Reference no: EM131321127

Question 1.

Pringle Company distributes a single product. The company's sales and expenses for a recent month follow:

	Total			Per Unit
Sales	$	300,000		$	20
Variable expenses		210,000			14
Contribution margin		90,000		$	6
Fixed expenses		78,000
Net operating income	$	12,000

Required:

1. What is the monthly break-even point in units sold and in sales dollars? (Omit the "$" sign in your response.)

Break-even point in unit sales units

Break-even point in sales dollars $

2. Without resorting to computations, what is the total contribution margin at the break-even point?

Total contribution margin $

3. How many units would have to be sold each month to earn a target profit of $31,200? Use the formula method.

4. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. (Round your percentage answer to 2 decimal places. Omit the "$" and "%" signs in your response.)

5. What is the company's CM ratio? If monthly sales increase by $61,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? (Omit the "$" and "%" signs in your response.)

CM ratio %

Net operating income increases by $

Question 2.

Reveen Products sells camping equipment. One of the company's products, a camp lantern, sells for $130 per unit. Variable expenses are $91 per lantern, and fixed expenses associated with the lantern total $179,400 per month.

Required:

1. Compute the company's break-even point in number of lanterns and in total sales dollars. (Omit the "$" sign in your response.)

Number of lanterns

Total sales dollars $

2. If the variable expenses per lantern increase as a percentage of the selling price, will it result in a higher or a lower break-even point? (Assume that the fixed expenses remain unchanged.)

Higher break-even point

Lower break-even point

3. At present, the company is selling 16,000 lanterns per month. The sales manager is convinced that a 10% reduction in the selling price will result in a 25% increase in the number of lanterns sold each month. Prepare two contribution format income statements, one under present operating conditions, and one as operations would appear after the proposed changes.

4. Refer to the data in (3) above. How many lanterns would have to be sold at the new selling price to yield a minimum net operating income of $80,000 per month? (Round your answer to the nearest whole number.)

Question 3.

Memofax, Inc., produces memory enhancement kits for fax machines. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company's contribution format income statement for the most recent month is given below:

Sales (12,700 units at $20 per unit)	$	254,000
Variable expenses		152,400
Contribution margin		101,600
Fixed expenses		113,600
Net operating loss	$	(12,000)

Required:

1. Compute the company's CM ratio and its break-even point in both units and dollars. (Omit the "%" and "$" signs in your response.)

2. The sales manager feels that an $6,800 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $85,000 increase in monthly sales. If the sales manager is right, what will the revised net operating income or loss? (Use the incremental approach in preparing your answer.) (Omit the "$" sign in your response.)

3. Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $40,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? (Input all amounts as positive values except losses which should be indicated by minus sign. Omit the "$" sign in your response.)

4. Refer to the original data. The company's advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $0.70 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,700? (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.)

5. Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $125,000 per month.

a. Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Round your final answers to the nearest whole number. Omit the "%" and "$" signs in your response.)

CM ratio %

Break-even point in units

Break-even point in dollars $

________________________________________

b. Assume that the company expects to sell 20,900 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Omit the "$" and "%" signs in your response.)

Question 4.

Shastri Bicycle of Bombay, India, produces an inexpensive, yet rugged, bicycle for use on the city's crowded streets that it sells for 983 rupees. (Indian currency is denominated in rupees, denoted by .) Selected data for the company's operations last year follow:

Units in beginning inventory		0
Units produced		19,000
Units sold		16,000
Units in ending inventory		3,000
Variable costs per unit:
Direct materials		270
Direct labor		490
Variable manufacturing overhead		47
Variable selling and administrative		18
Fixed costs:
Fixed manufacturing overhead		870,000
Fixed selling and administrative		760,000

Required:

1. Assume that the company uses absorption costing. Compute the unit product cost for one bicycle. (Round your intermediate and final answers to the nearest whole number. Omit the " " sign in your response.)

2. Assume that the company uses variable costing. Compute the unit product cost for one bicycle. (Omit the " " sign in your response.)

Question 5.

