Question 1: Lott Corporation showed the following balances in its inventory accounts as of January 1:
Raw materials inventory $28,800
Work-in-process inventory 36,000
Finished goods inventory 24,000
The given transactions took place throughout the year:
1) Manufacturing overhead costs of $352,400 were incurred.
2) Raw material purchases totaled $76,800.
3) Direct labor charges in the amount of $410,400 were incurred.
4) The cost of goods sold was determined to be $540,000.
5) Raw materials in the amount of $86,200 were placed into production.
6) Cost of goods completed during the period was $549,800.
Find out the year-end balance of each of the following. You are not required to use T-Accounts to answer this question, however whichever method used, please show all of your work and identify your answers clearly:
a) Raw materials inventory.
b) Work-in-process inventory.
c) Finished goods inventory.
d) Cost of goods sold.
Question 2: Greenville National Bank has requested an analysis of checking account profitability by customer type. Customers are classified according to the size of their account: low balances, medium balances and high balances. The activities related with the three different customer categories and their related annual costs are give below.
Opening and closing accounts $ 200,000
Issuing monthly statements 300,000
Processing transactions 2,050,000
Customer inquires 400,000
Providing ATM services 1,120,000
Total cost $ 4,070,000
Account Balance:
Low Medium High
Number of accounts opened/closed 15,000 3,000 2,000
Number of statements issued 450,000 100,000 50,000
Processing transactions 18,000,000 2,000,000 500,000
Number of telephone minutes 1,000,000 600,000 400,000
Number of ATM transactions 1,350,000 200,000 50,000
Number of checking accounts 38,000 8,000 4,000
a) Compute the annual cost per account by dividing the total cost of processing and maintain checking accounts by the total number of accounts. By using this traditional method of overhead allocation, find out the average monthly fee per that the bank must change to cover the costs incurred because of checking accounts?
b) Currently the bank offers free checking to all its customers. The interest revenues average $90 per account annually; though the interest revenues earned per account by category are $80, $100 and $165 annually for the low, medium and high-balance accounts respectively. Compute the average profit per account under the traditional method (average revenue less average cost computed in requirement a above).
c) By using the activity based costing method, compute the application rate that would be used for each of the banking activities shown above.
d) Next compute the profit per account by using the revenue per customer type and unit cost per customer type calculated by using the ABC method started in requirement c above.
e) After reviewing the analysis in requirement d, a vice-president recommended removing the free checking feature for low-balance customers. The bank president expressed reluctance to do so, arguing that the low-balance customers more than make up for the loss via cross sales. He presented a survey which showed that 50 % of the customers would switch banks if a checking fee were imposed. Describe how you could validate the president’s argument by using activity-based costing
Question 3:
a) Indicate whether each of the following statements is true or false. Ignore the effect of income taxes on the transactions:
- The break-even point is the point where total revenues equal total fixed costs.
- If Company A has fixed costs of $720,000, a selling price of $50 per unit, and contribution margin of $30 per unit, its break-even volume in units is 24,000 units.
- If Company A has fixed costs of $720,000, a selling price of $50 per unit, and contribution margin of $30 per unit, its variable expenses must be $24 per unit.
- If Company A has fixed costs of $720,000, a selling price of $50 per unit, and contribution margin of $30 per unit, once it has covered its fixed costs, net income will increase by $30 for each additional unit sold.
b) Farrish Company believes that a market exists for an electronic game with a sales price of $80 per unit. The annual fixed costs are estimated at $1,400,000.
Required: If Farrish wants to earn a profit of $400,000 per year, find out the maximum amount that the variable costs per unit could be if the company believes that it can sell 50,000 of the games?
c) Aziz Company produces and sells air compressors for $250. The variable costs per unit are $150 plus a sales commission of 15% of the selling price. Total fixed costs compise of $8,000 in fixed overhead and $4,500 in fixed selling and administrative costs.
Required:
i) Calculate the contribution margin per unit.
ii) Calculate the break-even point in units and dollars.
iii) How many units should be sold to earn a profit of $10,000?
iv) What would be the break-even point in units if the sales commission is decreased to $10 per unit sold?