Accounting 221 Homework 2-8

wk_7_hw_problems_-_solutions.xls

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Problem 1

Following are key terms relating to the concept of a contribution income statement reporting format:
	General corporate costs
	Contribution margin
	Controllable contribution margin
	Non-traceable
	Segment margin
	Controllable fixed costs
	Net income
	Uncontrollable fixed costs
Determine which of the following descriptions is best associated with each of the above terms:
(a)	These are subtracted from the segment margin to arrive at net income.
(b)	This amount is useful in evaluating management performance for a unit.
(c)	This is the result of subtracting all variable costs from revenues.
(d)	This is a measure of business viability.
(e)	This result would not relate to any segment, but only the corporate total.
(f)	These are incurred by a unit, but are not useful in evaluating unit management.
(g)	These costs may be attributable to a division, but not a specific product.
(h)	This amount is subtracted from the contribution margin to find the controllable contribution margin.

&R&"Myriad Web Pro,Bold"&20B-23.04

B-23.04

Worksheet 1

(a)	These are subtracted from the segment margin to arrive at net income.
	General corporate costs
(b)	This amount is useful in evaluating management performance for a unit.
	Controllable contribution margin
(c)	This is the result of subtracting all variable costs from revenues.
	Contribution margin
(d)	This is a measure of business viability.
	Segment margin
(e)	This result would not relate to any segment, but only the corporate total.
	Net income
(f)	These are incurred by a unit, but are not useful in evaluating unit management.
	Uncontrollable fixed costs
(g)	These costs may be attributable to a division, but not a specific product.
	Non-traceable
(h)	This amount is subtracted from the contribution margin to find the controllable contribution margin.
	Controllable fixed costs

&L&"Myriad Web Pro,Bold"&12Name: Date: Section: &R&"Myriad Web Pro,Bold"&20B-23.04

B-23.04

Problem 2

The focus of business decision making is to identify "relevant" items - those where future costs and revenues are expected to differ between alternatives under consideration. Examine the following listing, and apply your best judgment to identify if the item is "relevant."
	Relevant	Irrelevant
The cost of a prior paint job, in a decision to repaint a building.		✓
The original investment cost in shares of stock in a company that is in decline, in a decision to sell or hold.
Income taxes that can be saved by selling an asset at a loss, in a decision to sell or hold.
The cost of tearing out an old parking lot, in deciding whether or not to build a new lot.
The cost of textbooks, in deciding which classes to take during a semester.
The original cost of a textbook, in deciding whether or not to resell the book at the end of the term.
The cost of an attorney, in deciding whether to appeal a traffic fine that is undeserved.
The allocation of factory depreciation, in deciding whether to accept a special offer from a customer.
Research and development costs incurred to develop a new product, in deciding whether to file for a patent application.
Proceeds that will be received from the sale of "factory seconds," in deciding how to price a primary product.

&R&"Myriad Web Pro,Bold"&20B-24.01

B-24.01

Worksheet 2


	Relevant	Irrelevant
The cost of a prior paint job, in a decision to repaint a building.		x
The original investment cost in shares of stock in a company that is in decline, in a decision to sell or hold.		x
Income taxes that can be saved by selling an asset at a loss, in a decision to sell or hold.	x
The cost of tearing out an old parking lot, in deciding whether or not to build a new lot.	x
The cost of textbooks, in deciding which classes to take during a semester.	x
The original cost of a textbook, in deciding whether or not to resell the book at the end of the term.		x
The cost of an attorney, in deciding whether to appeal a traffic fine that is undeserved.	x
The allocation of factory depreciation, in deciding whether to accept a special offer from a customer.		x
Research and development costs incurred to develop a new product, in deciding whether to file for a patent application.		x
Proceeds that will be received from the sale of "factory seconds," in deciding how to price a primary product.	x

&L&"Myriad Web Pro,Bold"&12Name: Date: Section: &R&"Myriad Web Pro,Bold"&20B-24.01