Fletcher Company manufactures and sells one product. The following information pertains to each of the company's first two years of operations:

Variable costs per unit:
Manufacturing:
Direct materials		$ 26
Direct labor		$ 11
Variable manufacturing overhead		$ 3
Variable selling and administrative		$ 2
Fixed costs per year:
Fixed manufacturing overhead	$	240,000
Fixed selling and administrative expenses	$	90,000

During its first year of operations, Fletcher produced 50,000 units and sold 40,000 units. During its second year of operations, it produced 40,000 units and sold 50,000 units. The selling price of the company's product is $59 per unit.

1. Assume the company uses variable costing:

a. Compute the unit product cost for year 1 and year 2. (Omit the "$" sign in your response.)

b. Prepare an income statement for year 1 and year 2. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

2. Assume the company uses absorption costing:

a. Compute the unit product cost for year 1 and year 2. (Round your answers to 2 decimal places.Omit the "$" sign in your response.)

b. Prepare an income statement for year 1 and year 2. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

3. Reconcile the difference between variable costing and absorption costing net operating income in year 1 and year 2. (Input Income and anything that you add as positive numbers. Input losses and anything that you deduct as negative. Omit the "$" sign in your response.)

Shastri Bicycle of Bombay, India, produces an inexpensive, yet rugged, bicycle for use on the city's crowded streets that it sells for 940 rupees. (Indian currency is denominated in rupees, denoted by .) Selected data for the company's operations last year follow:

Units in beginning inventory		0
Units produced		18,000
Units sold		3,000
Units in ending inventory		15,000
Variable costs per unit:
Direct materials		87
Direct labor		318
Variable manufacturing overhead		35
Variable selling and administrative		10
Fixed costs:
Fixed manufacturing overhead		810,000
Fixed selling and administrative		471,000

The absorption costing income statement prepared by the company's accountant for last year appears below:

Sales		2,820,000
Cost of goods sold		1,455,000
Gross margin		1,365,000
Selling and administrative expense		501,000
Net operating income		864,000

Question 6.

Required:

1. Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period. (Omit the " " sign in your response.)

Total fixed manufacturing overhead in ending inventory

References
WorksheetDifficulty: EasyLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.

Question 7.

Prepare an income statement for the year using variable costing. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the " " sign in your response.)

Question 8.

Caltec, Inc., produces and sells recordable CD and DVD packs. Revenue and cost information relating to the products follow:

	Product
	CD		DVD
Selling price per pack	$	9.00	$	35.00
Variable expenses per pack	$	2.40	$	14.00
Traceable fixed expenses per year	$	133,000	$	38,000

Common fixed expenses in the company total $109,000 annually. Last year the company produced and sold 38,000 CD packs and 22,000 DVD packs.

Required:
Prepare a contribution format income statement for the year segmented by product lines. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Question 9.

Silicon Optics has supplied the following data for use in its activity-based costing system:

Overhead Costs
Wages and salaries	$	354,000
Other overhead costs		192,000
Total overhead costs	$	546,000

Activity Cost Pool	Activity Measure	Total Activity
Direct labor support	Number of direct labor-hours	10,000	DLHs
Order processing	Number of orders	490	orders
Customer support	Number of customers	95	customers
Other	This is an organization-sustaining activity	Not applicable

	Distribution of Resource Consumption Across Activities
	Direct Labor Support		Order Processing		Customer Support		Other		Total
Wages and salaries	10	%	30	%	25	%	35	%	100	%
Other overhead costs	20	%	10	%	20	%	50	%	100	%

During the year, Silicon Optics completed an order for a special optical switch for a new customer, Indus Telecom. This customer did not order any other products during the year. Data concerning that order follow:

Data Concerning the Indus Telecom Order
Selling price	$	305	per unit
Units ordered		100	units
Direct materials	$	260	per unit
Direct labor-hours		0.5	DLH per unit
Direct labor rate	$	26	per DLH

Required:

1. Prepare a report showing the first-stage allocations of overhead costs to the activity cost pools. (Omit the "$" sign in your response.)

2. Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places.Omit the "$" sign in your response.)

Activity Cost Pools Activity Rate
Direct labor support $
per DLH
Order processing $
per order
Customer support $
per customer

3. Compute the overhead costs for the order from Indus Telecom, including customer support costs. (Round your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your response.)

