Course : Managerial Accounting_Discussion4
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Practiceproblemsforreference.docxModule 4: Practice/Review Problems/Applications
Module 4 Review/Practice Problems
In addition to the review problems in the assigned reading material, review the following problems to help you understand the application of the concepts covered in Module 4. To maximize the benefit of your practice, solve the problems with as much details as you can provide. Check your answer after you complete all the problems. You are encouraged to complete this review before you start the related quiz.
Cost-Volume-Profit Analysis
Review 1: Effect of Changing Variables on Operating Profit
Hamiel Corporation produces and sells a single product. Data concerning that product appear
below:
|
|
|
Per Unit |
Percent of Sales |
|
|
Selling price...................... |
$240 |
100% |
|
|
Variable expenses.............. |
168 |
70% |
|
|
Contribution margin.......... |
$72 |
30% |
Fixed expenses are $301,000 per month. The company is currently selling 5,000 units per month.
Required:
The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $16 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $68,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 200 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!
Review 2: Breakeven, Margin of Safety, and Operating Profit.
Belli-Pitt, Inc, produces a single product. The results of the company's operations for a typical
month are summarized in contribution format as follows:
|
|
Sales................................ |
$540,000 |
|
|
Variable expenses........... |
360,000 |
|
|
Contribution margin....... |
180,000 |
|
|
Fixed expenses................ |
120,000 |
|
|
Net operating income...... |
$ 60,000 |
The company produced and sold 120,000 kilograms of product during the month. There were no beginning or ending inventories.
Required:
a. Given the present situation, compute
1. The break-even sales in kilograms.
2. The break-even sales in dollars.
3. The sales in kilograms that would be required to produce net operating income of $90,000.
4. The margin of safety in dollars.
b. An important part of processing is performed by a machine that is currently being leased for $20,000 per month. Belli-Pitt has been offered an arrangement whereby it would pay $0.10 royalty per kilogram processed by the machine rather than the monthly lease.
1. Should the company choose the lease or the royalty plan?
2. Under the royalty plan compute break-even point in kilograms.
3. Under the royalty plan compute break-even point in dollars.
4. Under the royalty plan determine the sales in kilograms that would be required to produce net operating income of $90,000.
Review 3: Breakeven, Margin of Safety, Target Profit, and Degree of Operating Leverage
The following is Arkadia Corporation's contribution format income statement for last month:
|
|
Sales.......................................... |
$1,200,000 |
|
|
Variable expenses..................... |
800,000 |
|
|
Contribution margin................. |
400,000 |
|
|
Fixed expenses.......................... |
300,000 |
|
|
Net operating income................ |
$ 100,000 |
The company has no beginning or ending inventories and produced and sold 20,000 units during the month.
Required:
a. What is the company's contribution margin ratio?
b. What is the company's break-even in units?
c. If sales increase by 100 units, by how much should net operating income increase?
d. How many units would the company have to sell to attain target profits of $125,000?
e. What is the company's margin of safety in dollars?
f. What is the company's degree of operating leverage?
Review 4: How Does Degree of Operating Leverage Affect Operating Profit.
Lubke Corporation's contribution format income statement for the most recent month follows:
|
|
Sales................................ |
$506,000 |
|
|
Variable expenses........... |
236,500 |
|
|
Contribution margin....... |
269,500 |
|
|
Fixed expenses................ |
241,700 |
|
|
Net operating income...... |
$ 27,800 |
Required:
a. Compute the degree of operating leverage to two decimal places.
b. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from a 3% increase in sales.
Relevant Cost for Decisions
Review 5: Make or Buy Decision
Recher Corporation uses part Q89 in one of its products. The company's Accounting Department
reports the following costs of producing the 8,000 units of the part that are needed every year.
|
|
|
Per Unit |
|
|
Direct materials.......................... |
$8.10 |
|
|
Direct labor................................ |
$4.40 |
|
|
Variable overhead...................... |
$8.60 |
|
|
Supervisor’s salary..................... |
$3.20 |
|
|
Depreciation of special equipment............................... |
$2.60 |
|
|
Allocated general overhead....... |
$1.30 |
An outside supplier has offered to make the part and sell it to the company for $27.60 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $3,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part Q89 could be used to make more of one of the company's other products, generating an additional segment margin of $16,000 per year for that product.
Required:
a. Prepare a report that shows the effect on the company's total net operating income of buying part Q89 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?
Review 6: Special Order
Anglen Co. manufactures and sells trophies for winners of athletic and other events. Its
manufacturing plant has the capacity to produce 18,000 trophies each month; current monthly
production is 14,400 trophies. The company normally charges $103 per trophy. Cost data for the
current level of production are shown below:
|
|
Variable costs: |
|
|
|
Direct materials........... |
$460,800 |
|
|
Direct labor.................. |
$316,800 |
|
|
Selling and administrative.......... |
$15,840 |
|
|
Fixed costs: |
|
|
|
Manufacturing............. |
$404,640 |
|
|
Selling and administrative.......... |
$74,880 |
The company has just received a special one-time order for 900 trophies at $48 each. For this particular order, no variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs.