B-24.01

Problem 3

Pop-In Burgers owns numerous restaurants and food production facilities. The company routinely evaluates proposals to drive operational efficiency. Four such proposals are currently under review. One entails the suggestion to close the unprofitable store in Canyon City. Another is to outsource the acquisition of onions, rather than growing them. Another proposal is to sell packaged beef to a non-competing restaurant chain under a private label. The final proposal is to scrap packaging material that is printed with an old logo. Michelle Euray is controller for Pop-In Burgers and is reviewing staff-prepared reports for each proposal. The reports are summarized as follows:
Canyon City Proposal: The Canyon City store should be closed. The company is a consistent money loser. Below is an income report for the Canyon City store for the past year. Half of the fixed expenses relate to facilities rent under a 20-year non-cancelable lease. The lease costs cannot be avoided, and the location is not able to be subleased to another user.
	Sales	$ 1,400,000	$ 1,400,000
	Variable expenses	1,000,000	1,000,000
	Contribution margin	$ 400,000	$ 400,000
	Fixed expenses	650,000	325,000
	Income (loss)	$ (250,000)	$ 75,000
Outsource Onions Proposal: The company spent a total of $2,000,000 producing onions during the past year. The onions were grown on a company-owned farm. A vender has offered to supply a similar quantity and grade of onions for $2,200,000. Staff recommends continuing to grow onions because the proposed purchase price is 10% higher than the cost of growing onions. Staff believes it is inappropriate to consider that the onion farm could be leased to another farmer for $350,000, if it is diverted from onion production.
Sell Packaged Beef Proposal: The other company has offered to buy packaged beef at $4 per pound. The packing plant is well below full capacity and can accommodate the request without incurring any additional fixed costs. However, staff believes it would be inappropriate to price the beef below its own internal cost of $4.50 per pound, which consists of raw materials ($2.50), direct labor ($0.75), variable factory overhead ($0.25), and fixed factory overhead ($1.00). This transaction would result in no material amount of added selling, general, or administrative costs.
Scrap Packaging Material Proposal: The company spent $500,000 on packaging material that is imprinted with an old logo. It is unlikely this material will ever be used. However, staff recommends against scraping because this will result in an immediate charge against net income. It costs only $2,000 per year to store the material.
Assume the role of Michelle Euray, and critique each staff prepared analysis.

&R&"Myriad Web Pro,Bold"&20I-24.01

I-24.01

Worksheet 3

Canyon City Proposal:

This proposal is flawed, because it indicates getting rid of the store will save $250,000 in losses. However, of the fixed costs in that analysis, $325,000 (half) related to a non-cancellable lease so those are the only relevant costs because they will continue even if the store is closed. Thus, only $325,000 of the fixed costs are relevent and should be in the analysis. That means, if the store is closed, the company will lose out on $75,000 (current loss of $250,000 and the $325,000 in fixed costs that can be avoided. (see financial analysis on previous tab)

Outsource Onions Proposal:

Cost to grow onions $2,000,000; Cost to purchase of $2,200,000 would be offset by income of $350,000 for a final cost of $1,850,000. They should purchase the onions because it is less expensive.

Sell Packaged Beef Proposal:

Cost to produce beef for sale at special price is: Raw materials $2.50 + Labor $.75 + Variable Overhead $.25) = $3.50 The fixed factory overhead is irrelevant because it will not change if they accept the special order. Since the price of $4 is greater than the $3 cost, they should accept the special order.

Scrap Packaging Material Proposal:

The original purchase price of the packaging material is irrelevant and should not be considered in this analysis. The only costs that should be considered are those that will be incurred now and in the future as a result of this decision. If the costs of scrapping the material are less than the $2,000 per year storage costs the materials should go ahead and be scrapped even though it causes an immediate expense.

&L&"Myriad Web Pro,Bold"&12Name: Date: Section: &R&"Myriad Web Pro,Bold"&20I-24.01

I-24.01

Problem 4

Luther company manufactures widgets, the standard cost for each is:

Direct Materials (3 lbs at $.24 per pound) = $.72 per widget

Direct Labor (1 hour at $6 per hour) = $6 per widget

Overhead:

Variable = $.48 per widget

Fixed ($21,600/60,000 widgets) = $.36 per widget

Total standard cost per widget = $7.56

The standard overhead rate is based on a volume of 60,000 units per month.

During the current month it manufactured 50,000 units.

The following data from production:

Materials purchased = 160,000 lbs at $.26 per pound

Materials used = 152,000 pounds

Direct Labor = 49,000 hours at $6.12 per hour

Fixed manufacturing overhead = $21,840

Variable manufacturing overhead = $24,420

Required: Calculate the following variances from standard for the month:

1. Materials Price Variance

2. Materials Usage Variance

3. Labor Rate Variance

4. Labor Efficiency Variance

5. Overhead budget variance

Worksheet 4


Required: Calculate the following six variances from standard for the month:
1. Materials Price Variance = (Actual Price - Standard Price) x Actual quantity purchased
	Price Variance = (.26 - .24) x 160,000 = $3,200 unfavorable
2. Materials Usage Variance = (Actual quantity used - Standard quantity allowed) x Standard Price
	Usage Variance = (152,000 - 150,000*) x.24 = $480 unfavorable
	*3 pounds allowed per widget x 50,000 widgets produced
3. Labor Rate Variance = (Actual Rate - Standard Rate) x actual hours worked
	Rate Variance = (6.12 - 6.00) x 49,000 = $5,880 Unfavorable
4. Labor Efficiency Variance = (Actual hours worked - Standard hours allowed) x Standard rate
	Efficiency Variance = (49.000 - 50,000) x $6.00 = $6,000 Favorable
5. Overhead budget variance = Actual overhead - Budgeted overhead
	Budget Variance = ($21,840 + $24,420) - [21,600 + (50,000 x .48)] = $660 Unfavorable

Problem 5

A. Flip manufactures footballs. The forecasted income statement for the year before any special orders included sales of $4,000,000 (sales price is $10 per unit.) Manufacturing cost of goods sold is anticipated to be $3,200,000. Selling expenses are expected to be $300,000, and operating income is projected at $500,000. Fixed costs included in these forecasted amounts are $1,200,000 for manufacturing cost of goods sold and $100,000 for selling expenses. Floozy is offering a special order to buy 50,000 footballs for $7.50 each. There will be no additional selling expenses, and sufficient capacity exists to manufacture the extra footballs.

Requirements: Prepare an incremental analysis schedule to demonstrate by what amount would operating income be increased or decreased as a result of accepting the special order.

B. Flop Company manufactures 10,000 units of widgets for use in its annual production. Costs are direct materials $20,000, direct labor $55,000, variable overhead $45,000, and fixed overhead $70,000. Floozy Company has offered to sell Flop 10,000 units of widgets for $18 per unit. If Flop accepts the offer, some of the facilities presently used to manufacture widgets could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to widgets would be totally eliminated.

Requirements: Prepare an incremental analysis schedule to demonstrate if Flop should accept Floozy's offer.

Worksheet 5

A. Flip Enterprises
Incremental Analysis
Special Order
Sales (special order = 50,000u X $7.50+	$375,000
Manufacturing COGS:
($3,200,000 - $1,200,000)/400,000u X 50,000u =	250,000
Increase in Net Income	$125,000
B. Flop Inc.
Incremental Analysis
To Produce or Buy
	Produce	Buy
Additional Rental Income		($15,000)
Costs:
Direct Material	$20,000
Direct Labor	55,000
Variable Overhead	45,000
Fixed Overhead	70,000
Fixed Overhead less Savings to buy		30,000
Cost to buy: 10,000u x $18	_______	180,000
Total Costs less Income	$190,000	$195,000
Produce over buy $5,000 savings to produce	$5,000