Monday, September 30, 2019

MANAGERIAL ACCOUNTING)
CHAPTER 7
EXERCISE 6
Exercise 7-6 Incremental Analysis and Opportunity Costs [LO 1,2] Finn's Seafood Restaurant has been approached by New England Investments, which wants to hold an employee recognition dinner next month. Lillian Sumner, a manager of the restaurant, agreed to a charge of $72 per person, for food, wine, and dessert, for 175 people. She estimates that the cost of unprepared food will be $36 per person and beverages will be $14 per person.
To be able to accommodate the group, Lillian will have to close the restaurant for dinner that night. Typically, she would have served 190 people with an average bill of $56 per person. On a typical night, the cost of unprepared food is $20 per person and beverages are $17 per person. No additional staff will need to be hired to accommodate the group from New England Investments.
REQUIRED
Calculate the incremental profit or loss associated with accepting the New England Investments group.
What was the opportunity cost of accepting the New England Investments group?
Should Lillian have considered any qualitative factors in her decision? Explain
SOLUTIONS
a.
New England Investment Group


Revenue (Total Bill = 72 * 175)

12,600

Deduct Food & Beverages (175 * 50)
(8750)

Net Profit From New England Investment Group
3,850




Lost Revenue
10,640

Deduct Food & Beverages ($37 * 190)
(7030)

Net Loss
3,610

Incremental Profit From New England Investment Group
240


Incremental Profit from New England Investment Group = Net Profit from New England Investment Group - Net loss.
b.
An opportunity is the forgone need or thing in order to acquire something. Finn's will pick up an extra $240 as compared to the previous daily business operations. Therefore, the New England Investment Group will have to forego the previous daily business operations in order to acquire an end goal of a net profit. 
c.
Lillian ought to consider the subjective factor that her typical clients may feel like they are being dealt with as not as much as the gathering. In any case, if Lillian has great interchanges with her general clients, that will facilitate that probability. On the off chance that Lillian doesn't do that, she chances the likelihood of losing her customary clients.
EXERCISE 8
Exercise 7-8 Make-Or-Buy Decision [LO 1] The Howell Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below:
                                                                                                              Cost per Unit
Variable Costs
Direct Material:                                                                                       950
Direct Labor:                                                                                           650
Variable Overhead:                                                                                 300
Total Variable Costs:                                                                              1,900
Fixed Costs
Depreciation of Equipment                                                                500
Depreciation of Building                                                                   200
Supervisory Salaries                                                                          300
Total Fixed Costs                                                                             1,000
Total Costs                                                                                       2,900
The company has an offer from Duvall Valves to produce the part for $2,100 per unit and supply 1,000 valves (the number needed in the coming year). If the company accepts this offer and shuts down the production of valves, production workers and supervisors will be reassigned to other areas where, unfortunately, they are really not needed. The equipment cannot be used elsewhere in the company, and it has no market value. However, the space occupied by the production of the valve can be used by another production group that is currently leasing space for $55,000 per year.
REQUIRED
Should the company make or buy the valve?
SOLUTIONS
Costs of Manufacturing the Valve Versus Purchasing



