Reference no: EM131922027

Exercise 1 - Cost Behavior

SmokeCity, Inc., manufactures barbeque smokers. Based on past experience, SmokeCity has found that its total annual overhead costs can be represented by the following formula: Overhead cost = $543,000 + $1.34X, where X equals number of smokers. Last year, SmokeCity produced 20,000 smokers. Actual overhead costs for the year were as expected.

Required:

1. What is the driver for the overhead activity?

For questions 2-4, Enter the final answers rounded to the nearest dollar.

2. What is the total overhead cost incurred by SmokeCity last year?

3. What is the total fixed overhead cost incurred by SmokeCity last year?

4. What is the total variable overhead cost incurred by SmokeCity last year?

For questions 5-8, round your answers to the nearest cent. Use those rounded figures in subsequent computations, if necessary.

5. What is the overhead cost per unit produced?

6. What is the fixed overhead cost per unit?

7. What is the variable overhead cost per unit?

8. Recalculate Requirements 5, 6, and 7 for the following levels of production: (a) 19,500 units and (b) 21,600 units.

Exercise 2 - High-Low Method, Cost Formulas

The controller of the South Charleston plant of Ravinia, Inc., monitored activities associated with materials handling costs. The high and low levels of resource usage occurred in September and March for three different resources associated with materials handling. The number of moves is the driver. The total costs of the three resources and the activity output, as measured by moves for the two different levels, are presented as follows:

Resource	Number of Moves	Total Cost
Forklift depreciation:
Low	6,500	$1,800
High	20,000	1,800
Indirect labor:
Low	6,000	$74,250
High	20,000	135,000
Fuel and oil for forklift:
Low	6,500	$4,940
High	20,000	15,200

Required:

If required, round your answers to two decimal places. Enter a "0" if required.

1. Determine the cost behavior formula of each resource. Use the high-low method to assess the fixed and variable components.

2. Using your knowledge of cost behavior, predict the cost of each item for an activity output level of 9,000 moves. For interim computations, carry amounts out to two decimal places. Round your final answer to the nearest dollar.

3. Construct a cost formula that can be used to predict the total cost of the three resources combined. If required, round your answers to two decimal places.

Materials handling cost = $ _________________ + $ _________________ X

Using this formula, predict the total materials handling cost if activity output is 9,000 moves.

Exercise 3 - CVP: Before- and After-Tax Targeted Income

Head-Gear Company produces helmets for bicycle racing. Currently, Head-Gear charges a price of $230 per helmet. Variable costs are $80.50 per helmet, and fixed costs are $1,255,800. The tax rate is 25 percent. Last year, 14,000 helmets were sold.

Required:

1. What is Head-Gear's net income for last year?

2. What is Head-Gear's break-even revenue? In your computations, round the contribution margin ratio to two decimal places.

3. Suppose Head-Gear wants to earn before-tax operating income of $900,000. How many units must be sold? Round to the nearest whole unit.

4. Suppose Head-Gear wants to earn after-tax net income of $650,000. How many units must be sold? Round to the nearest whole unit.

5. Suppose the income tax rate rises to 35 percent. How many units must be sold for Head-Gear to earn after-tax income of $650,000? Round to the nearest whole unit.

Exercise 4 - Contribution Margin, CVP, Net Income, Margin of Safety

Nail Glow, Inc., produces novelty nail polishes. Each bottle sells for $5.90. Variable unit costs are as follows:

Acrylic base	$0.86	Bottle, packing material	$1.15
Pigments	0.57	Selling commission	0.14
Other ingredients	0.43

Fixed overhead costs are $34,475 per year. Fixed selling and administrative costs are $6,720 per year. Nail Glow sold 35,000 bottles last year.

Required:

1. What is the contribution margin per unit for a bottle of nail polish?

What is the contribution margin ratio? Round your answer to four decimal places.

2. How many bottles must be sold to break even?

What is the break-even sales revenue? Round your answer to the nearest dollar, if rounding is required.

3. What was Nail Glow's operating income last year?

4. What was the margin of safety in revenue?

5. Suppose that Nail Glow, Inc., raises the price to $6.50 per bottle, but anticipated sales will drop to 28,750 bottles. What will the new break-even point in units be? Round your answer up to the nearest whole number of units.