses to be paid in cash are $21,100. - Monthly depreciation is $21,000. - Ignore taxes.
The net income for December would be:
$32,900 $13,700 $19,900 $40,900 Solution:- Computation of Net Income for December
Sales Less uncollectible ($310,000 × 2%) Net sales Cost of goods sold ($310,000 × 80%). Other expenses Depreciation expenses
$310,000 6,200 303,800 248,000 21,100 21,000
Net income
$ 13,700
Question 18: Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow: - Sales are budgeted at $290,000 for November, $310,000 for December, and $210,000 for January. - Collections are expected to be 65% in the month of sale, 33% in the month following the sale, and 2% uncollectible. - The cost of goods sold is 80% of sales. - The company purchases 70% of its merchandise in the month prior to the month of sale and 30% in the month of sale. Payment for merchandise is made in the month following the purchase. - Other monthly expenses to be paid in cash are $21,100. - Monthly depreciation is $21,000. - Ignore taxes.
The cash balance at the end of December would be:
$63,300 $57,900 $25,000 $38,300 Solution:- computation of cash balance at the end of December
October Accounts Receivable Balance ..... Collection of November Sales................... $290,000 × 65%...................................... $290,000 × 33%...................................... Collection of December Sales...................
November $ 77,000
December
188,500 $ 95,700
$310,000 × 65%...................................... October Accounts Payable Balance........... Payment for November Purchases............. ($290,000 × 80%) × 30%....................... ($310,000 × 80%) × 70%....................... Other cash monthly expenses.................... Net cash inflow(outflow) per month..........
201,500 (239,000)
(21,100) $ 5,400
Beginning cash balance, October 31........................ Add November net cash inflow................................ Add December net cash inflow................................. Ending cash balance, December 31..........................
(69,600) (173,600) (21,100) $ 32,900
$25,000 5,400 32,900 $63,300
Question 19: Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow: - Sales are budgeted at $290,000 for November, $310,000 for December, and $210,000 for January. - Collections are expected to be 65% in the month of sale, 33% in the month following the sale, and 2% uncollectible. - The cost of goods sold is 80% of sales. - The company purchases 70% of its merchandise in the month prior to the month of sale and 30% in the month of sale. Payment for merchandise is made in the month following the purchase. - Other monthly expenses to be paid in cash are $21,100. - Monthly depreciation is $21,000. - Ignore taxes.
The accounts receivable balance, net of uncollectible accounts, at the end of December would be:
$108,500 $198,000 $102,300
$83,200 Solution:- Computation of accounts
receivable balance, net of uncollectible accounts
From December sales ($310,000 × 33%): $102,300 Question 20: Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow: - Sales are budgeted at $290,000 for November, $310,000 for December, and $210,000 for January. - Collections are expected to be 65% in the month of sale, 33% in the month following the sale, and 2% uncollectible. - The cost of goods sold is 80% of sales. - The company purchases 70% of its merchandise in the month prior to the month of sale and 30% in the month of sale. Payment for merchandise is made in the month following the purchase. - Other monthly expenses to be paid in cash are $21,100. - Monthly depreciation is $21,000. - Ignore taxes.
Accounts payable at the end of December would be:
$248,000 $192,000 $117,600 $74,400 Solution:- Computation of
Accounts payable at the end of December
Sales
Cost of
Goods Sold November............................................ $290,000 $232,000 December............................................ $310,000 $248,000 January................................................ $210,000 $168,000 Merchandise purchases = Ending inventory + Cost of goods sold − Beginning inventory = ($168,000 × 70%) + $248,000 − ($248,000 × 70%) = $117,600 + $248,000 − $173,600 = $192,000
Question 21: Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow: - Sales are budgeted at $290,000 for November, $310,000 for December, and $210,000 for January. - Collections are expected to be 65% in the month of sale, 33% in the month following the sale, and 2% uncollectible. - The cost of goods sold is 80% of sales. - The company purchases 70% of its merchandise in the month prior to the month of sale and 30% in the month of sale. Payment for merchandise is made in the month following the purchase. - Other monthly expenses to be paid in cash are $21,100. - Monthly depreciation is $21,000. - Ignore taxes.