Cost per Unit

Variable Costs


Direct Material
950

Direct Labor
650

Variable Overhead
300

Total Variable Costs
1,900

Order Quantity
100

Total Cost of Manufacturing Order
1,900,00

Cost of Purchasing Valve


Cost per Unit
2,100

Quantity
1,000

Cost Of Purchasing Valves
2,100,000

Deduct Production Building Lease
55,000

Cost of Purchasing Valves
2,045,000

Cost Difference
145,000

It will cost $145,000 more to purchase the valve than to manufacture them. The company should continue manufacturing the valves.
EXERCISE 13
Exercise 7-13 Dropping a Product Line [LO 1]. Computer Village sells computer equipment and home office furniture. Currently, the furniture product line takes up approximately 50 percent of the company's retail floor space. The president of Computer Village is trying to decide whether the company should continue offering furniture or concentrate on computer equipment. Below is a product line income statement for the company. If furniture is dropped, salaries and other direct fixed costs can be avoided. In addition, sales of computer equipment can increase by 13 percent without affecting direct fixed costs. Allocated fixed costs are assigned based on relative sales
                                                     Computer Equipment          Home Office Furniture       Total
Sales                                                   $1,400,000                      $1,100,000                   $2,500,000
Less cost of good sold                          900,000                          800,000                        $1,700,000
Contribution margin                              500,000                           300,000                        $800,000
Less Direct Fixed Costs
Salaries                                                 175,000                          175,000                           $350,000
Other                                                    60,000                               60,000                          $120,000
Deduct Allocated Fixed Costs
Rent                                                      13,440                              10,560                             $24,000
Insurance                                              3,360                                2,640                               $6,000
Cleaning                                               3,920                                3,080                               $7,000
President's Salary                                72,800                               57,200                           $130,000
Other                                                   6,720                                5,280                               $12,000
Net Income                                         $164,760                        $ (13,760)                         $151,000


SOLUTIONS
Furniture Line Contribution



Sales

1,100,000

Less cost of goods sold

800,000

Contribution margin

300,000

Less direct fixed costs



Salaries

175,000

Others

60,000

Total direct fixed costs

235,000

Net Contribution from Furniture

$65,000






Computer Equipment
 13 % Increase

Sales
1,400,000
182,000

Less cost of goods sold
900,000
117,000

Contribution margin
500,000
65,000

Less direct fixed costs



Salaries
175,000
No increment

Others
60,000
No increment

Less allocated fixed costs



Rent
13,440


Insurance
3,360


Cleaning
3,920


President's Salary
72,800


Other
6,720


Net income
164,760
65,000





Increase Computer sales by 13%

65,000

Drop furniture line

65,000

The outcome is keeping the furniture line creates $65,000 and dropping the furniture line and expanding PC deals 13% likewise has an estimation of $65,00. It won't make any difference if the organization keeps or drops the furniture line, the outcome is the same.
EXERCISE 17
Exercise 7-17 Allocating Joint Costs [LO 2]. The American Produce Company purchased a truckload of cantaloupes (weighing 4,000 pounds) for $900.American Produce separated the cantaloupes into two grades: superior and economy. The superior-grade cantaloupes had a total weight of 3,200 pounds, and the economy-grade cantaloupes totaled 800 pounds. American
Produce sells the superior-grade cantaloupes at $0.50 per pound, and the economy-grade ones at $0.20 per pound.
REQUIRED
 Allocate the $900 cost of the truckload to the superior-grade and economy-grade cantaloupes using the physical quantity method and the relative sales value method.
SOLUTIONS
Physical Quantity Method







Cost of Cantaloupes
900


Weight of Cantaloupes
4,000






Superior-Grades
3,200
0.8

Economy-grades
800
0.2





Allocated Costs



Superior-Grade Cantaloupes
720


Economy-Grade Cantaloupes
180






Relative Sales Value Method







Sales of superior-grade cantaloupes
1,600


Sales of Economy-grade Cantaloupes
160


Total sales value
1,760






Allocation of Total cost



Superior grade cantaloupes
818.18


Economy grade cantaloupes
81.82



PROBLEM 2
Problem 7-2 Incremental Analysis of Outsourcing Decision [LO 1,2] Oakland College is considering outsourcing grounds maintenance. In this regard, Oakland has received a bid from Highline Grounds Maintenance for $300,000per year. Highline states that its bid will cover all services and planting materials required to "keep Oakland's grounds in a condition comparable to prior years." Oakland's cost for grounds maintenance in the preceding year were $309,000, as follows:
Salary of Three Full-time Gardeners                                               195,000
Plant Materials:                                                                                80,000
Fertilizer                                                                                 80,000
Fuel:                                                                                                12,000
Depreciation of Tractor, Mowers, and Other Misc. Equip:            12,000
Total:                                                                                              309,000
REQUIRED
IF Oakland college outsources maintenance, it will be able to sell equipment for $30,000 and the three gardener will be laid off. 

a.) Analyze the one-year financial impact of outsourcing grounds maintenance.
b.) How will savings in the second year differ from those in year one?
c.) Discuss qualitative factors that should be considered in the decision.





