AIM 2302 PRACTICE EXAM II

Section I Multiple Choice

Use the following information to answer questions 1 through 6

Pooh & Co. manufactures and sells teddy bears. Selling price and cost information for each teddy
bear are below:

Sales price $ 60
Direct materials 10
Direct labor 12
Variable manufacturing support costs 6
Variable selling support costs 2

Annual total fixed costs for Pooh & Co. are $600,000.

1) What is the contribution margin ratio?

a) 40%
b) 45%
c) 50%
d) 55%

2) What is the breakeven point in terms of number of teddy bears?

a) 20,000 units
b) 30,000 units
c) 40,000 units
d) 50,000 units

3) What is the breakeven point in terms of dollars of sales?

a) $1,200,000
b) $ 1,000,000
c) $800,000
d) $600,000

4) How many units of teddy bears must be sold in order to generate a profit of $300,000?

a) 20,000 units
b) 30,000 units
c) 40,000 units
d) 45,000 units

5) If the annual fixed costs increase by $120,000, the breakeven point (in units) changes to

a) 20,000 units
b) 24,000 units
c) 34,000 units
d) 44,000 units

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6) If the company decides to stimulate sales by spending an additional $150,000 on advertising, how
many more teddy bears must be sold to justify this spending?

a) 2,000 units
b) 3,000 units
c) 4,000 units
d) 5,000 units

7) The most likely strategy to reduce the breakeven point would be to:

a) Increase both the fixed costs and the contribution margin

b) Decrease both the fixed costs and the contribution margin
c) Decrease the fixed costs and increase the contribution margin
d) Increase the fixed costs and decrease the contribution margin

8) If the fixed costs for a firm decreases and the variable costs per unit also decreases, what will be
the effect on the contribution margin ratio and the breakeven point?

Contribution margin ratio Breakeven point

a) Increases Decreases
b) Decreases Increases
c) Decreases Decreases
d) Increases Increases

Use the following information to answer questions 9 through 13

Winthrop Company uses a job order costing system. The following data pertains to Job W250
completed during September 2002. Job W250 consisted of 100 clamping devices.

Resources required by W250 Quantity Price

Direct materials 4,000 pounds $5 per pound
Direct labor 1,000 hours $12 per hour
Manufacturing support costs (based on $6 per Direct labor hour
direct labor hours)

9) Direct material costs assigned to Job W250 are

a) $2,000
b) $4,000
c) $10,000
d) $20,000

10) Direct labor costs assigned to job W250 are

a) $12,000
b) $2,400
c) $6,000
d) $24,000

11) Manufacturing support costs assigned to job W250 are

a) $12,000
b) $2,400
c) $6,000
d) $24,000

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12) The cost per unit of the clamping device is

a) $ 200
b) $ 120
c) $ 380
d) $ 60

13) Winthrop Company establishes its plantwide manufacturing support cost rate at the beginning of
every year. If total estimated plantwide manufacturing support costs for 2002 were $600,000, what
was the estimated level of direct labor hours for 2002?

a) 1,000 hours
b) 10,000 hours
c) 100,000 hours
d) 600,000 hours

14) Departmental manufacturing support cost rates are usually preferred to a plantwide support cost
rates when

a) The activities performed in various departments in the plant are very different
b) The support costs are insignificant.
c) The accounting department has too many people.
d) The company wants to cut costs.

15) Total contribution margin equals

a) Revenues minus variable costs

b) Revenues minus fixed costs
c) Revenues minus manufacturing support costs
d) Revenues minus total manufacturing costs

16) The contribution margin ratio increases if

a) Total fixed costs increase

b) Unit variable cost increases
c) The percentage of variable costs to sales revenues increases
d) The percentage of variable costs to sales revenues decreases

17) The breakeven point is

a) Fixed costs divided by unit contribution margin
b) Fixed and variable costs divided by unit contribution margin
c) Total costs divided by unit contribution margin
d) Unit contribution margin divided by fixed costs per unit

18) The higher the safety margin,

a) The lower is the unit contribution margin

b) The higher is the ability of the firm to withstand drop in sales revenue without incurring
losses
c) The higher is the breakeven point
d) The lower is the profitability

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19) Design of an activity-based costing system requires that

a) The job bid process be redesigned

b) Resource costs be linked to the activities performed
c) The cost of activities be linked to cost objects
d) Both (b) and (c)

