Class Problem Solutions Chapters 15 - 22

Class Problem Solutions Chapters 15 - 22

M15-13

a. 8f. 8k. 12
b. 8g. 7l. 5
c. 11h. 5m. 4
d. 1i. 2n. 3
e. 11j. 3o. 8

E15-20

a.
Variable costs=($8,500  $4,300)/(400  100)

=$14 per mile

Fixed costs=$8,500  $14(400)=$2,900

or=$4,300  $14(100)=$2,900

Monthly labor=$2,900 + $14X

costs

where: X = miles mowed and cleaned

Variable costs=($8,500  $4,500)/(400  200)

=$20 per mile

Fixed costs=$8,500  $20(400)=$500

or=$4,500  $20(200)=$500

Monthly labor=$500 + $20X
costs

where: X = miles mowed and cleaned

E15-20 (cont.)

c. The equation used in (a) is influenced by the unusually high costs incurred in October when only 100 miles were mowed and cleaned. The October activity is low, perhaps due to the reduced growth of grass and less highway litter after the end of the summer vacation season. Employees may have had extra time and may have paced their work to fill the available time. The effect of including the October observation in the high-low cost estimate is to understate the variable costs and to overstate the fixed costs.

The effect of basing a cost-estimating equation on this observation is to overstate the variable costs and to understate the fixed costs.

d. The effect of a 7 percent wage increase is to increase the amount of each cost element by 7 percent.

Total costs = $535 + $21.40X

E15-21

a. Fixed costs are easily identified. They are the same at each activity level. Variable and mixed costs can be determined by dividing total costs by monthly sales at two activity levels. The quotients of variable costs will be the same at both levels. The quotients of mixed costs will be lower at the higher activity level. This is because the fixed costs are spread over a larger number of units.

CostBehavior
Cost of food soldVariable
Wages and fringe benefitsMixed
Fees paid delivery helpVariable
Rent on buildingFixed
Depreciation on equipmentFixed
UtilitiesMixed
Supplies (soap, floor wax, etc.)Mixed
Administrative costsFixed

E15-21 (cont.)
b. Fixed Variable
Costs Costs

V Cost of food sold ($10,000/5,000) $2.00X
M Wages and fringe benefits:
[($4,500  $4,250)/(10,000  5,000)] 0.05X
[$4,500  ($0.05  10,000)] $4,000
V Fees paid delivery help ($1,250/5,000) 0.25X
F Rent on building 1,200
F Depreciation on equipment 600
M Utilities:
[($600  $500)/(10,000  5,000)] 0.02X
[$600  ($0.02  10,000)] 400
M Supplies:
[($200  $150)/(10,000  5,000)] 0.01X
[$200  ($0.01  10,000)] 100
F Administrative costs 1,300 ______
Total costs equation $7,600 $2.33X

Where:

X = unit sales

Note: The computations can be performed at other activity levels.

c. Total costs = $7,600 + $2.33(9,500) = $29,735

M16-15

Selling price$5.00 per hot dog
Variable costs4.50 per hot dog
Contribution margin$0.50

Break-even point=$250,000/$0.50=500,000 hot dogs

Note: The three lines for variable costs, total costs, and revenues are difficult to distinguish because of the scale of operations.

M16-15 (cont.)

It is easier to determine profit or loss at any volume with a profit-volume graph than with a cost-volume-profit graph. This is especially true in situations, such as this, where the unit contribution margin is small and the scale of activity is large. Although a profit-volume graph provides a clear illustration of profits, it does not illustrate revenues and costs. Hence, a manager using a profit-volume graph does not see the relationship between revenues, costs, and profits.

