Assessment

Asignación Units 5, 6, 7, 8

(25 puntos)

EXERCISE #1

(3 points)

Hamilton Heating Company is a small manufacturer of auxiliary heaters. The units sell for $100 each. In 2008, the company produced 1,200 units and sold 1,000 units. Below are variable and full costing income statements for 2008.

Income Statement Prepared Using Variable Costing
Hamilton Heating Company
Income Statement
For the Year Ending December 31, 2008
Sales / $ 100,000
Less variable costs:
Variable cost of goods sold / $20,000
Variable selling expense / 10,000 / 30,000
Contribution margin / 70,000
Less fixed costs:
Fixed manufacturing expense / 24,000
Fixed selling expense / 8,000
Fixed administrative expense / 12,000 / 44,000
Net Income / $26,000
Income Statement Prepared Using Full Costing
Hamilton Heating Company
Income Statement
For the Year Ending December 31, 2008
Sales / $ 100,000
Less cost of goods sold / 40,000
Gross margin / 60,000
Less selling and administrative expenses:
Selling expense / $18,000
Administrative expense / 12,000 / 30,000
Net Income / $30,000

Required:

Reconcile the difference in profit between the two income statements.

EXERCISE #2

(3 points)

The following information relates to Ronald Industries for fiscal 2008, the company’s first year of operation:

Units produced / 100,000
Units sold / 80,000
Units in ending inventory / 20,000
Fixed manufacturing overhead / $500,000

Required:

  1. Calculate the amount of fixed manufacturing overhead that would be expensed in 2008 using full costing.
  2. Calculate the amount of fixed manufacturing overhead that would be expensed in 2008 using variable costing.
  3. Calculate the amount of fixed manufacturing overhead that would be included in ending inventory under full costing and reconcile it to the difference between parts a and b.

EXERCISE # 3

(3 points)

Cales Instrumentation manufactures a variety of electronic instruments that are used in military and civilian applications. Sales to the military are generally on a cost-plus profit basis with profit equal to 10 percent of cost. Instruments used in military applications require more direct labor time because “fail-safe” devices must be installed. (These devices are generally omitted in civilian applications.)

At the start of the year, Cales estimates that the company will incur $50,000,000 of overhead, $5,000,000 of direct labor, and 500,000 machine hours. Consider the Model KV10 gauge that is produced for both civilian and military uses:

Civilian / Military
Direct material / $2,000 / $2,500
Direct labor / $600 / $900
Machine hours / 80 / 80

Required:

  1. Calculate the cost of civilian and military versions of Model KV10 using both direct labor dollars and machine hours as alternative allocation bases.
  2. Explain why Cales Instruments may decide to use direct labor as an overhead allocation base.
  3. Is it ethical for Cales to select an allocation base that tends to allocate more of overhead costs to government contracts? Explain.

EXERCISE #4

(3 points)

Ricoh Printing Company is the publisher for many of the local newspapers and magazines. They publish nine periodicals and several other types of literature, including handouts and pamphlets. They have recently adopted an activity-based costing system to assign manufacturing overhead to products. The following data relate to one of their products, The Rich Weekly, and the ABC cost pools:

The Ricoh Weekly:
Annual production / 20,000 units
Direct material per unit / $31
Direct labor per unit / $6

Manufacturing overhead cost pools:

Cost Pool / Cost / Cost Driver
Material ordering / $800,000 / Number of Purchase orders
Materials inspection / 400,000 / Number of receiving reports
Equipment setup / 2,000,000 / Number of setups
Quality control / 900,000 / Number of inspections
Other / 15,000,000 / Direct labor cost
Total mfg. overhead / $19,100,000
Annual activity information related to cost drivers:
Cost Pool / All Products / The Ricoh Weekly
Materials ordering / 100,000 orders / 1,000
Materials inspection / 2,000 receiving reports / 300
Equipment setup / 100 setups / 1
Quality control / 4,000 inspections / 400
Other / $10,000,000 direct labor / $120,000

Required:

  1. Calculate the overhead rate per unit of activity for each of the five cost pools.
  2. Calculate the total overhead assigned to the production of The Ricoh Weekly.
  3. Calculate the overhead cost per unit for The Ricoh Weekly.
  4. Calculate the total unit cost for The Ricoh Weekly.
  5. Suppose that Ricoh Printing allocates overhead by a traditional production volume-based method using direct labor dollars as the allocation base and one cost pool. Determine the overhead rate per direct labor dollar and the per unit overhead assigned to The Ricoh Weekly. Discuss the difference in cost allocations between the traditional method and the activity-based costing approach.

