Accounting
AHMED3
PracticeFinal.xlsxProblem 1
| PROBLEM 1: SHORT-TERM DECISIONS--MAKE VERSUS BUY | |||||
| The Grilling Company manufactures gas grills for at-home grilling enthusiasts. Each grill features two side burners. In Year 1, The Grilling Company made the side burners for its grills internally. 20,000 grills (40,000 burners) were manufactured in Year 1. Details on the cost per burner in Year 1 follow: | |||||
| Cost per burner | |||||
| Direct materials | $ 5.00 | ||||
| Direct labor | $ 2.50 | ||||
| Overhead: | |||||
| Variable manufacturing overhead | $ 1.25 | ||||
| Inspection, setup, materials handling | $ 0.05 | ||||
| Machine rent | $ 0.20 | ||||
| Fixed costs of plant administration and insurance | $ 1.25 | ||||
| Total costs | $ 10.25 | ||||
| An external vendor has offered to supply The Grilling Company with any number of burners they require for $9.10 per burner, starting in Year 2. Management is currently considering whether to accept the offer. Additional information that is relevant to the decision follows: (1) The Grilling Company expects to produce and sell 20,000 grills in Year 2 (there are two burners per grill). (2) Inspection, setup, and materials handling costs vary with the number of batches run. The Grilling Company manufactures its burners in batches of 4,000 units. (3) The Grilling Company rents the machine that is used to make the burners. The machine's lease has not yet been signed for Year 2, so if the offer is accepted, The Grilling Company will not have to pay machine rent in Year 2. | |||||
| Required: | |||||
| 1a. | Assume that if The Grilling Company accepts the offer to purchase the burners from the external vendor, the facility where the burners were previously made would be left idle. In this situation, by how much would The Grilling Company's profits increase or decrease in Year 2 if management chooses to accept the offer to buy the burners? | ||||
| 1b. | Assume that if The Grilling Company accepts the offer to purchase the burners from the external vendor, the facility where the burners were previously made would be used to add a rotisserie attachment to each grill produced. As a result, The Grilling Company will be able to sell its grills for $30 more per unit. The variable cost of the rotisserie attachment would be $24, and additional fixed costs of $100,000 per year would be incurred related to the rotisserie attachment. In this situation, by how much would The Grilling Company's profits increase or decrease in Year 2 if management chooses to accept the offer to buy the burners? | ||||
| 1c. | The Grilling Company's sales manager is concerned that the estimate of 20,000 grills is too high and argues that it is more realistic that only 15,000 grills will be sold in Year 2. The lower production of only 15,000 grills would free up space in the manufacturing facility. This free space would be used to add the rotisserie attachments to the grills whether The Grilling Company buys the burners from the external vendor or manufactures them internally. In this situation, by how much would The Grilling Company's profits increase or decrease in Year 2 if management chooses to accept the offer to buy the burners? | ||||
Problem 2
| PROBLEM 2: SHORT-TERM DECISIONS--PRODUCT MIX | ||||||
| Northern Star Inc. is a small shipbuilder based out of Seattle, Washington. The company makes three types of yachts: (1) Sailing Yachts, (2) Motor Yachts, and (3) Luxury Yachts. Each Sailing Yacht requires 1,400 hours to build, whereas each Motor Yacht requires 1,500 hours to build, and each Luxury Yacht requires 3,000 hours to build. The company has 20 employees who build the yachts, each of whom works 1,970 hours per year. The company is currently scheduling the yachts that will be built in 2022. Based on the orders received so far, they expect that there will be demand for 11 Sailing Yachts, 12 Motor Yachts, and 5 Luxury Yachts. Clearly, the company is not large enough to meet the high demand for its products. The owner will not permit the company to hire additional employees, as it is her desire to maintain Northern Star Inc.'s reputation as a small, family-owned company. At a recent meeting, Jeff Jones, the company's new CEO, stated the following with regard to the 2022 scheduling: "Obviously, because our Luxury Yachts yield the highest profit margin at 19%, they should be our #1 focus in 2022. We should next focus on building our Sailing Yachts, because they have a profit margin of 14%. Then, with whatever time we have left, we can build our Motor Yachts, since their profit margin is only 11%." To support his argument, he showed everyone at the meeting the following report from the company's accounting system: | ||||||