M16-16

UnitSalesContributionMixProductMargin(units)*Weight

A $1 6$1  6/10 = $0.60
B 2 3 2  3/10 = 0.60
C 3 1 3  1/10 = 0.30
10$1.50

*B = 3C and A = 2B, so A = 3  2 = 6

Average unit contribution margin = $1.50

Break-even unit sales volume = $112,500/$1.50 = 75,000 units

Units of A at break-even = 75,000  6/10 = 45,000

E16-17

Manitoba Company
Contribution Income Statement
For the Month of May 2007

Sales (6,000  $50) $300,000
Less variable costs:
Direct materials (6,000  $5) $ 30,000
Direct labor (6,000  $10) 60,000
Factory overhead (6,000  $10) 60,000
Selling and administrative (6,000  $5) 30,000(180,000)
Contribution margin $120,000
Less fixed costs:
Factory overhead$ 40,000
Selling and administrative 20,000 (60,000)
Profit$ 60,000

Note: The instructor might extend this assignment in class, computing the break-even point, the margin of safety, and the impact on profits of a change in sales.
E16-18

a. Sales $750,000
Variable costs (412,500)
Contribution margin $337,500

Contribution margin ratio = $337,500/$750,000 = 0.45

Annual break-even dollar sales volume = $210,000/0.45 = $466,667

b. Annual margin of safety in dollars:

Sales $750,000
Break-even sales dollars (466,667)
Margin of safety $283,333

c. To determine the variable and total cost lines, it is necessary to compute the variable cost ratio:

Variable = Variable costs = $412,500 = 0.55
cost ratio Sales $750,000

At a volume of $1,000,000 sales dollars, variable costs are $550,000.

d. Revised annual break-even dollar sales:

($210,000 + $35,000)/0.45 = $544,444
M17-17

The current production volume is 400,000 units ($4,400,000/$11).

The variable production costs are ($3,200,000  $800,000)/400,000 = $6.

Hence, at a unit selling price of $7.50, the order provides a contribution of $1.50 per unit and a total contribution of $75,000 ($1.50  50,000).

Of course, the large sale to the hospital supply company may take away from some regular sales and it may upset regular customers who learn of the lower price.

E17-21

Cost to make:

Variable costs (10,000 units  $24.00)$240,000

Fixed costs (10,000 units  $5.00)50,000

Rent income (opportunity cost) 25,000$315,000

Cost to buy (10,000 units  $32.00)320,000

Advantage (disadvantage) of buying $ (5,000)

Making has an advantage of $5,000.

E17-24

Great Lakes Boat Company should sell the boat hulls.

Increase in revenues:
Sell complete sailboats $6,000
Sell sailboat hulls (5,000)$ 1,000
Costs of masts, sales, and rigging (1,500)
Advantage (disadvantage) of further processing$ (500)

An alternative analysis treats the selling price of the uncompleted hulls as an opportunity cost:

Revenues from complete sailboats$ 6,000
Costs:
Outlay costs of masts, sails, and rigging$1,500
Opportunity cost of not selling hull 5,000 (6,500)
Advantage (disadvantage) of further processing$ (500)

E17-25

Information is provided about the cost of raw material D and the cost of processing this material into E and F. However, students should recognize that these are joint costs incurred prior to the decision point. Consequently, they are irrelevant to a decision to sell product F or to process it further.

Revenues from G$12
Costs:
Outlay cost of additional processing$ 4
Opportunity cost of not selling F 5 (9)
Advantage of further processing$ 3

Product F should be processed further into product G.

E17-26

a. X Y Z

Unit contribution margin $ 60 $ 50 $ 30
Labor hours per unit  4  2  4
Contribution per labor hour $ 15 $ 25 $7.5

1. Product Z has the highest unit selling price.
2. Product X has the highest unit contribution margin.
3. Product Y has the highest contribution per labor hour.

The weekly contribution obtained with the use of each criterion is:

HighestHighestHighest
Unit SellingContributionContribution
Priceper Unitper Labor Hour

ZXY

Labor hours available200200200
Labor hours per unit 4 4 2
Weekly production5050100
Unit contribution margin  $30 $60 $50
Weekly contribution$1,500$3,000$5,000

b. To achieve short-run profit maximization, a for-profit organization should allocate limited resources in a manner that maximizes the contribution per unit of constraining factor.