SOLUTION
a.
Year One Financial Impact





Cost to outsource
300,000

Less sale of equipment
30,000

Groundkeepers Salaries
195,000

Net cost to outsource
75,00




Current maintenance cost
297,000

(Cost-equipment depreciation)





Net difference
222,00


b
Savings in Second-year





Current cost of maintenance
297,000

(Cost-equipment of maintenance)


Cost to outsource
300,000

Groundkeepers salaries
195,000

Net outsourcing cost
105,000




Net savings
192,000


The second-year loses the offer of the gear; however, the school still doesn't need to pay the settled cost of the maintenance people's compensations. The school will continue sparing every year, except more in the main year than the next years.


c.
The major subjective factor Oakland needs to take a gander at is the impact on the spirit of different representatives it would have if they somehow happened to give their whole support a chance to group go. Other auxiliary elements would be the loss of direct control over the upkeep teams and a conceivable loss of nature of work because of that loss of control.
PROBLEM 14
Problem 7-14 Joint Costs and Additional Processing [LO 2] Good Earth Products produces orange juice and candied orange peels. A 1,000-pound batch of oranges, costing $500, is transformed using the labor of $50 into 100 pounds of orange peels and 300 pints of juice. The company has determined that the sales value of 100 pounds of peels at the split-off point is $350, and the value of a pint of juice (not pasteurized or bottled) is $0.40. Beyond the split-off point, the cost of sugar-coating and packaging the 100 pounds of peels is $60. The cost of pasteurizing and packaging the 300 pints of juice is $250. A 100-pound box of candied peels is sold to commercial baking companies for $600. Each pint of juice is sold for $1.75.
REQUIRED
a.) Allocate joint costs using the relative sales values at the split-off point, and calculate the profit per 100-pound box of sugar-coated peels and the profit per pint of juice. Round to the nearest dollar.
b.) What is the incremental benefit (cost) to the company of sugar-coating the peels rather than selling them in their condition at the split-off point?
c.) What is the incremental benefit (cost) to the company of pasteurizing and packaging a pint of juice rather than selling the juice at the split-off point?
SOLUTIONS
a.
Joints costs









100-pounds of oranges
500



Labor
50




550









Orange peels
Juice
Total

Production
100
300







Sales value at split-off
350
120
470

% based sales
74.7%
25.53%


Joint costs allocated
410
140
550

profit
60
20


Profit per 100-pound box of peels
(60)



Profit per pint of juice

(0.07)



b
100-pound box of peels





Sales values after coating
600

Value a split-off
350

Incremental revenue
250




Costs for coating
60




Net incremental benefit of coating
190


c
Pint of juice





Sales Value after pasteurization
525

Value A split-off
100

Incremental revenue
405




Costs For Pasteurization
250




Net Incremental benefit of coating
155

Incremental benefit per pint of juice
0.25


CHAPTER 8
EXERCISE 4
Exercise 8-4: Profit Maximizing Price [l0 1] The editor of Spunk magazine is considering three alternative prices for her new monthly periodical. Her estimate of price and quantity demanded are:
Price                                    Quantity Demanded
$7.95                                   25,000
$6.95                                   31,00
$5.95                                   37,000
Monthly costs of producing and delivering the magazine include $93,800 of fixed costs and variable costs of $2.10per issue.
REQUIRED
Which price will yield the largest monthly profit?
SOLUTION
Price
Variable cost
Fixed costs
Quantity
Profit

