AC 501 – HEMBA 7 – Part 2– Modules 15, 16, 18 and 22 (50 points)
Please answer the following items. Answers should be submitted in a single document attached to your e-mail. Please use your name in the file name for your attachment. You are welcome to prepare your answers in Word or any other reasonable format. Be sure your answers are legible. Please show complete computations as needed. Showing your work is essential to earning partial credit if appropriate.
1. (10 points) Portland Manufacturing had the following data for the past three months.
January February March
Sales in units 6,000 7,500 9,000
Operating expenses $272,000 $296,000 $320,000
Using the high-low method, estimate Portland’s total fixed costs, contribution margin ratio and break-even point in sales dollars for April. In April, Portland expects to sell 10,000 units for $50 per unit.
Sales in units (x)Operating Expenses (y)Month
Highest9,000320,000March
Less Lowest sales in units6,000272,000January
Difference (∆)3,00048,000
Estimation of the equation:
TC= F.C + V.C
Where;
TC- Total Costs
FC-Fixed Costs
VC-Variable Costs
∑y = a+ b∑x
Where;
a-Fixed cost
b-Variable cost
y- Total Expenses
x-activity level
∆y= 48,000
b = ∆y/∆x
b = 48,000/3,000
b=16
Hence;
y = a+16x
Evaluating;
320,000 = a + 16(9,000)
320,000 = a + 144,000
a= 320,000-144,000
a=176,000
Hence;
Fixed costs = $ 176,000
Forecasting April:
T.E = F.C + V.C
T.E = 176,000 + 16(X)
T.E = 176,000 + 16 (10,000)
T.E = 176,000 + 160,000
T.E = $ 336,000
(ii) Contribution margin ratio
Contribution = T.R – T.C
Where;
T.R- Total Revenue
T.C-Total Costs
T.R = S*Q
T.R = 50 * 10,000
T.R= $ 500,000
Contribution = $(500,000-336,000)
Contribution = $ 164,000
Contribution margin ratio
r=164,000/500,000
r= 41/125
r=0.328
(iii) Break-even point in sales.
At break-even point: T.R=T.C
T.R= 50 * Q
T.C= 176,000 + 16 Q
50Q = 176,000 + 16Q
34Q = 176,000
Q = 176,000/34
Q= 5176. 47 units
2. (5 points) Sammy Company has a variable cost percentage of 40% on a product that sells for $50 per unit. Fixed costs are $40,000. How many units must be sold to earn a profit of $28,000 (disregard taxes)?
V.C = 40%
F.C = $40,000
Profit = $ 28,000
Q= F + ∏
S-V.C
V.C = 40% (50)
V.C = 20
Q = 40,000 + 28,000
50- 20
Q= 68,000
30
Q= 2,266.67 units.
3. (5 points) Talk Company manufactures 10,000 telephones per year. The full manufacturing costs per telephone are as follows:
Direct materials $ 4
Direct labor $16
Variable manufacturing overhead $10
Average fixed manufacturing overhead $11
Total $41
Telecom America has offered to sell Talk Company 10,000 telephones for $34 per unit. If Talk Company accepts the offer, $25,000 of fixed overhead will be eliminated.
Should Talk Company continue to make the phones or should it buy from Telecom? Why? (your answer must clearly state the dollar advantage of your decision – merely answering make or buy is not sufficient)
Total revenue = S*Q
S $34
V.C $30
Contribution (S-V.C) $ 4
Less Fixed overheads$ 11
Net loss ($7)
Q= 10,000
T.R = 10,000*(-7)
Loss = (-70,000)
Decision Criteria:
They should therefore buy since a decision to make the phones would lead to losses.
4. (5 points) Brahtz Company's budgeted sales were 8,000 units at $60 per unit. During 2014 it had actual sales of 7,600 units at $66 per unit. Budgeted variable costs were $30 per unit. Calculate Brahtz's sales volume variance.
UnitsS.P/unit
Budgeted Sales8,00060
Less Variable costs(30)
Margin30
Actual Sales 7,60066
Sales volume variance:
Variance = (A.V-B.V) S.M
V = (7,600-8,000) 30
V = (400)30
V= 12,000 A (adverse)
5. (10 points) Northern Production Company has 200 labor-hours available. There is no limit on machine-hours. Northern can sell all of Y it wants, but it can only sell 45 units and 20 units of X and Z, respectively.
Product X Product Y Product Z
Contribution margin per unit $30 $20$24
Labor-hours per unit 4 5 4
Machine-hours per unit 10 8 2
To maximize profits, how many units of each product should Northern produce?
Labor hours available = 200
Product X 45*4180
Product Z4*2080
Total hours260
Available 200
Ranking Criteria
Product XProduct YProduct Z
Contribution margin per unit 302024
Labor-hours per unit454
Contribution/Labor7.546
Ranking132
Units to produce:
RankProductUnits Labor HoursTotal hours Machine Hours
1X45418010
2Z201 202
3Y0000
Total hours available 200
Answer: Hence, He should produce:
- 45 units of X
- 20 units of Z
6. (5 points) New River Company management is analyzing the company’s standard cost variances for direct materials for the most recent period. The following information was available from company records.
Actual quantity of materials used 96,000 units
Budgeted quantity of materials used 88,000 units
Actual price paid for materials $8 per unit
Budgeted price paid for materials $12 per unit
There were no increases or decreases in inventories during the period. Calculate the materials quantity variance for the period.
Materials quantity variance.
UnitsPriceTotal Cost
Actual quantity of materials96,0008768,000
Budgeted quantity of materials88,000121,056,000
Variance = (S.Q-A.Q) S.P
V = (88,000-96,000) 12
V = - 11,000 * 12
V = 132,000 A (adverse)
7. (10 points) Demon Manufacturing Company has developed the following activity cost information for its manufacturing activities:
Assembly $30 per hour
Drilling $8 per hole
Inspection $4 per inspection
Machine setup $400 per batch
Movement $30 per batch plus $0.20 per lb.
Shaping $50 per hour
Welding $10 per inch
Filling a batch order for 90 units with a combined weight of 400 pounds required:
• Three sets of inspections per unit
• Drilling four holes in each unit
• Completing 20 inches of welds on each unit
• 0.6 hour of shaping for each unit
• One hour of assembly per unit
Applying activity based costing, calculate the total cost to produce a batch of 90 units.
Overheads= Rates* Activity level
OverheadsTotal Cost
Assembly30*1*902,700
Drilling8*4*902,880
Inspection4 * 3*901,080
Machine setup 400*1400
Movement30*1 + 0.20*400110
Shaping 50*0.6*902,700
Welding 10*20*9018,000
Total cost$ 27,870