E17-26 (cont.)

c. The decision to produce 10 units of Z will result in a weekly opportunity cost of $1,000. This is the net benefits that would have been derived from producing 20 units of Y.

Labor hours to produce 10 units of Z (10 units  4 hours per unit)40
Labor hours per unit of Y 2
Required reduction in the production of Y 20
Unit contribution margin for Y $50
Opportunity cost$1,000

Producing 10 units of Z will reduce profits by $700 from their maximum possible amount.

Contribution from Z (10 units  $30)$ 300

Opportunity cost (1,000)
Net disadvantage of producing 10 units of Z$ (700)

E18-24

a. The basic accounting problem that Arton and Yount are arguing about stems from the use of actual overhead rates when there are wide fluctuations in the volume of activity. In periods of high activity, fixed overhead is spread over a large number of units, producing a relatively low per unit cost assignment. In periods of low activity, fixed overhead is spread over a small number of units, producing a relatively high per unit cost assignment. Daytona should use a predetermined

overhead rate to avoid variations in costs assigned identical products because of seasonal variations in manufacturing overhead.

In addition to the accounting problem, Daytona Parts Company also has a pricing problem. Cost-based pricing should be used as a guideline, not an inflexible rule. Management should adjust cost-based prices in response to market conditions. If competitors are lowering their prices, Daytona should consider doing the same. Likewise, if competitors are raising their prices, Daytona should consider the desirability of a similar action. In any case, management should strive to avoid frequent price changes.

Finally, if the market for Daytona’s products is highly competitive, management should use the market price as a starting point to determine allowable product costs, rather than basing prices on costs. This approach, known as target costing, is discussed in Module 23.

b. Cost estimating equation for total manufacturing overhead:

Variable costs = ($237,500  $200,000)/(27,500  20,000) = $5.00

Fixed costs = $200,000  (20,000  $5.00) = $100,000

Total costs = $100,000 + $5X

c. Predetermined rate for 2009:

Predetermined = $100,000 + $5(25,000) = $9.00 per direct labor hour

Overhead rate 25,000

E18-24 (cont.)
d. Overapplied manufacturing overhead at the end of 2009 is $20,000:

Actual overhead$250,000

Applied overhead (30,000  $9) (270,000)

Overapplied overhead$ (20,000)

e. The overapplied overhead may be:

Written off to Cost of Goods Sold.
Allocated among Work-in-Process, Finished Goods Inventory, and Cost of Goods Sold.

E18-25

Raw Materials Inventory Accounts Payable

Beginning Balance 9,000 40,000 (2) 61,000 (1)

(1) 58,000

Wages Payable
31,800 (3)

Work-in-Process Inventory

Beginning Balance 5,000 85,000 (8) Other Payables
(2) 40,000 3,600 (6)

(3) 27,000

(7) 22,500

Ending Balance 9,500 Manufacturing Supplies

Beginning Balance 500 3,000 (4)
Finished Goods Inventory (1) 3,000
Beginning Balance 25,000 96,000 (9)

(8) 85,000 Manufacturing Overhead

Ending Balance 14,000 Beginning Balance -0- 22,500 (7)

(3) 4,800

Cost of Goods Sold (4) 3,000
(9) 96,000 (5) 15,000
(6) 3,600
Accumulated Depreciation-
Factory Assets
15,000 (5)

b. The balances in Work-in-Process Inventory and Finished Goods Inventory are the amounts in their respective “T” accounts at the end of November: Work-in-Process Inventory, $9,500, and Finished Goods Inventory, $14,000.

E18-24

overhead rate to avoid variations in costs assigned identical products because of seasonal variations in manufacturing overhead.

b. Cost estimating equation for total manufacturing overhead:

Variable costs = ($237,500  $200,000)/(27,500  20,000) = $5.00

Fixed costs = $200,000  (20,000  $5.00) = $100,000

Total costs = $100,000 + $5X

c. Predetermined rate for 2009:

Predetermined = $100,000 + $5(25,000) = $9.00 per direct labor hour

Overhead rate 25,000

E18-24 (cont.)
d. Overapplied manufacturing overhead at the end of 2009 is $20,000:

Actual overhead$250,000

Applied overhead (30,000  $9) (270,000)

Overapplied overhead$ (20,000)

e. The overapplied overhead may be:

*Written off to Cost of Goods Sold.

*Allocated among Work-in-Process, Finished Goods Inventory, and Cost of Goods Sold.

E18-25

Raw Materials Inventory Accounts Payable

Beginning Balance 9,000 40,000 (2) 61,000 (1)

(1) 58,000

Wages Payable
31,800 (3)

Work-in-Process Inventory

Beginning Balance 5,000 85,000 (8) Other Payables
(2) 40,000 3,600 (6)

(3) 27,000

(7) 22,500

Ending Balance 9,500 Manufacturing Supplies

Beginning Balance 500 3,000 (4)
Finished Goods Inventory (1) 3,000
Beginning Balance 25,000 96,000 (9)

(8) 85,000 Manufacturing Overhead

Ending Balance 14,000 Beginning Balance -0- 22,500 (7)

(3) 4,800

Cost of Goods Sold (4) 3,000
(9) 96,000 (5) 15,000
(6) 3,600
Accumulated Depreciation-
Factory Assets
15,000 (5)

M20-18

The Music Shop

Purchases Budget

January - May, 2008

January February March April May

Purchase units:

Budgeted sales 130,000 160,000 200,000 210,000 180,000

Plus desired end. inv.* 64,000 80,000 84,000 72,000 96,000

Total inventory needs 194,000 240,000 284,000 282,000 276,000

Less beginning inv. (40,000) (64,000) (80,000) (84,000) (72,000)

Purchases 154,000 176,000 204,000 198,000 204,000

*For example, 40% of the following month's sales, 240,000 × 0.40 for May.

January February March April May

Purchase dollars

($5 per unit):

Budgeted cost of. sales $650,000 $800,000 $1,000,000 $1,050,000 $900,000

Plus desired end. inv.* 320,000 400,000 420,000 360,000 480,000

Total inventory needs $970,000 $1,200,000 $1,420,000 $1,410,000 $1,380,000

Less beginning inv. (200,000) (320,000) (400,000) (420,000) (360,000)

Purchase dollars $770,000 $880,000 $1,020,000 $990,000 $1,020,000

*For example, 40% of the following month's sales, $1,050,000 x 0.40 for March.

M20-19

Wilson's Retail Company

Cash Budgets

February, March, and April

February March April

Cash balance, beginning$ 30,000$ 4,000$ (7,000)

Cash receipts:

60% of current month's sales$ 135,000$ 120,000$105,000

40 of previous month's sales 120,00090,000 80,000

Total receipts 255,000 210,000 185,000

Cash available$285,000$214,000$178,000

Budgeted disbursements:

80% of previous

month's sales$240,000$180,000$160,000

Operating expenses 41,000 41,000 41,000

Total disbursements (281,000) (221,000) (201,000)

Cash balance, ending$ 4,000$ (7,000) $ (23,000)

P21-33

Actual Cost Standard Cost

Direct materials ($2,378/1,000 bags) $2.378

(8,000 lbs./1,000 bags × $0.30) $2.400

Direct labor ($450/1,000 bags) 0.450

(48 hrs./1,000 bags × $8.50) 0.408

Variable overhead ($225/1,000 bags) 0.225

(16 hrs./1,000 bags × $10.00) 0.160

Total variable costs per bag $3.053 $2.968

Materials price variance= Actual cost  AQ × SP

= $2,378  (8,300 × $0.30)