Required:
Should the company accept this special order? Why?
Ans:
Only the direct materials and direct labor costs are relevant in this decision. To make the decision, we must compute the average direct materials and direct labor cost per unit.
|
|
Direct materials.......................................................... |
$460,800 |
|
|
Direct labor................................................................ |
316,800 |
|
|
Total........................................................................... |
$777,600 |
|
|
Current monthly production...................................... |
14,400 |
|
|
Average direct materials and direct labor cost per unit......................................................................... |
$54 |
Because price on the special order is $48 per trophy and the relevant cost is $54, the company would suffer a loss of $6 per trophy. Therefore, the special order should not be accepted.
Review 7A: Sell or Process Further
Prosner Corp. manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $500,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point.
Each product may be sold at the split-off point or processed further. The additional processing costs and sales value after further processing for each product (on an annual basis) are:
|
|
|
Sales Value at Split-Off |
Further Processing Costs |
Sales Value After Further Processing |
|
|
Product D...... |
$300,000 |
$125,000 |
$534,000 |
|
|
Product F...... |
$275,000 |
$210,000 |
$450,000 |
|
|
Product G...... |
$195,000 |
$135,000 |
$360,000 |
The “Further Processing Costs” consist of variable and avoidable fixed costs.
Required:
Which product or products should be sold at the split-off point, and which product or products should be processed further? Show computations.
Review 7B: Sell or Process Further
Farrugia Corporation produces two intermediate products, A and B, from a common input. Intermediate product A can be further processed into end product X. Intermediate product B can be further processed into end product Y. The common input is purchased in batches that cost $36 each and the cost of processing a batch to produce intermediate products A and B is $15. Intermediate product A can be sold as is for $21 or processed further for $14 to make end product X that is sold for $32. Intermediate product B can be sold as is for $44 or processed further for $28 to make end product Y that is sold for $64.
Required:
a. Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of the common input into the end products X and Y? Show your work!
b. Should each of the intermediate products, A and B, be sold as is or processed further into an end product? Explain.
Answers
Cost-Volume-Profit Analysis
Review 1: Effect of Changing Variables on Operating Profit
Ans:
|
|
New contribution margin ($72 − $16)........................................... |
$56 |
|
|
New unit monthly sales (5,000 units + 200 units)...................... |
5,200 |
|
|
New total contribution margin: 5,200 units × $56 per unit......... |
$291,200 |
|
|
Present total contribution margin: 5,000 units × $72 per unit......... |
360,000 |
|
|
Change in total contribution margin....................................... |
(68,800) |
|
|
Plus savings in salespersons’ salaries...................................... |
68,000 |
|
|
Change in net operating income... |
($ 800) |
Review 2: Breakeven, Margin of Safety, and Operating Profit.
Ans:
|
a. |
|
Per kg. |
|
|
|
Sales........................... |
$4.50 |
100.0% |
|
|
Variable expense........ |
3.00 |
66.7% |
|
|
Contribution margin... |
$1.50 |
33.3% |
1. Sales = Variable expenses + Fixed expenses + Target profit
$4.50Q = $3.00Q + $120,000 + $0
$1.50Q = $120,000
Q = $120,000 ÷ $1.50 per unit = 80,000 units
2. 80,000 units × $4.50 per unit = $360,000
3. Sales = Variable expenses + Fixed expenses + Target profit
$4.50Q = $3.00Q + $120,000 + $90,000
$1.50Q = $210,000
Q = $210,000 ÷ $1.50 per unit = 140,000 units
4. Margin of safety = Sales − Sales at breakeven = $540,000 − $360,000
= $180,000
b.
|
1. |
|
As Is |
|
Proposed |
||
|
|
|
Per Unit |
Amount |
|
Per Unit |
Amount |
|
|
Sales................................ |
$540,000 |
$4.50 |
|
$540,000 |
$4.50 |
|
|
Variable expense............ |
360,000 |
3.00 |
|
372,000 |
3.10 |
|
|
Contribution margin....... |
180,000 |
1.50 |
|
168,000 |
1.40 |
|
|
Fixed expense................. |
120,000 |
1.00 |
|
100,000 |
0.83 |
|
|
Net operating income..... |
$ 60,000 |
$0.50 |
|
$ 68,000 |
$0.57 |
Since net operating income increases by $8,000 the royalty is a good plan, provided sales remains at the same level.
