Item #1 - Cost Behavior
ABC Company's total overhead costs at various levels of activity are presented below:
Assume that the overhead costs above consist of utilities, supervisory salaries, and
maintenance. At the 50,000 machine-hour level of activity these costs are:
V = Variable; F = Fixed; M = Mixed
The company wants to break down the maintenance cost into its basic variable and fixed
cost elements.
Required:
a. Estimate the maintenance cost for June.
b. Use the high-low method to estimate the cost formula for maintenance cost.
c. Estimate the total overhead cost at an activity level of 55,000 machine hours.
Item #2 – Cost Behavior
Hinrichs Corporation reports that at an activity level of 2,400 units, its total variable cost
is $174,504 and its total fixed cost is $55,080.
Required:
For the activity level of 2,700 units, compute: (a) the total variable cost; (b) the total fixed
cost; (c) the total cost; (d) the average variable cost per unit; (e) the average fixed cost per
unit; and (f) the average total cost per unit. Assume that this activity level is within the
relevant range.
ACC241 – Examination #2 Review Activities
ACC241 – Examination #2 Review Activities
Item #3 – Cost Behavior
Utility costs at one of Hannemann Corporation's factories are listed below:
Management believes that utility cost is a mixed cost that depends on machine-hours.
Required:
Estimate the variable cost per machine-hour and the fixed cost per month using the high-
low method.
Item #4 – Cost Behavior
In January, Verba Corporation, a manufacturing company, reported the following
financial data:
The company had no beginning or ending inventories.
Required:
a. Prepare an income statement in good form for January using the traditional approach.
b. Prepare an income statement in good form for January using the contribution
approach.
ACC241 – Examination #2 Review Activities
Item #5 – CVP
The following is Arkadia Corporation's contribution format income statement for last
month:
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?
ACC241 – Examination #2 Review Activities
Item #6 – CVP
The Garry Corporation's most recent contribution format income statement is shown
below:
Required:
Prepare a new contribution format income statement under each of the following
conditions (consider each case independently):
a. The sales volume increases by 10% and the price decreases by $0.50 per unit.
b. The selling price decreases $1.00 per unit, fixed expenses increase by $15,000, and the
sales volume decreases by 5%.
c. The selling price increases by 25%, variable expense increases by $0.75 per unit, and
the sales volume decreases by 15%.
d. The selling price increases by $1.50 per unit, variable cost increases by $1.00 per unit,
fixed expenses decrease by $15,000, and sales volume decreases by 12%.
ACC241 – Examination #2 Review Activities
Item #7 – CVP
Spencer Company's most recent monthly contribution format income statement is given
below:
The company sells its only product for $10 per unit. There were no beginning or ending
inventories.
Required:
a. What are total sales in dollars at the break-even point?
b. What are total variable expenses at the break-even point?
c. What is the company's contribution margin ratio?
d. If unit sales were increased by 10% and fixed expenses were reduced by $2,000, what
would be the company's expected net operating income? (Prepare a new income
statement.)
ACC241 – Examination #2 Review Activities
Item #8 - CVP
Merlin Enterprises manufactures a cellular telephone. The company's partial contribution
format income statement for the most recent year is below.
Required:
a. Complete the contribution income statement above.
b. Determine the breakeven sales and units using either the equation or the contribution
approach.
c. Determine the sales necessary to earn a profit of $54,000.
d. Determine the margin of safety percentage for the year above.
ACC241 – Examination #2 Review Activities
Item #9 – CVP
Mcquage Corporation has provided its contribution format income statement for July.
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 19% increase in sales.
Item #10 – CVP
Veren Inc. produces and sells two products. During the most recent month, Product
F73A's sales were $27,000 and its variable expenses were $9,450. Product L75P's sales
were $14,000 and its variable expenses were $5,310. The company's fixed expenses were
$21,060.
Required:
a. Determine the overall break-even point for the company.
b. If the sales mix shifts toward Product F73A with no change in total sales, what will
happen to the break-even point for the company? Explain.
ACC241 – Examination #2 Review Activities
Item #11 – Process Costing
Bayas Corporation uses process costing. A number of transactions that occurred in
November are listed below.
(1) Raw materials that cost $39,800 are withdrawn from the storeroom for use in the
Mixing Department. All of these raw materials are classified as direct labor.
(2) Direct labor costs of $16,100 are incurred, but not yet paid, in the Mixing
Department.
(3) Manufacturing overhead of $45,700 is applied in the Mixing Department using the
department's predetermined overhead rate.
(4) Units with a carrying cost of $87,600 finish processing in the Mixing Department and
are transferred to the Drying Department for further processing.