EXERCISE # 5

(3 points)

Enterprise Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below:

Cost per Unit
Variable costs
Direct material / $800
Direct labor / 500
Variable overhead / 200
Total variable cost / 1,500
Fixed Cost
Depreciation of equipment / 400
Depreciation of building / 100
Supervisory salaries / 200
Total fixed cost / 700
Total cost / $2,200

The company has an offer from McDonald Valves to produce the part for $1,800 per unit and supply 1,000 valves (the number needed in the coming year). If the company accepts this offer and shuts down production of valves, production workers and supervisors will be reassigned to other areas needing their services. The equipment cannot be used elsewhere in the company, and it has no market value. However, the space occupied by the production of the valve can be used by another production group that is currently leasing space for $50,000 per year.

Required:

Should the company make or buy the valve? Explain

EXERCISE #6

(3 points)

Batali Corporation is beginning to manufacture Titanic Mint, a new mouthwash in a small spray container. The product will be sold to wholesalers and large drugstore chains in packages of 30 containers for $18 per package. Management allocates $200,000 of fixed manufacturing overhead costs to Titanic Mint. The manufacturing cost per package of 30 containers for expected production of 100,000 packages is as follows:

Direct material / $6.50
Direct labor / 3.50
Overhead (fixed and variable) / 3.00
Total / $13.00

The company has contacted a number of packaging suppliers to determine whether it is better to buy or manufacture the spray containers. The lowest quote for the containers is $1.75 per 30 units. It is estimated that purchasing the containers from a supplier will save 10 percent of direct materials, 20 percent of direct labor, and 15 percent of variable overhead. Batali’s manufacturing space is highly constrained. By purchasing the spray containers, the company will not have to lease additional manufacturing space that is estimated to cost $15,000 per year. If the containers are purchased, one supervisory position can be eliminated. Salary plus benefits for this position are$70,000 per year.

Required:

Should Batali make or buy the containers? What is the incremental cost (benefit) of buying the containers as opposed to making them?

EXERCISE # 7

(3 points)

Planet View is considering production of a lighted world globe that the company would price at a markup of 20 percent above full cost. Management estimates that the variable cost of the globe will be $50 per unit and fixed cost per year will be #100,000.

Required:

  1. Assuming sales of 1,000 units, what is the full cost of a globe and what is the price with a 20 percent markup?
  2. Assume that the quantity demanded at the price calculated in part a is only 500 units. What is the full cost of the globe and what is the price with a 20 percent markup?
  3. Is the company likely to sell 500 units at the price calculated in part b?

EXERCISE #8

(4 points)

Roger Electronics has just developed a low-end electronic calendar that it plans on selling via a cable channel marketing program. The cable program’s fee for selling the item is 15 percent of revenue. For this fee, the program will sell the calendar over six 10-minute segments in September.

Roger’s fixed cost of producing the calendars are $120,000 per production run. The company plans to wait for all orders to come in, and then it will produce exactly the number of units ordered. Production time will be less than three weeks. Variable production costs are $20 per unit. In addition, it will cost approximately $6 per unit to ship the calendars to customers.

Kourtney Bow, a product manager at Roger, is charged with recommending a price for the item. Based on her experience with similar items, focus group responses, and survey information, she estimated the number of units that can be sold at various prices:

Price / Quantity
$69.99 / 10,000
$59.99 / 15,000
$49.99 / 25,000
$39.99 / 40,000
$29.99 / 60,000

Required:

  1. Calculate expected profit for each price.
  2. Which price maximizes company profit?