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PROBLEMS
Sales $400,000
Purchases of direct materials 70,000
Indirect labor 10,000
Indirect materials 4,000
Depreciation of factory equipment 15,000
Depreciation of factory buildings 11,000
Depreciation of administrative building 41,000
Marketing costs 25,000
Direct labor 180,000
Direct materials inventory, 12-31-04 14,000
Work in process, 1-1-04 31,000
Direct materials inventory, 1-1-04 10,000
Work in process, 12-31-04 23,000
Finished goods inventory, 1-1-04 49,000
Finished goods inventory, 12-31-04 44,000
Required:
b. Prepare an income statement for the Haverhill Company for the year ending
December 31, 2004.
Chapter Two ♦ Basic Management Accounting Concepts 18
ANS:
a. HAVERHILL COMPANY
STATEMENT OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 2004
Direct materials:
Beginning inventory $10,000
Add: Purchases 70,000
Materials available $80,000
Less: Ending inventory 14,000
Direct materials used $ 66,000
Direct labor 180,000
Manufacturing overhead:
Indirect labor $10,000
Indirect materials 4,000
Depreciation of factory equipment 15,000
Depreciation of factory buildings 11,000 40,000
Total manufacturing costs added $286,000
Add: Beginning work in process 31,000
Total manufacturing costs $317,000
Less: Ending work in process 23,000
Cost of goods manufactured $294,000
b. HAVERHILL COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2004
Sales $400,000
Less cost of goods sold:
Beginning finished goods inventory $ 49,000
Add: Cost of goods manufactured 294,000
Cost of goods available for sale $343,000
Less: Ending finished goods inventory 44,000 299,000
Gross margin $101,000
Less operating expenses:
Selling expenses $ 25,000
Administrative expenses 41,000 66,000
Income before income taxes $ 35,000
Chapter Two ♦ Basic Management Accounting Concepts 19
PROBLEM
2. Enola, Inc., manufactures a product that sells for $400. The variable
costs per unit are as follows:
Required:
b. Determine the number of units that must be sold to earn $300,000 in profit
before taxes.
Chapter Two ♦ Basic Management Accounting Concepts 20
ANS:
Sales $100,000
Total variable costs ?
Contribution margin ?
Total fixed costs $20,000
Net income $12,000
Units sold 10,000
Price ?
Variable cost per unit ?
Contribution margin per unit ?
Contribution margin ratio ?
Break-even point in units ?
Chapter Two ♦ Basic Management Accounting Concepts 21
ANS:
Sales $100,000
Total variable costs $68,000
Contribution margin $32,000
Total fixed costs $20,000
Net income $12,000
Units sold 10,000
Price ($100,000/10,000) $10
Variable cost per unit $6.80
Contribution margin per unit $3.20
Contribution margin ratio 32%
Break-even point in units ($20,000/$3.20) 6,250 units
Sales $400,000
Less: Variable costs 100,000
Contribution margin $300,000
Less: Fixed costs 75,000
Operating income $225,000
Required:
ANS:
a. $100,000 $75,000/($300,000/$400,000)
b. $500,000 ($75,000 + $300,000)/75%
CHOPRA COMPANY
PROJECTED INCOME STATEMENT
FOR THE CURRENT YEAR ENDING DECEMBER 31
Sales $240,000
Required:
b. The sales manager believes the company could increase sales by 1,000 units
if advertising expenditures were increased by $15,000. Determine the
effect on income if the company increases advertising expenditures.
c. What is the maximum amount the company could pay for advertising if the
advertising would increase sales by 1,000 units?
Chapter Two ♦ Basic Management Accounting Concepts 23
ANS:
PROBLEM
Job 43 Job 44
Direct materials $10,200 $34,400
Direct labor 21,000 10,400
Applied overhead* 4,950 7,370
Total cost $36,150 $52,170
Machine hours 45 67
During March, Job 45 was started and Job 44 was completed and delivered
to the customer. Job 43 was missing a part that was backordered and
would be completed in June. The following costs were incurred in March:
Required:
b. Calculate the overhead applied to each job during the month of March.
ANS:
During the year Dewey Company used 37,000 direct labor hours.
At the end of the year, Dewey Company records revealed the following
information:
Required:
ANS:
a. $6.00 ($240,000/40,000)
b. $222,000 ($6.00 x 37,000)
c. $12,000 overapplied ($222,000 - $210,000)
Mahoney started and completed Job 1512 during the year. The job-order
cost sheet indicated the following:
Required:
b. Assume that Mahoney uses separate departmental overhead rates based upon
direct labor hours for assembly and upon machine hours for finishing.