Retained earnings at the end of December would be:
$311,400 $347,200 $325,100 $335,200
Retained earnings at the end of December Net income in November: Sales.................................................... $290,000 Less uncollectible ($290,000 × 2%).... 5,800 Net sales.............................................. 284,200 Cost of goods sold ($290,000 × 80%). 232,000 Other expenses.................................... 21,100 Depreciation expenses......................... 21,000 Net income.......................................... $ 10,100 Retained earnings in December = Retained earnings in October + Net income in November + Net income in December = $311,400 + $10,100 + $13,700 = $335,200
Solution:- Computation of
Question 22: Bramble Corporation is a small wholesaler of gourmet food products. Data regarding the store's operations follow: - Sales are budgeted at $340,000 for November, $320,000 for December, and $310,000 for January. - Collections are expected to be 80% in the month of sale, 16% in the month following the sale, and 4% uncollectible. - The cost of goods sold is 75% of sales. - The company purchases 60% of its merchandise in the month prior to the month of sale and 40% in the month of sale. Payment for merchandise is made in the month following the purchase. - Other monthly expenses to be paid in cash are $24,000. - Monthly depreciation is $15,000. - Ignore taxes.
Expected cash collections in December are: $256,000 $310,400 $54,400 $320,000 Solution :- Computation of Expected cash collections in December
December sales ($320,000 × 80%)
$256,000
November sales ($340,000 × 16%) Total
54,400 $310,400
Question 23: Bramble Corporation is a small wholesaler of gourmet food products. Data regarding the store's operations follow: - Sales are budgeted at $340,000 for November, $320,000 for December, and $310,000 for January. - Collections are expected to be 80% in the month of sale, 16% in the month following the sale, and 4% uncollectible. - The cost of goods sold is 75% of sales. - The company purchases 60% of its merchandise in the month prior to the month of sale and 40% in the month of sale. Payment for merchandise is made in the month following the purchase. - Other monthly expenses to be paid in cash are $24,000. - Monthly depreciation is $15,000. - Ignore taxes.
The cost of December merchandise purchases would be:
$240,000 $235,500 $139,500 $255,000 Solution ;- Computation of cost of December merchandise purchases
:
Cost of Sales Goods Sold November December January
$340,000 $320,000 $310,000
$255,000 $240,000 $232,500
Merchandise purchases = Ending inventory + Cost of goods sold − Beginning inventory = ($232,500 × 60%) + $240,000 − ($240,000 × 60%) = $139,500 + $240,000 − $144,000 = $235,500 Question 24: Bramble Corporation is a small wholesaler of gourmet food products. Data regarding the store's operations follow: - Sales are budgeted at $340,000 for November, $320,000 for December, and $310,000 for January. - Collections are expected to be 80% in the month of sale, 16% in the month following the sale, and 4% uncollectible. - The cost of goods sold is 75% of sales. - The company purchases 60% of its merchandise in the month prior to the month of sale and 40% in the month of sale. Payment for merchandise is made in the month following the purchase. - Other monthly expenses to be paid in cash are $24,000. - Monthly depreciation is $15,000. - Ignore taxes.
December cash disbursements for merchandise purchases would be:
$246,000 $235,500 $139,500 $240,000
Solution:- computation of December cash disbursements for merchandise purchases
November purchases = Ending inventory + Cost of good sold − Beginning inventory = ($240,000 × 60%) + $255,000 − ($255,000 × 60%)
= $144,000 + $255,000 − $153,000 = $246,000 December cash disbursements = November purchases = $246,000 Question 25: Bramble Corporation is a small wholesaler of gourmet food products. Data regarding the store's operations follow: - Sales are budgeted at $340,000 for November, $320,000 for December, and $310,000 for January. - Collections are expected to be 80% in the month of sale, 16% in the month following the sale, and 4% uncollectible. - The cost of goods sold is 75% of sales. - The company purchases 60% of its merchandise in the month prior to the month of sale and 40% in the month of sale. Payment for merchandise is made in the month following the purchase. - Other monthly expenses to be paid in cash are $24,000. - Monthly depreciation is $15,000. - Ignore taxes.