$7.95
$2.20
$95,000
$25,000
$48,750

$6.95
$2.20
$95,000
$31,000
$52,250

$5.95
$2.20
$95,00
$37,000
$43,750

Selling at $6.95 per issue will provide the highest profit




EXERCISE 6
Exercise 8-6: Analyzing a Special Order [l0 1] Power Drive produces a hard disk drive that sells for $175 per unit. The cost of producing 25,000 drives in the prior year was:
Direct Material                                                       $ 725,000
Direct Labor                                                            475,000
Variable Overhead                                                   225,000
Fixed Overhead:                                                     1,500,000
Total Cost:                                                            $ 2,925,00
At the start of the current year, the company received an order for 3,000 drives from a computer company in China. Management Power Drive has mixed feelings about the order. On one hand, they welcome the order because they currently have excess capacity. Also, this is the company's first international order. On the other hand, the company in China is willing to pay only $125 per unit.
REQUIRED
What will be the effect on profit of accepting the order?
SOLUTION
Because there is excess capacity, the calculations will only use the variable costs as only they are relevant in this case. Fixed costs are not relevant because they won't change due to the order.
Variable Cost per unit


Direct Material per Unit
29

Direct Labor per Unit
19

Variable OH per Unit
19

Total Variable Cost per Unit
57




Offer From China per Unit
125

Profit per unit
69

Profit on 3,00 units
$204,000

If they accept the order from China, the company's profit margin will increase by $204,000
EXERCISE 9
Exercise 8-9: Cost-Plus Pricing [LO 2] World View is considering production of a lighted world globe that the company would price at a markup of 25 percent above full cost. Management estimates that the variable cost of the globe will be $80 per unit and fixed costs per year will be $240,000.
REQUIRED
a.) Assuming sales of 1,200 units, what is the full cost of a globe, and what is the price with a 25 percent markup?
b.) Assume that the quantity demanded at the price calculated in part a is only 600 units. What is the full cost of the globe, and what is the price with a 25 percent markup?
c.) Is the company likely to sell 600 units at the price calculated in part b?

SOLUTIONS
a.
Fixed Cost per unit
$200

Variable cost per unit
80

Total cost
280

25% markup on cost
70

Asking price
$350


b.
Fixed Cost per unit
$400

Variable cost per unit
80

Total cost
480

25% markup on cost
210

Asking price
$600


c.
At $600 per unit, the organization will have an income of $360,000 and at 1,200 units, the organization will have an income of $420,000. A distinction of $60,000. The organization resembles to offer more units at a lower cost rather than fewer units at higher benefit.
EXERCISE 14
Exercise 8-14: Target Costing [LO2] The product design team at New Time Products is in the process of designing a new clock using target costing. Product features in comparison to competing products suggest a price of $35 per unit. The company requires a profit of 30 percent of the selling price.
REQUIRED
a.) What is the target cost per clock?
b.) Suppose it appears that the clocks cannot be manufactured for the target cost. What are some of the options that the company should consider?
SOLUTIONS
a.
Target asking price
$35

Target costs
$24.50

Target profit(30%)
$10.50

The target cost per clock is $24.50.
b.
In request to lessen the expenses of assembling the clock, the organization can consider various things. To begin with, outsourcing the assembling of the clock to a producer who has to bring down general costs, looking to discover bring down material expenses, and breaking down where any bottlenecks in the assembling procedure are and redressing them, accordingly enhancing the productivity of the procedure
EXERCISE 18
Exercise 8-18: Activity-Based Pricing [LO 3] Refer to the information in exercise 8-17. For the coming year, The Triumph Corporation has told Julius Company that it will be switched to an activity-based pricing system or it will be dropped as a customer. In addition to regular prices, Julius will be required to pay:
Order Processing (per order)                                                                $11
Additional Handling Costs If Order Marked Rush (per order)          $20
Technical Support Calls (per call)                                                       $21
From 8-17:
Sales                                                                                                $22,000
Number of Orders                                                                             170
Percent of Orders Marked Rush                                                        80%
Calls to Technical Support                                                                 90
Order Processing                                                                                 $9
Additional Costs If Order Marked Rush (per order)                            $11
Technical Support Calls (per call)                                                         $13
Relationship Management Costs (per customer, per year)                    $1,800
REQUIRED
a.) Calculate the profitability of the Julius Company account if the activity is the same as in the prior year.
b.) Is it realistic to expect Julius' activity to be the same this year as the previous year if activity-based pricing is instituted? How might Julius Company react to the new pricing scheme? How might its order behavior change as a result of the new fees?
SOLUTIONS
a.