Calculate the total cost and the unit cost for each of the 2,000 units
produced by Job 1512.
Chapter Two ♦ Basic Management Accounting Concepts 26
ANS:
During the year, the company actually worked 24,000 direct labor hours
and incurred the following manufacturing costs:
Required:
ANS:
a. $50 $1,300,000/26,000
b. $1,200,000 $50 x 24,000
c. $140,000 underapplied $1,200,000 - ($280,000 + $220,000 + $150,000
+ $190,000 + $180,000 + $320,000)
PROBLEM
Maintenance $240,000
Inspection 500,000
The plant currently applies overhead using direct labor hours and
expected capacity of 100,000 direct labor hours. The following data has
been assembled for use in developing a bid for a proposed job. Bid
prices are calculated as full manufacturing cost plus 20 percent markup.
Total expected machine hours for all jobs during the year is 60,000, and
the total expected number of inspections is 4,000.
Required:
a. Compute the total cost of the potential job using direct labor hours to
assign overhead.
b. Compute the total cost of the job using activity-based costing and the
appropriate cost drivers.
ANS:
2. Holbrook, Inc., has identified the following overhead costs and cost
drivers for next year:
The following are two of the jobs completed during the year:
Required:
a. Determine the unit cost for each job using direct labor hours to apply
overhead.
b. Determine the unit cost for each job using the four cost drivers. (Round
amounts to two decimal places.)
ANS:
Job 702
Prime costs $18,000
Overhead assigned:
$46 x 220 10,120
Total cost $28,120
Job 701
Prime costs $25,000
Overhead assigned:
$200 x 12 2,400
$8 x 16 128
$10 x 360 3,600
$0.40 x 180 72
Total cost $31,200
Job 702
Prime costs $18,000
Overhead assigned:
$200 x 15 3,000
$8 x 30 240
$10 x 300 3,000
$0.40 x 650 260
Total cost $24,500
Maintenance $140,000
Materials handling 60,000
Setups 50,000
Inspection 100,000
The company has been asked to submit a bid for a proposed job. The plant
manager feels that obtaining this job would result in new business in
future years. Usually bids are based upon full manufacturing cost plus
30 percent.
Expected activity for the four activity-based cost drivers that would be
used are as follows:
Required:
costing is used.
ANS:
b. $2,882.50
Maintenance: $140,000/16,000 = $8.75 per machine hour
Materials handling: $60,000/4,000 = $15 per move
Setups: $50,000/2,000 = $25 per setup
Inspection: $100,000/8,000 = $12.50 per inspection
Overhead assigned:
$8.75 x 300 $2,625.00
$15 x 8 120.00
$25 x 3 75.00
$12.50 x 5 62.50
$2,882.50
Required:
b. What would be the effect on the firm's profit if Product A were dropped?
Indicate whether this is an increase or decrease.
c. What would be the effect on the firm's profit if Product N were dropped?
Indicate whether this is an increase or decrease.
d. What would be the effect on the firm's profit if Product G were dropped?
Indicate whether this is an increase or decrease.
e. Which, if any, of the products should the firm drop in order to increase
profits?
Chapter Two ♦ Basic Management Accounting Concepts 34
Chapter Two ♦ Basic Management Accounting Concepts 35
ANS:
b. $30,000 decrease
c. $15,000 decrease
d. $2,000 increase
e. Based on quantitative factors, Product G should be dropped in order
to increase profits by $2,000.
Dallas Houston
Units produced and sold 20,000 15,000
Chapter Two ♦ Basic Management Accounting Concepts 36
Required:
ANS:
AUSTIN INDUSTRIES
SEGMENTED INCOME STATEMENTS
FOR THE CURRENT YEAR ENDED DECEMBER 31
Chapter Two ♦ Basic Management Accounting Concepts 37
Required:
ANS:
The memorandum should contain a recommendation to drop Product Y if the
decision is based on quantitative factors. Coral Industries can increase
profits by $4,000 if it drops Product Y.
Required:
a. What is the effect on income if Solomon purchases the component from the
outside supplier?
b. Assume that Solomon can avoid $50,000 of the total fixed overhead costs if
it purchases the components. Now what is the effect on income if Solomon
purchases the component from the outside supplier?
Chapter Two ♦ Basic Management Accounting Concepts 41
ANS:
a. $40,000 decrease
Make:
Direct materials (20,000 components x $10) $200,000
Direct labor (20,000 components x $14) 280,000
Variable overhead (20,000 components x $6) 120,000
Total cost to make $600,000
Buy:
Purchase price (20,000 components x $32) $640,000
b. $10,000 increase
Make:
Direct materials (20,000 components x $10) $200,000
Direct labor (20,000 components x $14) 280,000
Variable overhead (20,000 components x $6) 120,000
Avoidable fixed overhead 50,000
Total cost to make $650,000
Buy:
Purchase price (20,000 components x $32) $640,000
An outside supplier has offered to sell the component to Mills Inc. for
$35.