20) Different products consume different proportions of manufacturing support costs because of
differences in all of the following EXCEPT

a) Sales prices
b) Customers customization specifications
c) Setup times
d) Product design

21) The major reason for using normal or practical capacity as the denominator for activity driver
calculations is to

a) Avoid distortions induced by the assignment of excess capacity costs to the products
b) Simplify the calculations of the activity cost drivers
c) Reduce the cost of unused capacity
d) Place less emphasis on the cost of unused capacity

22) Activity-based costing information

a) Should be used when services place similar demands on resources

b) Usually results in peanut-butter costing
c) Will yield inaccurate cost numbers when products are similar
d) May assist in improving product design and efficiency

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Section II

Taylor Manufacturing Inc. produces two products: D110 and E220. The following data are available
from their records:

D110 E220
Selling price per unit $15 $35
Variable costs per unit $7.50 $20.00

For every 9 units of D110 sold, 1 unit of E220 is sold. Fixed costs for the firm are $ 82,500.

a) Calculate the unit contribution margin for D110 and E220.

b) Calculate the weighted average contribution margin per unit for Taylor Manufacturing Inc.
assuming a constant sales mix between D110 and E220.

c) Calculate the breakeven volume for Taylor Manufacturing Inc. in terms of numbers of units
of D110 and E220.

d) Calculate the number of units of D110 and E220 that need to be sold, if Taylor
Manufacturing Inc. wants to generate a net income of $ 247,500?

e) Assume that Taylor Manufacturing Inc. can increase its selling price of D110 to $ 17.50 (no
costs will change) and still attract enough customers to keep the same sales mix of 9:1 for
D110 and E220. How many units of D110 and E220 does Taylor Manufacturing Inc. need
to sell in order to achieve the target income of $247,500?

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Section III

Neptune Company produces customized sailboats. The company uses a job costing system. Its
plant has 3 production departments: Cutting, machining, and assembly. The estimated support cost
and direct labor cost for each department for 2001 are as follows:

Cutting Machining Assembly

Manufacturing support cost $540,000 $800,000 $100,000
Direct labor hours 30,000 20,000 40,000

In May 2001, the company received an invitation from Duluth Sailing Company to bid for an order
of 5 sailboats. This job would require the following direct manufacturing costs:

Cutting Machining Assembly

Direct material cost $12,000 $900 $5,600
Direct labor hours 6,500 1,700 13,000

a) Assume that a single, plantwide manufacturing support cost driver based on direct labor
hours is used. Determine the plant-wide support cost rate.

b) Using the rate in (a) above, determine the support costs applied to the Duluth job.

c) Assume that instead of a plant-wide manufacturing support cost rate, Neptune Company is
using departmental manufacturing support cost rates based on direct labor hours. Determine
the manufacturing support cost rate for each of the three departments.

d) Using the rates in (c) above, determine the support costs applied to the Duluth job.

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Section IV

Automotive Products (AP) designs, manufactures and sells automotive parts. It has three main
operating departments: design, engineering and production.

Design The design of parts, using computer-aided design (CAD) equipment

Engineering The prototyping of parts and testing of their specifications
Production The manufacture of parts

For many years, AP had long-term contracts with major automobile assembly companies. APs
costing system allocates manufacturing overhead on the basis of machine-hours. Actual
manufacturing overhead costs for 2004 were $308,600. AP had three contracts in 2004 and its
machine-hours used in 2004 were assigned as follows:

United Motors 120

Holden Motors 2,800
Leland Vehicle 1,080
Totals 4,000

a) Compute the plantwide manufacturing overhead cost rate for 2004.

b) Compute the amount of manufacturing overhead allocated to each contract in 2004.

c) What conditions must be present for machine-hours to provide an accurate estimate of the
manufacturing overhead incurred on each individual contract?

The new plant accountant suggested implementing an activity-based costing system and collected
the following summary data about the companys activities:

Department Mfg. OH Costs Cost Driver

Design $39,000 CAD Design-Hours
Engineering 29,600 Engineering Hours
Production 240,000 Machine Hours
Totals $308,600

Details pertaining to usage of the cost drivers for each of the three 2004 contracts are:

Department Cost Driver United Holden Leland

Design CAD Design-Hours 110 200 80
Engineering Engineering Hours 70 60 240
Production Machine Hours 120 2,800 1,080

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d) Compute the manufacturing overhead cost rate for each department in 2004.

e) Compute the amount of manufacturing overhead allocated to each contract in 2004 using
activity-based costing.