| Sailing Yacht | Motor Yacht | Luxury Yacht | ||||
| Revenue per unit | $ 1,000,000 | $ 1,500,000 | $ 2,250,000 | |||
| Variable manufacturing costs per unit | $ 725,000 | $ 1,200,000 | $ 1,700,000 | |||
| Fixed manufacturing costs per unit | $ 100,000 | $ 100,000 | $ 100,000 | |||
| Gross margin per unit | $ 175,000 | $ 200,000 | $ 450,000 | |||
| Variable SG&A costs per unit | $ 12,000 | $ 14,000 | $ 11,000 | |||
| Fixed SG&A costs per unit | $ 20,000 | $ 20,000 | $ 20,000 | |||
| Profit per unit | $ 143,000 | $ 166,000 | $ 419,000 | |||
| Profit margin % per unit | 14% | 11% | 19% | |||
| Required: | ||||||
| 2a. | Based on your knowledge of cost accounting, you question the CEO's argument that the company should prioritize the yacht with the highest profit margin percentage. Perform an analysis to identify the yacht that should be the company's #1 priority, assuming that the Northern Star Inc.'s goal is to maximize its profits in 2022. What would the total contribution margin be for this type of yacht in 2022? | |||||
| 2b. | What is the difference in Northern Star Inc.'s contribution margin under the profit-maximizing product mix vs. the CEO's proposed product mix (if any)? In other words, calculate: Contribution margin under the profit maximizing product mix - Contribution margin under the CEO's proposed product mix. | |||||
| 2c. | Suppose that, upon hearing about the high demand for Northern Star's yachts in 2022, the CEO agrees to hire one more employee who will work 1,970 hours per year. By how much will the company's contribution margin increase in 2022 as a result of the additional employee (if any)? In other words, calculate: Contribution margin under the profit maximizing product mix with 21 employees - Contribution margin under the profit maximizing product mix with 20 employees. | |||||
Problem 3
| PROBLEM 3: ACTIVITY-BASED COSTING | ||||
| Tom's Toy Train Co. (TTT) manufactures and sells two types of toy trains: Passenger Trains and Freight Trains. The CFO has asked you to compare three different methods of allocating the firm's overhead costs. She is interested in understanding whether it would be worthwhile to implement an activity-based costing (ABC) system, or if using a department-wide costing system or even a plant-wide costing system would approximate the costs under a more refined system such ABC. To complete the analysis, you compile the following budgeted information from the firm's accounting system: | ||||
| Assembly Department | Passenger Train | Freight Train | Total | |
| Direct materials | $ 2.50 | $ 3.75 | $ 6.25 | |
| Direct labor | $ 3.50 | $ 2.00 | $ 5.50 | |
| Total direct cost per unit | $ 6.00 | $ 5.75 | $ 11.75 | |
| Number of units produced | 800 | 740 | ||
| Painting Department | Passenger Train | Freight Train | Total | |
| Direct materials | $ 0.50 | $ 1.00 | $ 1.50 | |
| Direct labor | $ 2.25 | $ 1.50 | $ 3.75 | |
| Total direct cost per unit | $ 2.75 | $ 2.50 | $ 5.25 | |
| Number of units produced | 800 | 740 | ||
| The toy trains pass through TTT's Assembly Department and Painting Department in batches. Upon exiting the Painting Department, the toy trains are complete and ready for sale. | ||||
| Overhead Costs | Assembly Department | Painting Department | Total | |
| Utilities | $ 2,580 | $ 2,100 | $ 4,680 | |
| Materials handling | $ 1,700 | $ 900 | $ 2,600 | |
| Quality inspection | $ 2,750 | $ 1,150 | $ 3,900 | |
| Total | $ 7,030 | $ 4,150 | $ 11,180 | |
| Utility costs vary with the direct labor costs. Materials handling and quality inspection costs vary with the number of batches run in each department. The budgeted number of batches for each product follow: | ||||
| Number of Batches | Passenger Train | Freight Train | Total | |
| Total batches | 250 | 80 | 330 | |
| Required: | ||||
| 3a. | Suppose that the firm allocates its overhead costs using a plant-wide overhead rate based on total direct costs (direct materials costs plus direct labor costs). What is the total cost per unit for the toy Passenger Trains? | |||
| 3b. | Suppose that the firm allocates its overhead costs using department-wide overhead rates, where (1) the Assembly Department allocates its overhead based on direct labor costs, and (2) the Painting Department allocates its overhead based on the total direct costs in the Painting Department (direct materials costs plus direct labor costs). What is the total cost per unit for the toy Passenger Trains? | |||
| 3c. | Suppose that the firm allocates its overhead costs using an ABC system. Use your cost accounting expertise to establish appropriate cost pools and cost drivers. What is the total cost per unit for the toy Passenger Trains? | |||