Required:
a. What is the effect on income if Mills Inc. purchases the component from
the outside supplier?
b. Assume that Mills Inc. can avoid $700,000 of the total fixed overhead
costs if it purchases the components. Now what is the effect on income if
Mills Inc. purchases the component from the outside supplier?
Chapter Two ♦ Basic Management Accounting Concepts 43
ANS:
a. $250,000 decrease
Make:
Direct materials (50,000 components x $12) $ 600,000
Direct labor (50,000 components x $13) 650,000
Variable overhead (50,000 components x $5) 250,000
Total cost to make $1,500,000
Buy:
Purchase price (50,000 components x $35) $1,750,000
b. $450,000 increase
Make:
Direct materials (50,000 components x $12) $ 600,000
Direct labor (50,000 components x $13) 650,000
Variable overhead (50,000 components x $5) 250,000
Avoidable fixed overhead 700,000
Total cost to make $2,200,000
Buy:
Purchase price (50,000 components x $35) $1,750,000
6. Vance Company manufactures a product that has the following unit costs:
direct materials, $15; direct labor, $12; variable overhead, $8; and
fixed overhead, $12. Fixed selling costs are $1,500,000 per year.
Variable selling costs of $4 per unit cover the transportation cost.
Although production capacity is 800,000 units per year, the company
expects to produce only 650,000 units next year. The product normally
sells for $70 each. A customer has offered to buy 50,000 units for $45
each. The customer will pay the transportation charge on the units
purchased.
Required:
a. What is the incremental cost to Vance Company for the special order?
ANS:
b. $500,000 increase
Required:
a. What is the incremental cost per unit to Majestic Company for the special
order?
ANS:
b. $30,000 increase
Product A Product B
Revenue per unit $150 $125
Variable costs per unit 80 70
Contribution margin per unit $ 70 $ 55
Required:
a. Which of the products should Dash Company produce if it can only produce
one of the products?
b. Assume that Dash Company uses half of the hours available to produce
Product A and half of the hours available to produce Product B. What is
Dash's total contribution margin?
c. Assume that Dash Company produces the product mix that will maximize
profit. What is Dash's total contribution margin?
Chapter Two ♦ Basic Management Accounting Concepts 49
ANS:
b. $900,000
c. $940,000
6. Terrazo Corporation produces three kinds of ceramic tile that are used in
home and office construction. Details of each type of tile are as
follows:
Chapter Two ♦ Basic Management Accounting Concepts 50
Required:
Assume that Terrazo can sell all of each type of tile that it produces.
a. Determine the amount of each type of tile that Terrazo should produce.
c. Assume that the demand for each type of tile is limited to 20,000 units
each. Determine the amount of each type of tile that Terrazo should
produce.
ANS:
Contribution margin per scarce unit of resource:
Chapter Two ♦ Basic Management Accounting Concepts 51
d. $1,905,600
Required:
Assume that KnitWorks can sell all of each type of yarn that it produces.
a. Determine the amount of each type of yarn that KnitWorks should produce.
b. Assume that the demand for each type of yarn is limited to 10,000 units
each. Determine the amount of each type of yarn that KnitWorks should
produce.
c. Assume that the demand for each type of yarn is limited to 10,000 units
each. Determine KnitWorks' contribution margin.
Chapter Two ♦ Basic Management Accounting Concepts 53
ANS:
c. $1,575,000
2.Budgeted sales for the third quarter of the year for Brown Company are as
follows:
Budgeted Sales
July $300,000
August 375,000
September 450,000
Required:
ANS:
*$245,000 = .70 X
June sales = X = $245,000/.7
X = $350,000
.65 x $350,000 = $227,500
Chapter Two ♦ Basic Management Accounting Concepts 56
Required:
ANS:
May June
Beginning cash balance $ 40,000 $ 40,000
Add: Cash receipts 120,000 110,300
Cash available $ 160,000 $ 150,300
Less: Cash disbursements (150,000) (150,300)*
Cash surplus (deficiency) $ 10,000 $ 0
Add: Cash from loans 30,000 40,000
Ending cash balance $ 40,000 $ 40,000
6.Budgeted sales for the second quarter of the year for Reuben Company are as
follows:
Budgeted Sales
April $400,000
May 200,000
June 600,000
Required:
ANS:
Required:
Prepare a cash budget for each of the first three months of the year.
