Compute the unit product cost under absorption costing

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9. The Bohne Company produces chocolate candies. The chocolates sell for \$12 per box. Annually, the company produces 10,000 boxes of chocolates and sells 9,000 boxes of the candies. The company's cost information includes the following:

Direct materials \$2.00 per unit
Direct labor \$3.00 per unit
Fixed manufacturing overhead \$20,000
Fixed selling and administrative expenses \$5,000
Variable manufacturing overhead \$1.00 per unit
Variable selling and administrative expenses \$3.00 per unit

(a) Compute the unit product cost under absorption costing.

(b) Compute the unit product cost under variable costing.

(c) Prepare an income statement using absorption costing.

(d) Prepare an income statement using variable costing.

(e) Explain the difference of \$2,000 in the net operating income determined under the absorption and variable costing methods.

Use the following information to answer questions 10 - 15:

Dilbert Farm Supply is located in a small town in the rural west. Data regarding the store's operations follows:

* Sales are budgeted at \$260,000 for November, \$230,000 for December, and \$210,000 for January.
* Collections are expected to be 80% in the month of sale, 19% in the month following the sale, and 1% uncollectible.
* The cost of goods sold is 65% 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 \$20,300.
* Monthly depreciation is \$20,000.
* Ignore taxes.

Statement of Financial Position

October 31

Cash \$ 27,000

Accounts receivable

(net of allowance for uncollectible accounts) 79,000

Inventory 101,400

Property, plant and equipment

(net of \$574,000 accumulated depreciation) 1,082,000

Total assets \$1,289,400

Liabilities and Stockholder's Equity

Accounts Payable \$ 169,000

Common Stock 740,000

Retained Earnings 380,400

Total Liabilities and stockholder's equity \$1,289,400

10. Expected cash collections (from the Sales Budget) in December are:
1. \$230,000
2. \$184,000
3. \$233,400
4. \$49,400

11. The cost of December merchandise purchases would be:
1. \$141,700
2. \$169,000
3. \$81,900
4. \$149,500

The entry for November is as follows:
November
Sales 260,000
Budgeted COGS (Sales * 65%) 169,000
Required Purchases 157,300*
*(169,000 *.4)+(149,500 *.6)

12. December cash disbursements for merchandise purchases would be:
1. \$141,700
2. \$149,500
3. \$157,300
4. \$81,900

13. The cash balance at the end of December would be:
1. \$180,800
2. \$153,500
3. \$82,800
4. \$27,000

14. The excess (deficiency) of ending cash available over beginning cash available for December would be:
1. \$55,800
2. \$37,900
3. \$93,700
4. \$17,900

15. The net income for December would be:
1. \$60,200
2. \$37,900
3. \$40,200
4. \$55,800

16. Labeau Products, ltd., of Perth Australia has \$35,000 to invest. The company is trying to decide between two alternative uses for the funds as follows:

Project X Project Y
Investment Required \$35,000 \$35,000
Annual Cash Inflows \$9,000
Single Cash Inflow (Year 10) \$150,000
Life of Project 10 years 10 years

The company's discount rate is 18%. Which project would you recommend that the company accept. Show all computations using the net present value approach. Prepare separate computation for each project.

17. Oxford Company has limited funds available for investment and must ration the funds among five competing projects. Selected information on the five projects follows:
Project Investment Required Net Present Value Life of the Project (years) Internal Rate of Return (percent)
A \$160,000 \$44,323 7 18%
B \$135,000 \$42,000 12 16%
C \$100,000 \$35,035 7 20%
D \$175,000 \$38,136 3 22%
E \$150,000 \$(8,696) 6 8%

The net present values have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth.

1. Compute the project probability index for each project.

2. In order of preference, rank the five projects in terms of :
1. Net Present Value
2. Project Probability Index
3. Internal Rate of Return

Which ranking do you prefer? Why?

18. Glaceau, the producer of nutrient enhanced water beverages bases its variable overhead performance report on the actual direct labor-hours of the period. Data concerning the most recent year that ended on December 31 appear below:
Budgeted direct labor hours 38,000
Actual direct labor hours 34,000
Standard direct labor hours allowed 35,000
Cost formula (per direct labor hour):
Indirect labor \$0.60
Supplies \$0.10
Electricity \$0.05
Actual costs incurred:
Indirect labor \$21,200
Supplies \$3,200
Electricity \$1,600

Prepare a variable overhead performance report using the format in Exhibit 11-6 of your text. Only compute the spending variances.

19. Sacha Lakic, is a designer of exclusive European furniture and accessories. One item he designs, Meuble de Rangement (a storage unit) sells for \$1000 per unit. Below is Mr. Lakic's contribution format income statement for last month:
Sales \$4,000,000
Less Variable Expenses 2,800,000
Contribution Margin 1,200,000
Less Fixed Expenses 720,000
Net Income \$ 480,000

Sacha has no beginning or ending inventories. A total of 4,000 units were produced and sold last month. Compute the following:

(a) Breakeven in sales dollars and units?

(b) How many units need to be sold to attain target profits of \$600,000?

(c) What is the Sacha's margin of safety?

(d) What is the degree of operating leverage?

20. You've graduated from Russell University with an MBA degree and acquired a position as Executive Vice President of Investments at Credit Suisse. You've had your mind set on building a house overlooking Rehoboth beach, and now that you're a double comma kid, you can afford your dream house. You've met with the architect and other contractors and the bottom line number to build your house is \$845,000. You want to pay in cash upon completion of the project, which will take 3 years. How much money should you invest today, at a rate of 9% interest to ensure that you have \$845,000 in 3 years?

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