Current Year


Sales
$22,000
$22,000

Revenue from extras



Order processing
1,870


Rush orders
2,720


Technical calls
1,170


Technical Revenue
$27,760
$22,000





Total costs



Cost of goods sold
$17,600
$17,600

Order processing costs
1,530
1,530

Rush orders costs
1,870
1,870

Technical calls costs
1,170
1,170

Relationship management cost
1,800
1,800

Total costs
$23,970
$23,970





Total profit on Julius company
$3,790
$(1,970)


b.
It is not likely that Julius will have an indistinguishable movement from they did the year earlier because action based evaluating tends to drive those exercises down. Julius will start checking their exercises and keep them to a base. Notwithstanding, this will likewise work to Triumph's support as the fewer exercises from Julius will likewise mean the less expenses caused. In the event that the movement continues as before as a year ago, Triumph will really make a benefit as opposed to losing cash as they did precede that.
PROBLEM 11
Problem 8-11: Analyzing Customer Profitability [LO 3] Lauden Conference Solutions specializes in the design and installation of meeting and conference centers for large corporations. When bidding on jobs, the company estimates product cost and direct labor for installers and marks up the total cost by 35 percent. On a recent job for Orvieto Industries, the company set its price as follows:
Production Costs Including Podiums, Seating, Lighting, Etc.              $ 175,000
Installer Salaries                                                                                    25,000
Total Costs:                                                                                            200,000
Markup at 35%                                                                                       70,000
Bid Price                                                                                                $ 270,000
The job turned out to be a big hassle. Orvieto requested 25 change orders, although the dollar value of the products it requested changed very little. The company also returned 33 items that had extremely minor flaws (scratches that were barely visible and would be expected in normal shipping). Orvieto also requested seven meetings with designers taking 40 hours before its plan was finalized. Normally, only two or three meetings are necessary. Alison Jackson, controller for Lauden, decided to conduct a customer profitability analysis to determine the profitability of Orvieto. She grouped support costs into three categories with the following drivers.
Driver                                                  Annual Value of Driver                                   Annual Cost
Change orders                                 850 change orders                               $212,500
Number of returns                          1,000 product returns                          70,000
Design meeting hours                     1,300 meeting hours                           78,000
REQUIRED
a.) Calculate the indirect service costs related to the job performed for Orvieto Industries.
b.) Assuming that Orvieto Industries causes a disproportionate amount of indirect service costs, how should Lauden deal with this situation?
SOLUTIONS
a.
Driver
Quantity
Unit
Annual cost
Cost per Unit

Change orders
850
Change orders
$212,500
$250

Number of returns
1,000
Product Returns
$70,000
$70

Design meeting hours
1,300
Meeting hours
$78,000
$60


Driver
Cost per Unit
N number of units
Total cost

Change orders
$250
25
$6,250

Number of returns
$70
33
$2,310

Design meeting hours
$60
40
$2,400






Total Indirect Service Costs
$10,960




b.
If Orvieto Industries is using services at a disproportionate rate, Lauden could charge Orvieto an activity-based rate. Because of this Orvieto may use less of the services thus clearing up time for Lauden's other customers.

No comments:

Post a Comment