Q 1.Ritz Company Makes Three Products from a Joint Input That Have the Following Information

ACC 3123 / EXAM 2 / FALL 2010

(VERSION A/B/C)

Q / ANSWER / Q / ANSWER
1 / PRODUCT B
(+$60,000) / 9 / $23.50/UNIT
2 / $98,823.5294 / 10 / BUY (+$10,000)
3 / $67,741.9355 / 11 / 320,000 BRUSHES
+ 0 COMBS)
4 / $20,800 / 12 / DECREASE
($227,000)
5 / $3/UNIT / 13 / $52.00
6 / $40,000 / 14 / $96,429
7 / $240,000 / 15 / $62,768
8 / DECREASE
($155,000)

Q 1.Ritz Company makes three products from a joint input that have the following information:

Units Produced / Sales Value per unit at split off / Total Additional processing costs / Sales value per unit after additional processing
Product A / 50,000 / $10 / $400,000 / $15
Product B / 30,000 / $8 / $300,000 / $20
Product C / 45,000 / $7 / $180,000 / $10.50

The joint cost incurred to produce the three products to the split off point is $600,000. Which products should be processed further?

SOLUTION:

Units Produced / Sales Value per unit at split off / Total Additional processing costs / Sales value per unit after additional processing / PROCESS FURTHER
Product A / 50,000 / $10 / $400,000 / $15 / ($150,000)
Product B / 30,000 / $8 / $300,000 / $20 / $60,000
Product C / 45,000 / $7 / $180,000 / $10.50 / ($22,500)

Q 2-3:iowa industries

Iowa Industries makes corn oil and corn meal from corn in a joint process. The corn oil can be further processed into margarine, and the corn meal can be further processed into corn muffin mix. The joint cost incurred to process the corn to the split off point was $140,000. Information on the quantities, value, and further processing costs for the joint product appears below:

Quantity / Sales value at split off / Estimated further
processing cost. / Final Sales Value after processing
Corn Oil / 800,000 lbs. / $0.30/lb. / $0.15/lb. / $0.60/lb.
Corn Meal / 1,500,000 lbs. / $0.15/lb. / $0.45/lb. / $0.55/lb.

Q2.Assume that the joint cost is allocated to the products based on the approximate net realizable value of each product. How much joint cost should be assigned to the corn oil?

Quantity / ADDLCOSTS / FINAL VALUE / APPXNRV / RATIO / ALLOCATION
Corn Oil / 800,000 / $0.15 / $0.60 / $360,000.00 / 0.70588235 / $98,823.5294
Corn Meal / 1,500,000 / $0.45 / $0.55 / $150,000.00 / 0.29411765 / $41,176.4706
$510,000.00

Q 3.Assume that the joint cost is allocated to the products based on the relative sales value at split-off of each product. How much joint cost should be assigned to the corn meal?

Quantity / AT SPLIT OFF / VALUE AT SPLIT OFF / RATIO / ALLOCATION
Corn
Oil / 800,000 / $0.30 / $240,000.00 / 0.516129032 / $72,258.0645
Corn Meal / 1,500,000 / $0.15 / $225,000.00 / 0.483870968 / $67,741.9355
$465,000.00

Q 4:Value Pro produces and sells a single product. Information on its costs follow:

Variable costs:
SG&A / $2 per unit
Production / $4 per unit
Fixed costs:
SG&A / $12,000 per year
Production / $15,000 per year

In the upcoming year, Value Pro estimates that it will produce and sell 4,000 units. The variable costs per unit and the total fixed costs are expected to be the same as in the current year. However, it anticipates a sales price of $16 per unit. What is Value Pro's projected margin of safety (in dollars) for the coming year?

Profit at 4,000 units
Gross Sales = $16 * 4,000 units = $64,000
Contribution Margin = $(16 - 6) = $10/unit
Breakeven
10*x - $27,000 = $0  x=2,700 units
Break Even Sales = 2,700*16=$43,200
$(64,000 - 43,200) = $20,800

Q5.Meixner Manufacturing incurs annual fixed costs of $250,000 in producing and selling a single product. Estimated unit sales are 125,000. An after-tax income of $75,000 is desired by management. The company projects its income tax rate at 40 percent. What is the maximum amount that Meixner can expend for variable costs per unit and still meet its profit objective if the sales price per unit is estimated at $6?

Before Tax Income: $75,000 / 0.60 = $125,000
Fixed Costs: 250,000
Contribution Margin: $375,000
Projected Sales $750,000
less: Contribution Margin 375,000
Variable Costs $375,000
$375,000 / 125,000 units $3/unit

Q6.Adams Company uses 10,000 units of a part in its production process. The costs to make a part are: direct material, $12; direct labor, $25; variable overhead, $13; and applied fixed overhead, $30. Adams has received a quote of $55 from a potential supplier for this part. If Adams buys the part, 70 percent of the applied fixed overhead would continue. Adams Company would be better off by $______?