The excess (deficiency) of cash available over disbursements for December would be:
$68,600 $12,200 $28,200 $40,400 Solution:- Computation of excess (deficiency) of cash available over disbursements for December
December sales ($320,000 × 80%)..... November sales ($340,000 × 16%)..... Total cash collections in December... .
$256,000 54,400 $310,400
November purchases = Ending inventory + Cost of good sold − Beginning inventory =
($240,000 × 60%) + $255,000 − ($255,000 × 60%) = $144,000 + $255,000 − $153,000 = $246,000 December cash disbursements = November purchases = $246,000 Cash collections − Cash disbursements − Other monthly expenses = $310,400 − $246,000 − $24,000 = $40,400 Question 26: An activity-based costing system that is designed for internal decision-making generally will not conform to generally accepted accounting principles. Which of the following is NOT a reason for this happening?
Some manufacturing costs (i.e., the costs of idle capacity and organization-sustaining costs) will not be assigned to products. First-stage allocations may be based on subjective interview data. Some nonmanufacturing costs are assigned to products. Allocation bases other than direct labor-hours, direct labor cost, and machine-hours are used. Question 27: Abel Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A is 200 units and of Product B is 400 units. There are three activity cost pools, with estimated costs and expected activity as follows:
The cost per unit of Product B is closest to:
$74.73 $17.69 $41.58 $81.53 Solution:-
Activity Cost Pool Activity 1 Activity 2 Activity 3
(a) Total Cost $16,660 $18,450 $9,731
(b) Total Activity 700 1,800 220
(a) ÷ (b) Activity Rate $23.80 $10.25 $44.23
Total Cost of Product B: (a)
(b)
(a) × (b)
Activity Cost Pool Activity 1 Activity 2 Activity 3
Activity Rate $23.80 $10.25 $44.23
Total Activity 100 700 160
ABC Cost $ 2,380.00 7,175.00 7,076.80 $16,631.80
Cost per unit of Product B = $16,631.80 ÷ 400 units = $41.58 per unit Question 28: (Appendix 8A) Groats Catering uses activity-based costing for its overhead costs. The company has provided the following data concerning the activity rates in its activity-based costing system: Activity Cost Pools
Preparing Meals
Arranging Functions
Wages
$1.15
$180.00
Supplies
$0.40
$320.00
Other expenses
$0.15
$130.00
The number of meals served is the measure of activity for the Preparing Meals activity cost pool. The number of functions catered is used as the activity measure for the Arranging Functions activity cost pool. Management would like to know whether the company made any money on a recent function at which 150 meals were served. The company catered the function for a fixed price of $18.00 per meal. The cost of the raw ingredients for the meals was $12.40 per meal. This cost is in addition to the costs of wages, supplies, and other expenses detailed above . For the purposes of preparing action analyses, management has assigned ease of adjustment codes to the costs as follows: wages are classified as a Yellow cost; supplies and raw ingredients as a Green cost; and other expenses as a Red cost. Suppose an action analysis report is prepared for the function mentioned above. What would be the "red margin" in the action analysis report? (Round to the nearest whole dollar.)
$(195) $105 $(45) $(145) Solution:- Computation of red margin
Sales ($18.00 × 150) Green costs: Supplies−Preparing meals ($0.40 × 150) Supplies Arranging functions Raw ingredients ($12.40 × 150) Green margin Yellow costs: Wages Preparing meals ($1.15 × 150) Wages Arranging functions Yellow margin Red costs: Other expenses Preparing meals ($0.15 × 150)
$2,700.00 $ 60.00 320.00 1,860.00
172.50 180.00
22.50
2,240.00 460.00
352.50 107.50
Other expenses Arranging functions Red margin
130.00
152.50 $(45.00)
Question 29: (Appendix 8A) Groats Catering uses activity-based costing for its overhead costs. The company has provided the following data concerning the activity rates in its activity-based costing system: Activity Cost Pools
Preparing Meals
Arranging Functions
Wages
$1.15
$180.00
Supplies
$0.40
$320.00
Other expenses
$0.15
$130.00
The number of meals served is the measure of activity for the Preparing Meals activity cost pool. The number of functions catered is used as the activity measure for the Arranging Functions activity cost pool. Management would like to know whether the company made any money on a recent function at which 150 meals were served. The company catered the function for a fixed price of $18.00 per meal. The cost of the raw ingredients for the meals was $12.40 per meal. This cost is in addition to the costs of wages, supplies, and other expenses detailed above. For the purposes of preparing action analyses, management has assigned ease of adjustment codes to the costs as follows: wages are classified as a Yellow cost; supplies and raw ingredients as a Green cost; and other expenses as a Red cost. Suppose an action analysis report is prepared for the function mentioned above. What would be the "yellow margin" in the action analysis report? (Round to the nearest whole dollar.)
$233 $108 $183 $288
Solution:- Computation of Yellow margin
Sales ($18.00 × 150) Green costs: Supplies−Preparing meals ($0.40 × 150) Supplies Arranging functions Raw ingredients ($12.40 × 150) Green margin Yellow costs: Wages−Preparing meals ($1.15 × 150) Wages Arranging functions Yellow margin
$2,700 $ 60 320 1,860
173 180
2,240 460
353 $ 108
Question 30: (Appendix 8B) Addison Company has two products: A and B. Annual production and sales are 800 units of Product A and 700 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.2 direct labor hours per unit and Product B requires 0.6 direct labor hours per unit. The total estimated overhead for next period is $71,286. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools--Activity 1, Activity 2, and General Factory--with estimated overhead costs and expected activity as follows:
(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor hours.) The overhead cost per unit of Product B under the activity-based costing system is closest to:
$56.62 $22.38 $73.74 $47.52
Solution:
Activity Cost Pool Activity 1 Activity 2 General Factory
(a) Estimated Cost $20,272 $29,380 $21,634
Total Cost of Product B:
(b) Estimated Activity 800 1,300 580
(a) ÷ (b) Activity Rate $25.34 $22.60 $37.30
Activity Cost Pool Activity 1 Activity 2 General Factory
(a) Activity Rate $25.34 $22.60 $37.30
(b) Activity 500 500 420
(a) × (b) ABC Cost $12,670 11,300 15,666 $39,636
Overhead cost per unit = $39,636 ÷ 700 units = $56.62 per unit (rounded)
Question 31: (Appendix 8B) Kebort Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, U86Y and M91F, about which it has provided the following data: U86Y
M91F
Direct materials per unit
$19.80
$45.80
Direct labor per unit
$18.20
$49.40
0.70
1.90
40,000
10,000
Direct labor-hours per unit Annual production
The company's estimated total manufacturing overhead for the year is $2,541,760 and the company's estimated total direct labor-hours for the year is 47,000. The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below: Activities and Activity Measures
Estimated Overhead Cost
Direct labor support (DLHs)
$1,175,000
Setting up machines (setups)
407,960
Part administration (part types)
958,800
Total
$2,541,760 Expected Activity U86Y
DLHs
M91F
Total
28,000
19,000
47,000
Setups
2,256
658
2,914
Part types
1,034
2,162
3,196
The unit product cost of product M91F under the activity-based costing system is closest to:
$95.20 $121.57
$197.95 $216.77
Solution:
(a) Activity Cost Pool Direct labor support Setting up machines Part administration
Estimated Cost $1,175,000 $407,960 $958,800
(b) Expected Activity 47,000 DLHs 2,914 setups 3,196 part types
Total Overhead applied to Product M91F: (a) Activity Cost Pool Activity Rate Direct labor support $25 per DLH Setting up machines $140 per setup $300 per part Part administration type
(a) ÷ (b) Activity Rate $25 per DLH $140 per setup $300 per part type
(b) Expected Activity 19,000 DLHs 658 setups 2,162 part types
(a) × (b) ABC Cost $ 475,000 92,120 648,600 $1,215,720
Overhead Cost per unit = $1,215,720 ÷ 10,000 units = $121.57 per unit Unit Product Cost: Direct materials.............................. Direct labor.................................... Applied manufacturing overhead. . Total...............................................