= $2,378  $2,490

= $112 F

Materials quantity variance = SP × (AQ  SQ)

= $0.30 × (8,300  8,000)

= $0.30 × 300

= $90 U

Labor rate variance = Actual costs  AH × SR

= $450  (45 × $8.50)

= $450  $382.50

= $67.50 U

Labor efficiency variance = SR × (AH  SH)

= $8.50 × (45  48)

= $25.50 F

Variable overhead spending variance = Actual cost  (AH × SR)

= $225  (18 hrs. × $10)

= $225  $180

= $45 U

Variable overhead efficiency variance= SR × (AH  SH)

= $10 × (18  16)

= $20 U

P21-33 (cont.)

Materials price variance: materials quality below standard, purchased in larger than standard quantities, bargain purchases.

Materials quantity variance: material quality below standard, higher than normal waste, lower-skilled labor, inefficient machinery.

Labor rate variance: use of higher-skilled workers, rate changes not reflected in standards.

Labor efficiency variance: use of high-quality materials, higher machine efficiency, higher worker efficiency.

Variable overhead spending variance: excessive prices paid for variable overhead items and/or excessive consumption of variable overhead items.

Variable overhead efficiency variance: inefficient machinery resulting

from poor maintenance or inefficient use of machinery by workers.

Note: A possible explanation for any of the variances could be incorrect standards.

M22-22

North American Division:

ROI = Return-on-sales ratio  Investment turnover

0.16 = 0.04  Investment turnover

Investment turnover = 4

Return-on-sales ratio= Income/Sales

0.04= $100,000/Sales

Sales= $2,500,000

Investment turnover = Sales/Operation assets

4 = $2,500,000/Operating assets

Operating assets = $625,000

Asian Division:

Return-on-sales ratio= $200,000/$5,000,000

= 0.04

Investment turnover = Return on investment/Return-on-sales ratio

= 0.10/0.04

= 2.5

Operating assets= Sales/Investment turnover

= $5,000,000/2.5

= $2,000,000

European Division:

Sales= Investment turnover  Operating assets

= 1.5  $800,000

= $1,200,000

ROI= Return-on-sales ratio  Investment turnover

= 0.12  1.5

= 0.18

M22-22

North American Division:

ROI = Return-on-sales ratio  Investment turnover

0.16 = 0.04  Investment turnover

Investment turnover = 4

Return-on-sales ratio= Income/Sales

0.04= $100,000/Sales

Sales= $2,500,000

Investment turnover = Sales/Operation assets

4 = $2,500,000/Operating assets

Operating assets = $625,000

Asian Division:

Return-on-sales ratio= $200,000/$5,000,000

= 0.04

Investment turnover = Return on investment/Return-on-sales ratio

= 0.10/0.04

= 2.5

Operating assets= Sales/Investment turnover

= $5,000,000/2.5

= $2,000,000

European Division:

Sales= Investment turnover  Operating assets

= 1.5  $800,000

= $1,200,000

ROI= Return-on-sales ratio  Investment turnover

= 0.12  1.5

= 0.18

M22-22

North American Division:

ROI = Return-on-sales ratio  Investment turnover

0.16 = 0.04  Investment turnover

Investment turnover = 4

Return-on-sales ratio= Income/Sales

0.04= $100,000/Sales

Sales= $2,500,000

Investment turnover = Sales/Operation assets

4 = $2,500,000/Operating assets

Operating assets = $625,000

Asian Division:

Return-on-sales ratio= $200,000/$5,000,000

= 0.04

Investment turnover = Return on investment/Return-on-sales ratio

= 0.10/0.04

= 2.5

Operating assets= Sales/Investment turnover

= $5,000,000/2.5

= $2,000,000

European Division:

Sales= Investment turnover  Operating assets

= 1.5  $800,000

= $1,200,000

ROI= Return-on-sales ratio  Investment turnover

= 0.12  1.5

= 0.18

(P22-32 printed solution given in class)