Question 1 (cost allocation, product profitmargin, killing products in the long term)
Use the following contribution margin statement:
Product A Product B Total sales volume (units) 100 180 280 Revenue $40,000 $240,000 $280,000 Variable costs: direct materials $8,000 $16,000 $24,000 direct labor $16,000 $40,000 $56,000 Contribution margin $16,000 $184,000 $200,000 Fixed costs $168,000 Profit $32,000
Required:
(a) allocate the shared fixed costs ($168,000) among product A andproduct B, using direct labor dollars as the allocationbasis.
allocation rate=$ ______ per DL$
FC allocated to A=$ _______
FC allocated to B=$ _______
(b) using the allocated costs from (a), compute the profit marginfor product A and product B.
If you get a negative number, enter it with a minus sign, i.e.,enter negative $1000 as -1000, not as ($1000)
profit margin for A=$ _______
profit margin for B=$ _______
c) based on the profit margins from (b), should you kill product Aor product B in the long term? Explain your decision.________________________________________________________________________________
d) allocate the shared fixed costs ($168,000) among product Aand product B, using the number of units as the allocationbasis.
allocation rate=$ _______ per unit
FC allocated to A=$ _______
FC allocated to B=$ ______
Question 1 (cost allocation, product profitmargin, killing products in the long term)
Use the following contribution margin statement:
| Product A | Product B | Total | |
| sales volume (units) | 100 | 180 | 280 |
| Revenue | $40,000 | $240,000 | $280,000 |
| Variable costs: | |||
| direct materials | $8,000 | $16,000 | $24,000 |
| direct labor | $16,000 | $40,000 | $56,000 |
| Contribution margin | $16,000 | $184,000 | $200,000 |
| Fixed costs | $168,000 | ||
| Profit | $32,000 |
Required:
(a) allocate the shared fixed costs ($168,000) among product A andproduct B, using direct labor dollars as the allocationbasis.
allocation rate=$ ______ per DL$
FC allocated to A=$ _______
FC allocated to B=$ _______
(b) using the allocated costs from (a), compute the profit marginfor product A and product B.
If you get a negative number, enter it with a minus sign, i.e.,enter negative $1000 as -1000, not as ($1000)
profit margin for A=$ _______
profit margin for B=$ _______
c) based on the profit margins from (b), should you kill product Aor product B in the long term? Explain your decision.________________________________________________________________________________
d) allocate the shared fixed costs ($168,000) among product Aand product B, using the number of units as the allocationbasis.
allocation rate=$ _______ per unit
FC allocated to A=$ _______
FC allocated to B=$ ______
Related questions
Question 1: (allocating costs using ABC,product profit margin)
Generic Motors Corporation has two product lines, A and B. Itscontribution margin statement for last year is as follows:
| Product A | Product B | Total | |
| sales volume (units) | 150 | 300 | 450 |
| Revenue | $6,000 | $30,000 | $36,000 |
| Variable costs: | |||
| direct materials | $1,200 | $6,000 | $7,200 |
| direct labor | $3,000 | $12,000 | $15,000 |
| Contribution margin | $1,800 | $12,000 | $13,800 |
| Fixed costs | $11,700 | ||
| Profit | $2,100 |
Generic Motors uses ABC to allocate the fixed costs. It examinedthe main activities in the firm, and decided to break up the totalfixed costs of $11,700 into 3 cost pools:
* "labor-related" - the total cost in this pool is $3,000,allocated based on direct labor dollars
* "sales-related" - the total cost in this pool is $2,700,allocated based on number of units
* "production setups" - the total cost in this pool is $6,000,allocated based on the number of production batches. A is producedin batches of 10 units, and B is produced in batches of 5units.
Required:
a) for each cost pool, compute the allocation rateand the amounts allocated to product A and product B. (assume thatpractical capacity = total activity volume for each pool)
(hint: The amounts allocated to A and B from each pool shouldadd up to the total cost in that pool. To allocate the costs in the"production setups" pool, you will have to compute the number ofbatches. If the total number of batches for A and B does not add upto 75, you are doing something wrong).