$ 45.80 49.40 121.57 $216.77
Question 32: (Appendix 8B) Pacchiana Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, R21V and D00B, about which it has provided the following data:
The unit product cost of product R21V under the company's traditional costing system is closest to:
$23.50 $24.40 $41.36 $34.02
Solution: Predetermined overhead rate = $1,262,880 ÷ 36,000 DLHs = $35.08 per DLH
Applied overhead = [(45,000 units × 0.30 DLHs per unit) × $35.08 per DLH] ÷ 45,000 units = $10.52 per unit Unit Product Cost: Direct materials Direct labor Applied manufacturing overhead
$19.60 3.90 10.52
Total
$34.02
Question 33: (Appendix 8B) Pacchiana Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, R21V and D00B, about which it has provided the following data:
The unit product cost of product D00B under the activity-based costing system is closest to:
$111.81 $81.20 $30.61 $133.82
Solution: (a) Activity Cost Pool
Estimated Cost
(b) Expected Activity
(a) ÷ (b) Activity Rate
Assembling products Preparing batches Product support
$108,000
36,000 DLHs
$3 per DLH
$362,880 $792,000
2,592 batches 1,980 product variations
$140 per batches $400 per product variation
Total Overhead applied to Product D00B: (a) Activity Cost Pool Activity Rate Assembling products $3 per DLH Preparing batches $140 per batch $400 per product Product support variation
(b) Expected Activity 22,500 DLHs 1,152 batches 576 product variations
(a) × (b) ABC Cost $ 67,500 161,280 230,400 $459,180
Overhead Cost per unit = $459,180 ÷ 15,000 units = $30.61 per unit Unit Product Cost: Direct materials.............................. Direct labor.................................... Applied manufacturing overhead. . Total...............................................
$ 61.70 19.50 30.61 $111.81
Question 34: Under the variable costing method, which of the following is always expensed in its entirety in the period in which it is incurred?
fixed manufacturing overhead cost fixed selling and administrative expense variable selling and administrative expense all of the above Question 35: Net operating income under absorption costing may differ from net operating income determined under variable costing. How is this difference calculated?
number of units produced during the period times the fixed manufacturing overhead rate per unit. number of units produced during the period times the variable manufacturing cost per unit. change in the quantity of units in inventory times the variable manufacturing cost per unit. change in the quantity of units in inventory times the fixed manufacturing overhead rate per unit.
Question 36: Blake Company produces a single product. Last year, Blake's net operating income under absorption costing was $3,600 lower than under variable costing. The company sold 10,000 units during the year, and its variable costs were $9 per unit, of which $1 was variable selling expense. If production cost was $11 per unit under absorption costing, then how many units did the company produce during the year?