2. Sales = Variable expenses + Fixed expenses + Target profit
$4.50Q = $3.10Q + $100,000 + $0
$1.40Q = $100,000
Q = $100,000 ÷ $1.40 per unit = 71,429 units
3. 71,429 units × $4.50 unit = $321,429
4. Sales = Variable expenses + Fixed expenses + Target profit
$4.50Q = $3.10Q + $100,000 + $90,000
$1.40Q = $190,000
Q = $190,000 ÷ $1.40 per unit = 135,714 units
Review 3: Breakeven, Margin of Safety, Target Profit, and Degree of Operating Leverage
Ans:
a. Contribution margin ratio:
CM ratio = Contribution margin ÷ Sales = $400,000 ÷ $1,200,000 = 0.333
b. Break-even units:
Selling price ($1,200,000 ÷ 20,000 units) = $60 per unit
Variable expenses ($800,000 ÷ 20,000 units) = $40 per unit
Sales = Variable expenses + Fixed expenses + Profit
$60Q = $40Q + $300,000 + $0
$20Q = $300,000
Q = $300,000 ÷ $20 per unit = 15,000 units
c. Increase in net operating income from additional sales of 100 units:
|
|
Selling price.............................. |
$60 per unit |
|
|
Variable expenses..................... |
$40 per unit |
|
|
Unit contribution margin.......... |
$20 per unit |
|
|
Additional sales........................ |
× 100 units |
|
|
Increase in net operating income................................... |
$2,000 |
d. Sales to attain target profit:
Sales = Variable expenses + Fixed expenses + Profit
$60Q = $40Q + $300,000 + $125,000
$20Q = $425,000
Q = $425,000 ÷ $20 per unit = 21,250 units
e. Margin of safety in dollars:
Break-even sales = $60 per unit × 15,000 units = $900,000
Margin of safety in dollars = Sales − Break-even sales
= $1,200,000 − $900,000 = $300,000
f. Degree of operating leverage = Contribution margin ÷ Net operating income
= $400,000 ÷ $100,000 = 4.0
Review 4: How Does Degree of Operating Leverage Affect Operating Profit.
Relevant Cost for Decisions
Review 5: Make or Buy Decision
Ans:
a.
|
|
|
Make |
Buy |
|
|
Direct materials (8,000 units @ $8.10 per unit)........................................................ |
$ 64,800 |
|
|
|
Direct labor (8,000 units @ $4.40 per unit)........................................................ |
35,200 |
|
|
|
Variable overhead (8,000 units @ $8.60 per unit).................................................. |
68,800 |
|
|
|
Supervisor’s salary (8,000 units @ $3.20 per unit).................................................. |
25,600 |
|
|
|
Depreciation of special equipment (not relevant)................................................. |
0 |
|
|
|
Allocated general overhead (avoidable only)....................................................... |
3,000 |
|
|
|
Outside purchase price (8,000 units @ $27.60 per unit)...................................... |
|
$220,800 |
|
|
Opportunity cost........................................ |
|
( 16,000) |
|
|
Total cost................................................... |
$197,400 |
$204,800 |
b. The total cost of the make alternative is lower by $7,400. Thus, net operating income would decline by $7,400 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself.
Review 6: Special Order
Ans:
Only the direct materials and direct labor costs are relevant in this decision. To make the decision, we must compute the average direct materials and direct labor cost per unit.
|
|
Direct materials.......................................................... |
$460,800 |
|
|
Direct labor................................................................ |
316,800 |
|
|
Total........................................................................... |
$777,600 |
|
|
Current monthly production...................................... |
14,400 |
|
|
Average direct materials and direct labor cost per unit......................................................................... |
$54 |
Because price on the special order is $48 per trophy and the relevant cost is $54, the company would suffer a loss of $6 per trophy. Therefore, the special order should not be accepted.
Review 7A: Sell or Process Further
Ans:
|
|
Product D |
Product F |
Product G |
|
Sales value after further processing..... |
$534,000 |
$450,000 |
$360,000 |
|
Sales value at split-off......................... |
300,000 |
275,000 |
195,000 |
|
Incremental revenue............................ |
234,000 |
175,000 |
165,000 |
|
Further processing costs...................... |
125,000 |
210,000 |
135,000 |
|
Incremental income (loss)................... |
$109,000 |
($ 35,000) |
$ 30,000 |
Products D and G should be sold after further processing beyond the split-off point. Product F should be sold at the split-off point without any further processing.
Review 7B: Sell or Process Further
Ans:
a. Analysis of the profitability of the overall operation:
|
|
Combined final sales value ($32 + $64)............................................... |
|
$96 |
|
|
Less costs of producing the end products: |
|
|
|
|
Cost of common input................... |
$36 |
|
|
|
Cost of processing common input. |
15 |
|
|
|
Cost of further processing product A................................................ |
14 |
|
|
|
Cost of further processing product B................................................ |
28 |
93 |
|
|
Profit (loss)....................................... |
|
$ 3 |
b. Analysis of sell or process further:
|
|
|
Product X |
Product Y |
|
|
Final sales value after further processing........... |
$32 |
$64 |
|
|
Less sales value at split-off point....................... |
21 |
44 |
|
|
Incremental revenue from further processing..... |
11 |
20 |
|
|
Less cost of further processing........................... |
14 |
28 |
|
|
Profit (loss) from further processing.................. |
($ 3) |
($ 8) |
|
|
|
Don’t process further |
Don’t process further |