4. Prepare a report showing the customer margin for Indus Telecom. (Input all amounts as positive values except losses which should be indicated by a minus sign. Round your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your response.)

Question 10.

As You Like It Gardening is a small gardening service that uses activity-based costing to estimate costs for pricing and other purposes. The proprietor of the company believes that costs are driven primarily by the size of customer lawns, the size of customer garden beds, the distance to travel to customers, and the number of customers. In addition, the costs of maintaining garden beds depends on whether the beds are low-maintenance beds (mainly ordinary trees and shrubs) or high-maintenance beds (mainly flowers and exotic plants). Accordingly, the company uses the five activity cost pools listed below:

Activity Cost Pool	Activity Measure
Caring for lawn	Square feet of lawn
Caring for garden beds-low maintenance	Square feet of low-maintenance beds
Caring for garden beds-high maintenance	Square feet of high-maintenance beds
Travel to jobs	Miles
Customer billing and service	Number of customers

The company has already completed its first-stage allocations of costs. The company's annual costs and activities are summarized as follows:

Activity Cost Pool	Estimated Overhead Cost		Expected Activity
Caring for lawn	$	78,600	170,000	square feet of lawn
Caring for garden beds-low maintenance	$	31,200	28,000	square feet of low-maintenance beds
Caring for garden beds-high maintenance	$	60,720	22,000	square feet of high-maintenance beds
Travel to jobs	$	4,400	19,000	miles
Customer billing and service	$	9,100	20	customers

Required:
Compute the activity rate for each of the activity cost pools. (Round your answers to 2 decimal places.Omit the "$" sign in your response.)

Question 11.

Performance Products Corporation makes two products, titanium Rims and Posts. Data regarding the two products follow:

	Direct Labor-Hours per Unit	Annual   Production
Rims	0.50	11,000	units
Posts	0.10	52,000	units

Additional information about the company follows:
a. Rims require $34 in direct materials per unit, and Posts require $16.
b. The direct labor wage rate is $16 per hour.
c. Rims are more complex to manufacture than Posts, and they require special equipment.
d. The ABC system has the following activity cost pools:

	Estimated		Activity
Activity Cost Pool (and activity measure)	Overhead Cost		Rims	Posts	Total
Machine setups (number of setups)	$	22,680	90	72	162
Special processing (machine-hours)	$	112,500	4,500	0	4,500
General factory (direct labor-hours)	$	192,600	5,500	5,200	10,700

Required:
1. Compute the activity rate for each activity cost pool. (Omit the "$" sign in your response.)

2. Determine the unit cost of each product according to the ABC system. (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "$" sign in your response.)

Question 12.

Sven's Cookhouse is a popular restaurant located on Lake Union in Seattle. The owner of the restaurant has been trying to better understand costs at the restaurant and has hired a student intern to conduct an activity-based costing study. The intern, in consultation with the owner, identified three major activities. She then completed the first-stage allocations of costs to the activity cost pools, using data from last month's operations. The results appear below:

Activity Cost Pool	Activity Measure	Total Cost		Total Activity
Serving a party of diners	Number of parties served	$	15,120	5,600	parties
Serving a diner	Number of diners served	$	115,620	12,300	diners
Serving a drink	Number of drinks ordered	$	30,740	10,600	drinks

The above costs include all of the costs of the restaurant except for organization-sustaining costs such as rent, property taxes, and top-management salaries. A group of diners who ask to sit at the same table are counted as a party. Some costs, such as the costs of cleaning linen, are the same whether one person is at a table or the table is full. Other costs, such as washing dishes, depend on the number of diners served.
Prior to the activity-based costing study, the owner knew very little about the costs of the restaurant. He knew that the total cost for the month (including organization-sustaining costs) was $180,000 and that 12,000 diners had been served. Therefore, the average cost per diner was $15.

Required:
1. According to the activity-based costing system, what is the total cost of serving each of the following parties of diners? (Round your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your response.)

2. Convert the total costs you computed in (1) above to costs per diner. In other words, what is the average cost per diner for serving each of the following parties? (Round your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your response.)