8,200 units 11,800 units 11,200 units 8,800 units
Solution: Direct material + Direct labor + Variable manufacturing overhead = Variable unit product cost = $9 – $1 = $8 Unit fixed manufacturing overhead = $11 – $8 = $3 Difference in net income between methods ÷ Unit fixed manufacturing overhead = ($3,600) ÷ $3 per unit = (1,200) units Units produced = Units sold + Change in inventory = 10,000 + (1,200) = 8,800 Question 37: Pungent Corporation manufactures and sells a spice rack. Shown below are the actual operating results for the first two years of operations:
Pungent's cost structure and selling price were the same for both years. What is Pungent's variable costing net operating income for Year 2?
$54,000 $48,000 $56,000 $50,000
Solution:
Unit fixed manufacturing overhead = Difference in net income ÷ Change in inventory = ($44,000 – $38,000) ÷ (40,000 – 37,000) = $6,000 ÷ 3,000 = $2 Variable costing net operating income = Absorption costing net income − Difference in net
operating income = $52,000 − [(40,000 − 41,000) × $2)] = $52,000 − ($2,000) = $54,000 Question 38: Hurlex Company produces a single product. Last year, Hurlex manufactured 15,000 units and sold 12,000 units. Production costs for the year were as follows:
Sales totaled $840,000 for the year, variable selling expenses totaled $60,000, and fixed selling and administrative expenses totaled $180,000. There were no units in the beginning inventory. Assume that direct labor is a variable cost. The contribution margin per unit would be:
$25 $39 $34 $35 Solution:- Computation of contribution margin
Unit selling price ($840,000 ÷ 12,000).................. Less direct materials ($150,000 ÷ 15,000)............ Less direct labor ($180,000 ÷ 15,000)................... Less variable manufacturing overhead ($135,000 ÷ 15,000)............................................................ Less variable selling and administrative ($60,000 ÷ 12,000)............................................................ Contribution margin..............................................
$70 $10 12 9 5
36 $34
Question 39: Abdi Company, which has only one product, has provided the following data concerning its most recent month of operations:
What is the total period cost for the month under the variable costing approach?
$86,700 $65,700 $98,000 $163,700
Solution: Variable selling and administrative cost + Fixed costs = ($11 × 7,000) + ($65,700 + $21,000) = $77,000 + $86,700 = $163,700
Question 40: Abdi Company, which has only one product, has provided the following data concerning its most recent month of operations:
What is the total period cost for the month under the absorption costing approach?
$65,700 $163,700 $21,000 $98,000
Solution: Variable selling and administrative cost + Fixed selling and administrative cost = $11 × 7,000 + $21,000 = $77,000 + $21,000 = $98,000
Question 41: Hopi Corporation expects the following operating results for next year:
What is Hopi expecting total fixed expenses to be next year?
$75,000 $200,000 $225,000 $100,000
Solution: Current sales - Breakeven sales = Margin of safety Substituting the given information into the above equation, we will have: $400,000 − Breakeven sales = $100,000 Breakeven sales = $300,000 Breakeven sales = Fixed expenses ÷ Contribution margin ratio Substituting the given information into the above equation, we will have: $300,000 = Fixed expenses ÷ 0.75 Fixed expenses = $225,000
Question 42: The margin of safety in the Flaherty Company is $24,000. If the company's sales are $120,000 and its variable expenses are $80,000, its fixed expenses must be:
$32,000 $8,000 $24,000 $16,000
Solution: Current sales - Breakeven sales = Margin of safety Substituting the given information into the above equation, we will have: $120,000 - Breakeven sales = $24,000 Breakeven sales = $96,000 Sales - Variable expenses = Contribution margin $120,000 - $80,000 = $40,000 Contribution margin ratio = Contribution margin ÷ Sales Contribution margin ratio = $ 40,000 ÷ $120,000 Contribution margin ratio = 0.33333 Breakeven sales = Fixed costs ÷ Contribution margin ratio Substituting the given information into the above equation, we will have: $96,000 = Fixed costs ÷ 0.33333 Fixed costs = $32,000
Question 43: The following data relate to a company that produces and sells a travel guide that is updated monthly: Fixed costs: Copy editing
$6,000
Art work
$2,000
Typesetting
$72,000
Variable costs: Printing and binding
$3.20 per copy
Bookstore discounts
$4.00 per copy
Salespersons’ commissions
$0.50 per copy
Author’s royalties
$2.00 per copy
Each book sells for $20.00. The company sold 8,000 books in June and 10,000 books in July. The degree of operating leverage for July is:
higher than that for June lower than that for June the same as that for June not determinable
Solution: For June: Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70 $160,00 Sales (8,000 units)............. 0 77,60 Variable expenses.............. 0 Contribution margin.......... 82,400 80,00 Fixed expenses................... 0 $ Net operating income......... 2,400 Degree of operating leverage = Contribution margin/Net operating income = $82,400/$2,400 = 34.33 For July: Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70 $200,00 Sales (10,000 units)........... 0 97,00 Variable expenses.............. 0 Contribution margin.......... 103,000 80,00 Fixed expenses................... 0 $ Net operating income......... 23,000 Degree of operating leverage = Contribution margin/Net operating income = $103,000/$23,000 = 4.48 As sales increase past the breakeven point, the degree of operating leverage will decrease.