Chapter Two ♦ Basic Management Accounting Concepts 61
ANS:
PROBLEM
3. Starling Manufacturing has developed the following standards for one of its products.
Required:
ANS:
4. The following standard costs were developed for one of the products of Larry Corporation:
The following information is available regarding the company's operations for the period:
Budgeted fixed manufacturing overhead for the period is $960,000, and the standard fixed overhead
rate is based on expected capacity of 80,000 direct labor hours.
Required:
ANS:
5. Barker Production Company has developed the following standards for one of its products.
Required:
ANS:
7. Hansenko Company manufactures 100-pound bags of fertilizer that have the following unit
standard costs for direct materials and direct labor:
Required:
ANS:
c. All of the material price variances could be caused by out-of-date or inappropriate standards.
Other potential reasons could be that the firm could be purchasing in larger quantities (larger
quantity discounts), purchasing lower grade materials, or that the supplier could be forced to
offer a lower price due to the economics of their product.
PROBLEM
1. The following results for the current year are for the Grundy Division of
Salmon Enterprises:
Sales $700,000
Variable costs 260,000
Contribution margin $440,000
Fixed expenses 300,000
Divisional income $140,000
Required:
ANS:
a. 20% $140,000/$700,000
b. 50% $700,000/$1,400,000
c. 10% $140,000/$1,400,000
d. $14,000 [$140,000 x (1 - .3)] - ($1,400,000 x 6%)
Investment
Opportunity Income Investment
1 $ 91,000 $650,000
2 63,000 700,000
3 59,400 540,000
4 117,600 980,000
Required:
ANS:
Toy #1 Toy #2
Projected investment $900,000 $750,000
Expected operating income 144,000 90,000
Required:
a. Compute the Toddler Division's operating income and ROI, assuming that the
division manager rejects both projects.
b. Compute the Toddler Division's operating income and ROI, assuming that the
division manager accepts only the Toy #1 project.
c. Compute the Toddler Division's operating income and ROI, assuming that the
division manager accepts only the Toy #2 project.
d. Compute the Toddler Division's operating income and ROI, assuming that the
division manager accepts both projects.
ANS:
4. The following results for the current year are for the Calvin Division of
Stinson Enterprises:
Sales $400,000
Variable costs 180,000
Contribution margin $220,000
Fixed expenses 160,000
Divisional income $ 60,000
Average operating assets are $500,000. The firm's minimum required rate
of return is 10 percent, the weighted average cost of capital is 8
percent, and the tax rate is 30 percent.
Required:
ANS:
a. 15% $60,000/$400,000
b. 80% $400,000/$500,000
c. 12% $60,000/$500,000
d. $2,000 [$60,000 x (1 - .3)] - ($500,000 x 8%)
5. Brothers, Incorporated, has just formed a new division, and the following
four investment opportunities are available to the division. The firm
requires a minimum return of 8 percent.
Investment
Opportunity Income Investment
1 $57,600 $ 640,000
2 75,000 600,000
3 60,000 1,000,000
4 59,500 850,000
Required:
b. If you were the division manager and you were evaluated based on ROI,
which investment opportunity would you accept?
ANS:
a. Project 1: 9% $57,600/$640,000
Project 2: 12.5% $75,000/$600,000
Project 3: 6% $60,000/$1,000,000
Project 4: 7% $59,500/$850,000
b. Project 2, because it has the highest ROI
c. Projects 1 and 2
Required:
ANS:
1) $400,000/x = 2, x = $200,000
2) Margin x turnover = 8%
Sales revenue ?
Operating income $20,000
Average operating assets $200,000
Return on investment 10%
Margin 4%
Turnover ?
Required:
2) Determine turnover.
Chapter Two ♦ Basic Management Accounting Concepts 78
ANS:
1) $20,000/x = .04, x = $500,000
8. Brown Industries has two divisions: the Hank Division and the Murray
Division. Information about a component that the Hank Division produces
is as follows:
The Hank Division can produce up to 22,000 components per year. The
Murray Division needs 1,000 units of the component for a product it
manufactures.
Required:
a. Determine the minimum transfer price that the selling division would be
willing to accept.
b. Determine the maximum transfer price that the buying division would be
willing to pay.
c. If the Hank Division did not have excess capacity, what would be the
correct transfer price?
Chapter Two ♦ Basic Management Accounting Concepts 79
ANS:
The Triangle Division can produce up to 15,000 components per year. The
Square Division needs 1,500 units of the component for a product it
manufactures.
Required:
a. Determine the minimum transfer price that the Triangle Division would
accept.
b. Determine the maximum transfer price that the Square Division would pay.
ANS: