1. Garth Company sells a single product. If the selling price per unit and the variable expense per unit both increase by 10% and fixed expenses do not change, then:
Contribution Contribution Break-even
margin per unit margin ratio in Units
A Increases Increases Decreases
B No change No change No change
C No change Increases No change
D Increases No change Decreases
2. The costs of publishing a grade school textbook can be assumed to be as follows. Use the date for questions 2 to 5.
Fixed expenses for each new edition of the book:
Copy editing $3,000
Art work $1,000
Typesetting $36,000
Variable expenses per copy of the book:
Printing and binding $1.60
Bookstore discounts $2.00
Salespersons' commissions $0.25
Author's royalties $1.00
Each book sells for $10 per copy. The unit contribution margin for each copy of the book is?
3. Contribution margin ratio for the textbook is?
4. Publishing company is currently selling 8,000 copies of the textbook per edition but management feels that sales could be increased by 1,000 books if the selling price per book was reduced by $1.00 per copy. Implementing such a policy should result in?
5. Break-even point in total sales revenue at the price of $10 per copy is?
6. Barrus Company makes 30,000 motors to be used in the productions of its power lawn mowers. The manufacturing cost per motor at this level of activity is as follows:
Direct materials $9.50
Direct labor $8.60
Variable manufacturing overhead $3.75
Fixed manufacturing overhead $4.35
This motor has recently become available from an outside supplier for $25 per motor. If Barrus decides not to make the motors, none of the fixed manufacturing overhead would be avoidable and there would be no other use for the facilities. If Barrus decides to continue making the motor, how much higher or lower will the company's net operating income be than if the motors are purchased from the outside supplier?
7. The Melville Company produces a single product called a Pong. Melville has the capacity to produce 60,000 Pongs each year. If Melville produces at capacity, the per unit costs to produce and sell one Pong are as follows. Use the data for questions 7 to 9.
Direct materials $15
Direct labor 12
Variable manufacturing overhead 8
Fixed manufacturing overhead 9
Variable selling expense 8
Fixed selling expense 3
The regular selling price for one Pong is $80. A special order has been received by Melville from Mowen Company to purchase 6,000 Pongs next year. If this special order is accepted, the variable selling expense will be reduced by 75%. However, Melville will have to purchase a specialized machine to engrave the Mowen name on each Pong in the special order. This machine will cost $9,000 and it will have no use after the special order is filled. The total fixed manufacturing overhead and selling expenses would be unaffected by this special order.
Assume Melville anticipates selling only 50,000 units of Pong to regular customers next year. If Mowen Company offers to buy the special order units at $65 per unit, the effect of accepting the special order on Melville's operating income for next year should be a:
8. Assume Melville anticipates selling only 50,000 units of Pong to regular customers next year. At what selling price for the 6,000 special order units would Melville be economically indifferent between accepting or rejecting the special order from Mowen? (That is the price at which the total contribution with or without the special order would be the same.)
9. Assume Melville can sell 58,000 units of Pong to regular customers next year and sale of 6000 units to this special order customer will result in losing the contribution on sales to regular customers at the regular price due to the 60,000 unit maximum production capacity. If Mowen Company offers to buy the special order units at $65 per unit, the effect of accepting the special order on Melville's operating income next year should be a what?
10. Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the prime costs of one unit of product. Use the data for questions 10 to 14.
Standard Standard Standard
Quantity Price Cost
Direct materials 8 pounds $1.80 per pound $14.40
Direct labor 0.25 hour $8.00 per hour $ 2.00
During May, Arrow purchased 160,000 pounds of direct material at a total cost of $304,000. The total direct labor wages for May were $37,800. Arrow manufactured 19,000 units of product during May using 142,500 pounds of direct material and 5,000 direct labor hours.
The direct material price variance for May is (note that the purchase price variance is based on the amount purchased - while usage variance is based on amount used):
11. Direct material quantity variance for May is?
12. Direct labor rate variance for May is?
13. Direct labor efficiency variance for May is?
14. BRIEFLY, how might you use the variance information calculated in problems 10-13?
15. Perrson Company makes two types of backpacks. Data for the company's activity during a typical month are presented below. Use this data for questions 15 to 17.
School Hiker
Model Model
Sales units 40,000 40,000
Selling price per unit $6 $18
Variable expense per unit $2 $10
The company's total fixed expenses are $80,000. There are no beginning or ending inventories. What is the per unit contribution margin for each of the two models?
16. What is the break-even point in terms of sales dollars if the sales mix remains constant?
17. If the sales mix is changed to 60,000 units of the school model and 20,000 units of the hiker model, what will be the break-even point in terms of sales dollars?
18. The most recent monthly income statement for Kennaman Stores is given below:
Total Store I Store II
Sales $2,000,000 $1,200,000 $800,000
Less variable expenses 1,200,000 840,000 360,000
Contribution margin 800,000 360,000 440,000
Less traceable fixed expenses 400,000 220,000 180,000
Segment margin 400,000 140,000 260,000
Less common fixed expenses 300,000 180,000 120,000
Net operating income $ 100,000 $( 40,000) $140,000
Kennaman is considering closing Store I. If Store I is closed, one-fourth of its traceable fixed expenses would continue unchanged. Also, the closing of Store I would result in a 20% decrease in sales in Store II. (The decrease in sales would be the result of selling fewer units in store II, not due to reduced selling prices. In addition to sales, what other elements in the budget will be affected?) Kennaman allocates common fixed expenses on the basis of sales dollars.
Compute the overall increase or decrease in Kennaman's net operating income if Store I is closed.
19. Cabigas Company manufactures two products, Product C and Product D. The company estimated it would incur $167,140 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labor hours. Data concerning the current period's operations appear below:
Product C Product D
Estimated volume 2,000 units 2,700 units
Direct labor hours per unit
Total hours 2.00 hours
4000 hour 0.80 hour
2160 hours
Direct materials cost per unit $21.50 $24.10
Direct labor cost per unit $24.00 $ 9.60
Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year.
20. The company is considering using an activity-based costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labor hours. The activity-based costing system would use three activity cost pools. Data relating to these activities for the current period are given below. Use the data for questions 20 to 24.
Estimated
Activity Overhead Expected Activity
Cost Pool Costs Product C Product D Total
Machine setups $ 13,630 130 160 290
Purchase orders 85,750 750 1,000 1,750
General factory 67,760 4,000 2,160 6,160
$167,140
Determine the unit product cost of each product for the current period using the activity-based costing approach.
21. Which cost method would you use to manage this business and why?
22. You are the product manager for product D and are evaluated based on product profitability. Which method would you prefer?
23. The government wants to buy product C and will pay the business for the cost of the product plus a fixed fee. Should you adopt the ABC system or keep the old plant-wide overhead system and why?
24. A customer has offered to buy a special order of 100 units of D for $60 each. This sale will not impact any other part of your business and you have excess capacity to produce this special order and will produce these extra units if you accept the order. How would this impact the business - would you be better off and by how much? Would you need other information to answer this question and, if so, what other information?