(5) Units with a carrying cost of $111,300 finish processing in the Drying Department,
the final step in the production process, and are transferred to the finished goods
warehouse.
(6) Finished goods with a carrying cost of $98,200 are sold.
Required:
Prepare journal entries for each of the transactions listed above.
Item #12 – Process Costing
Kamp Company uses the weighted-average method in its process costing. Information
about units processed during a recent month in the Curing Department follow:
The beginning work in process inventory had $4,600 in conversion cost. During the
month, the Department incurred an additional $210,000 in conversion cost.
Required:
a. Determine the equivalent units of production for conversion for the month.
b. Determine the cost per equivalent unit of production for conversion for the month.
c. Determine the total conversion cost transferred out during the month.
d. Determine the conversion cost assigned to the ending work in process inventory.
ACC241 – Examination #2 Review Activities
Item #13 – Process Costing
Avignon Inc. uses the weighted-average method in its process costing system. The
following data concern the operations of the company's first processing department for a
recent month.
Required:
a. Determine the equivalent units of production.
b. Determine the costs per equivalent unit.
c. Determine the cost of ending work in process inventory.
d. Determine the cost of the units transferred to the next department.
ACC241 – Examination #2 Review Activities
Item #14 – Business Decisions
Saalfrank Corporation is considering two alternatives that are code-named M and N.
Costs associated with the alternatives are listed below:
Required:
a. Which costs are relevant and which are not relevant in the choice between these two
alternatives?
b. What is the differential cost between the two alternatives?
Item #15 – Business Decisions
The most recent monthly income statement for Benner Stores is given below:
Due to its poor showing, consideration is being given to closing Store B. Studies show
that if Store B is closed, one-fourth of its traceable fixed expenses will continue
unchanged. The studies also show that closing Store B would result in a 10 percent
decrease in sales in Store A. The company allocates common fixed expenses to the stores
on the basis of sales dollars.
Required:
Compute the overall increase or decrease in the company's operating income if Store B is
closed.
ACC241 – Examination #2 Review Activities
Item #16 – Business Decisions
The management of Schmader Corporation is considering dropping product M12C. Data
from the company's accounting system appear below:
All fixed expenses of the company are fully allocated to products in the company's
accounting system. Further investigation has revealed that $137,000 of the fixed
manufacturing expenses and $79,000 of the fixed selling and administrative expenses are
avoidable if product M12C is discontinued.
Required:
a. What is the net operating income earned by product M12C according to the company's
accounting system?
b. What would be the effect on the company's overall net operating income of dropping
product M12C? Should the product be dropped?
ACC241 – Examination #2 Review Activities
Item #17 – Business Decsions
Foubert Company makes 40,000 units per year of a part it uses in the products it
manufactures. The unit product cost of this part is computed as follows:
An outside supplier has offered to sell the company all of these parts it needs for $51.80 a
unit. If the company accepts this offer, the facilities now being used to make the part
could be used to make more units of a product that is in high demand. The additional
contribution margin on this other product would be $268,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part
would be avoided. However, $17.00 of the fixed manufacturing overhead cost being
applied to the part would continue even if the part were purchased from the outside
supplier. This fixed manufacturing overhead cost would be applied to the company's
remaining products.
Required:
a. How much of the unit product cost of $60.80 is relevant in the decision of whether to
make or buy the part?
b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than
making it?
c. What is the maximum amount the company should be willing to pay an outside
supplier per unit for the part if the supplier commits to supplying all 40,000 units required
each year?
ACC241 – Examination #2 Review Activities
Item #18 – Business Decisions
McGraw Company uses 5,000 units of Part X each year as a component in the assembly
of one of its products. The company is presently producing Part X internally at a total
cost of $100,000, computed as follows:
An outside supplier has offered to provide Part X at a price of $18 per unit. If McGraw
Company stops producing the part internally, one-third of the fixed manufacturing
overhead would be eliminated.
Required:
Prepare an analysis showing the annual dollar advantage or disadvantage of accepting the
outside supplier's offer.
ACC241 – Examination #2 Review Activities
Item #19 – Business Decisions
Wehrs Corporation has received a request for a special order of 6,000 units of product
K19 for $32.30 each. The normal selling price of this product is $33.45 each, but the
units would need to be modified slightly for the customer. The normal unit product cost
of product K19 is computed as follows:
Direct labor is a variable cost. The special order would have no effect on the company's
total fixed manufacturing overhead costs. The customer would like some modifications
made to product K19 that would increase the variable costs by $4.90 per unit and that
would require a one-time investment of $23,000 in special molds that would have no
salvage value. This special order would have no effect on the company's other sales. The
company has ample spare capacity for producing the special order.
Required:
Determine the effect on the company's total net operating income of accepting the special
order.