Question 44: (CPA, adapted) The Maxwell Company manufactures and sells a single product. Budgeted data follow:
If Maxwell Company's direct labor costs increase 8 percent, what selling price per unit of product must it charge to maintain the same contribution margin ratio?
$27.00 $25.40 $25.51 $26.64
Solution: Current contribution margin per unit = Selling price per unit − Total variable expenses per unit = $25.00 − $19.80 = $5.20 Current contribution margin ratio = Contribution margin ÷ Selling price per unit
$5.20 ÷ $25.00 = 20.8% Direct labor per unit × 0.08 = Increase in variable expense $5.00 × 0.08 = $0.40 New total variable expenses per unit = $19.80 + $0.40 = $20.20 0.208 = (Selling price − $20.20) ÷ Selling price 0.208 × Selling price = Selling price − $20.20 $20.20 = Selling price − 0.208 × Selling price $20.20 = 0.792 × Selling price Selling price = $25.51
Question 45: Next year, Rad Shirt Company expects to sell 32,000 shirts. Rad is budgeting the following operating results for next year:
Rad is considering increasing its advertising by $48,000 next year. By how much would sales have to increase in order for Rad to still generate a $320,000 net operating income?
$76,800 $120,000 $75,000 $48,000
Solution:
Sales............................................... Variable expenses.......................... Contribution margin...................... Fixed expenses............................... Net operating income.....................
Current Proposed $800,00 0 288,000 512,000 $560,000 * 192,000 240,000 $320,00 $320,000
0 *Work backwards to obtain the number. Sales price = $800,000 ÷ 32,000 units = $25 Variable expense per unit = $288,000 ÷ 32,000 units = $9 Contribution margin per unit = $25 − $9 = $16 $560,000 ÷ $16 = 35,000 units 35,000 − 32,000 = 3,000 unit increase 3,000 × $25 = $75,000 increase in sales
Question 46: Taylor, Inc. produces only two products, Acdom and Belnom. These account for 60% and 40% of the total sales dollars of Taylor, respectively. The unit variable expense as a percentage of the selling price is 60% for Acdom and 85% for Belnom. Total fixed expenses are $150,000. There are no other costs. What is Taylor's break-even point in sales dollars?
$214,286 $150,000 $500,000 $300,000
Solution: Each product’s contribution margin rate is (1 − variable expense percentage) Acdom = 1 − 0.6 = 0.4 Belnom = 1 − 0.85 = 0.15 To calculate the weighted average contribution margin, multiply each product’s contribution margin ratio by its percentage of total sales dollars: (60% × 0.4%) + (40% × 0.15%) = 0.24% + 0.06% = 0.30% To calculate the break-even point in sales dollars: Fixed expenses ÷ Weighted average contribution margin ratio = $150,000 ÷ 0.30 = $500,000
