Question 1:
CVP analysis, income taxes. (CMA, adapted) R. A. Ro and Company, a manufacturer of quality handmade walnut bowls, has had a steady growth in sales forthe past five years.
However, Increased com-petition has led Mr. Ro, the president, to believe that an aggressive marketing campaign will be necessary next year to maintain the company's present growth. To prepare for next year's marketing campaign, the company's controller has prepared and presented Mr. Re with the following data for the current year, 2011:
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Variable cost (per bowl)
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Direct materials
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$ 315
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Direct manufacturing labor
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8.00
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Variable overhead (manufacturing, marketing, distribution, and customer service)
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2.50
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Total variable cost per howl
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$ 13.75
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Fixed costs
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Manufacturing
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$ 25,000
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Marketing, distribution, and customer service
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110,000
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Total fixed costs
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$135,000
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Selling price
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25.03
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Expected sales, 20,000 units
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$500,000
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income tax rate
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40%
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1. What is the projected net income for 2011?
2. What is the breakeven point in units for 2011?
3. Mr. Ro has set the revenue target fur 2012 at a level of $550,000 (or 22,000 bowls). He believes an additional marketing cost of $11,250 for advertising in 2012, with all other costs remaining constant, will be necessary to attain the revenue target. What is the net.income for 2012 if the additional $11,250 is spent and the revenue target is met?
4. What is the breakeven point in revenues for 2012 if the additional $11„250 is spent for advertising?
5. lf the additional $11,250 is spent, what are the required 2012 revenues for 2012 net income to equal 7.011 net income?
6. At a sales level of 22,030 units, what maximum amount can be spent on advertising if a 2012 net income of $60,000 is desired?
Question 2:
Budgeting; direct material usage, manufacturing cost and gross margin. Xerxes Manufacturing Company manufactures blue rugs, using wool and dye as direct materials. One rug is budgeted to use 36 skeins of wool at a cost of $2 per skein and 0.8 gallons of dye at a cost of $6 per gallon. All other materials are indirect At the beginning of the year Xerxes has an inventory of 458,000 skeins of wool at a cost of $961,800 and 4,000 gallons of dye at a cost of $23,680. Target ending inventory of wool and dye is zero. Xerxes uses the FIFO inventory cost flow method.
Xerxes blue rugs are very popular and demand is high, but because of capacity constraints the firm will produce only 200,000 blue rugs per year. The budgeted selling price is $2,000 each. There are no rugs in beginning inventory. Target ending inventory of rugs is also zero.
Xerxes makes rugs by hand, but uses a machine to dye the wool, Thus, overhead costs are accumu¬lated in two cost pools-one for weaving and the other for dyeing. Weaving overhead is allocated to prod¬ucts based on direct manufacturing labor-hours (IJMLH). Dyeing overhead is allocated to products based on machine-hours OAK
There is no direct manufacturing labor cost for dyeing. Xerxes budgets 52 direct manufacturing labor-hours to weave a rug at a budgeted rate of $13 per hour. It budgets 0,2 machine-hours to dye each skein in the dyeing process.
The following table presents the budgeted overhead costs for the dyeing and weaving cost pools:
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Dyeing
(based on 1,440,000 MH)
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Weaving
(based on 12,400,000 IJMLH)
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Variable costs
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-
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Indirect materials
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0
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$15,400,000
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Maintenance
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6,560,000
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5,540,000
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Utilities
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7,550,000
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2,890,000
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Fixed costs indirect labor
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347-,000
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1,700,000
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Depreciation
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2,100,000
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274,000
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Other
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723,000
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5,816,000
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Total budgeted costs
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$17,280,000
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$31,620,000
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1. Prepare a direct material usage budget in both units and dollars.
2. Calculate the budgeted overhead allocation rates for weaving and dyeing,
3. Calculate the budgeted unit cost of a blue rug for the year.
4. Prepare a revenue budget for blue rugs for the year, assuming Xerxes sells (a) 200,000 or (b) 185,000 blue rugs (that is, at two different sales levels). .
5. Calculate the budgeted cost of goods sold for blue rugs under each sales assumption.
6. Find the budgeted gross margin for blue rugs under each sales assumption.