Cost to buy: $55/unit * 10,000 units = $550,000
Cost to manufacture: $(12+25+13+9)= $59/unit
Incremental difference in favor of buying: $4/unit * 10,000 units = $40,000

Q 7.Gamble Company has only 25,000 hours of machine time each month to manufacture its two products. Product X has a contribution margin of $50, and Product Y has a contribution margin of $64. Product X requires 5 hours of machine time, and Product Y requires 8 hours of machine time. If Gamble Company wants to dedicate 80 percent of its machine time to the product that will provide the most income, the company will have a total contribution margin of

Assume 80% of capacity applied to Product X
X: 20,000 hrs/5 hrs per unit / 4,000 units * $50 CM/unit / $200,000
Y: 5,000 hrs/8 hrs per unit / 625 units * $64 CM/unit / 40,000
Total / $240,000
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Q 8.Perry Company has 3 divisions: R, S, and T. Division R's income statement shows the following for the year ended December 31:

Sales / $1,000,000
Cost of goods sold / (800,000)
Gross profit / $ 200,000
Selling expenses / $100,000
Administrative expenses / 250,000 / (350,000)
Net loss / $(150,000)

Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are avoidable if the division is closed. All of the selling expenses relate to the division and would be eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied from corporate costs (unavoidable). If Division R were eliminated, how would Perry’s income change?

Sales foregone / $(1,000,000)
COGS avoided
Variable / $600,000
Fixed / 120,000 / 720,000
Selling Expense Avoided / 100,000
Administrative Expense Avoided / 25,000
Decrease in income / $(155,000)
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Q9.Pratt Company is currently operating at a loss of $15,000. The sales manager has received a special order for 5,000 units of product, which normally sells for $35 per unit. Costs associated with the product are: direct material, $6; direct labor, $10; variable overhead, $3; applied fixed overhead, $4; and variable selling expenses, $2. The special order would allow the use of a slightly lower grade of direct material, thereby lowering the price per unit by $1.50 and selling expenses would be decreased by $1. If Pratt wants this special order to increase the total net income for the firm to $10,000, what sales price must be quoted for each of the 5,000 units?

In order to increase income to $10,000, there must be an increase of $25,000 or $5 per unit.

Direct materials / $ 4.50
Direct Labor / 10.00
Variable Overhead / 3.00
Variable Selling Exp / 1.00
Production Costs / $18.50
Additional profit per unit / 5.00
Sales price/unit / $23.50
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Q10.West Company produces a part that has the following costs per unit:

Direct material / $ 8
Direct labor / 3
Variable overhead / 1
Fixed overhead / 5
Total / $17

Zest Corporation can provide the part to West for $19 per unit. West Company has determined that 60 percent of its fixed overhead would continue if it purchased the part. However, if West no longer produces the part, it can rent that portion of the plant facilities for $60,000 per year. West Company currently produces 10,000 parts per year. Which alternative is preferable and by what margin?

Purchase price from Zest / $(190,000)
Rent Revenue Received / 60,000
Variable Costs Avoided / 120,000
Fixed Overhead Avoided / 20,000
Difference in Favor of Buying / $ 10,000

Q11.Glamorous Grooming Corporation makes and sells brushes and combs. It can sell all of either product it can make. The following data are pertinent to each respective product:

Brushes / Combs
Units of output per machine hour / 8 / 20
Selling price per unit / $12.00 / $4.00
Product cost per unit
Direct material / $1.00 / $1.20
Direct labor / 2.00 / 0.10
Variable overhead / 0.50 / 0.05

Allocated Fixed Costs $8.00 $1.00

The company has 40,000 machine hours available for production. What sales mix will maximize profits?

Brushes have a contribution margin of $8.50 per unit and 8*8.50=$68/hour; combs have a contribution margin of $2.65 per unit and 20*2.65=$53/hour. Brushes have bigger CM per hour (constrained resource).
The combination of 320,000 brushes (=8*40,000) and 0 combs provides the highest profit.

Q12.Green Industries has two sales territories-East and West. Financial information for the two territories is presented below:

East / West
Sales / $980,000 / $750,000
Direct costs:
Variable / (343,000) / (225,000)
Fixed / (450,000) / (325,000)
Allocated common costs / (275,000) / (175,000)
Net income (loss) / $(88,000) / $ 25,000

Because the company is in a start-up stage, corporate management feels that the East sales territory is creating too much of a cash-drain on the company and it should be eliminated. If the East territory is discontinued, one sales manager (whose salary is $40,000 per year) will be relocated to the West territory. By how much would Green's income change if the East territory is eliminated?

Sales foregone in East / $(980,000)
Variable costs avoided / 343,000
Fixed costs avoided / 410,000
Decrease in income from eliminating East territory / $(227,000)
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Q13:Jones Corp. has a capacity to produce 40,000 units. Its product sells for $50 per unit and the variable costs incurred in manufacturing and selling the product are as follows on a per unit basis: Direct materials = $10; Direct labor = $20; Variable manufacturing OH = $5; Sales commission = $3. Annual fixed manufacturing OH is $500,000 and annual fixed S G & A costs are $200,000. A customer has proposed a special order to purchase 10,000 units. If Jones accepts the order, the company would not have to pay its sales people their normal commission of $3 per unit, but the company would incur extra shipping cost of $5 per unit. Assume that Jones is operating at full capacity and will have to divert sales from regular customers, if the offer is accepted. What is the minimum price per unit below which Jones should reject the order?

Ans: 50-3+5=$52

Q14-15: The following information relates toTwo-4-One Corp.

Service DepartmentsCosts

Service A$70,000

Service B$90,000

Production Departments

Production C$16,000

Production D$21,000

Number of employees is the cost driver for service department A and square-feet is the cost driver for service department B. The cost drivers are distributed as followed:

DepartmentSquare-feetNumber of employees

A1,0005

B1,50015

C4,00045

D3,00025

Q14: How much of the total Service Department Costs will be allocated to Production Department C (using the direct method).

Q15: How much of the total Service Department Costs will be allocated to Production Department D (using the step-down method).