* "labor-related" pool:
allocation rate = $ ______ per DL$
FC allocated to A = $ ______
FC allocated to B = $ ______
* "sales-related" pool:
allocation rate = $ ______ per unit
FC allocated to A = $ ______
FC allocated to B = $ ______
* "production setups" pool:
allocation rate = $ ______ per batch
FC allocated to A = $ ______
FC allocated to B = $ ______
b) using the allocated costs from (a), compute theprofit margin for product A and product B.
If you get a negative number, enter it with a minus sign, i.e.,enter negative $100 as -100, not ($100)
profit margin for A = $ ______
profit margin for B = $ ______
| #1 | Which of the following correctly describes fixed and variable cost behavior as total volume increases? | ||
| A. | Unit fixed costs stay the same and unit variable costs increase. | ||
| B. | Total fixed costs stay the same and total variable costs increase. | ||
| C. | Unit fixed costs decrease and total variable costs decrease. | ||
| D. | Unit fixed costs decrease and unit variable costs decrease. | ||
| #2 | The incremental profit generated by the sale of one additional unit is equal to the | ||
| A. | contribution margin per unit. | ||
| B. | selling price. | ||
| C. | margin of safety. | ||
| D. | incremental cost. | ||
| #3 | Clipper Office Furniture uses cost-plus pricing with a 40% mark-up on total cost at capacity. The company is currently selling 40,000 units at $19.60 per unit. Each unit has a variable cost of $9. In addition, the company incurs $200,000 in fixed costs annually. If demand falls to 32,000 units and the company wants to continue to earn a 40% return, what price should the company charge? | ||
| A. | $15.25 | ||
| B. | $21.35 | ||
| C. | $19.60 | ||
| D. | $27.44 | ||
| #4 | ABC company has $6.50 per unit in variable costs and $2.20 per unit in fixed costs at a volume of 40,000 units. If the company uses cost-plus 20% for pricing, which of the following should the company use to determine the price? | ||
| A. | The company should use a unit cost of $8.70 per unit only at a volume of 40,000 units. | ||
| B. | The company should use a unit cost of $8.70 at any volume level. | ||
| C. | The company should use a unit price of $10.44 at any volume level. | ||
| D. | The company should ignore fixed costs for cost-plus pricing. | ||
| #5 | Which of the following is a grouping of overhead costs whose total is allocated using one allocation base? | ||
| A. | Cost objective | ||
| B. | Cost pool | ||
| C. | Direct cost | ||
| D. | Cost driver | ||
| #6 | Which one of the following is the preferred alternative when deciding between two options? | ||
| A. | Incremental profit is greater than under the other alternatives. | ||
| B. | Revenues are greater than under the other alternatives. | ||
| C. | Expenses are less than under the other alternatives. | ||
| D. | No opportunity or sunk costs exist. | ||
| #7 | The required rate of return used to calculate an investmentâs net present value is related to the firmâs | |||
| A. | contribution margin. | |||
| B. | cost of capital. | |||
| C. | total assets. | |||
| D. | Price/Earnings ratio. | |||
| #8 | A company is trying to decide whether to keep or drop the organic foods department in its grocery store. If organic foods are dropped, the manager will be laid off. What is the manager's salary in relation to the decision to keep or drop the department? | |||
| A. | A variable cost and therefore relevant | |||
| B. | Avoidable and therefore incremental | |||
| C. | Sunk and therefore not relevant | |||
| D. | A fixed cost and therefore not relevant | |||
| #9 | The following information relates to Ajax Widgets during the year. There was no beginning inventory. | |||
| Units produced | 11,000 | |||
| Units sold | 10,000 | |||
| Units in ending inventory | 1,000 | |||
| Fixed manufacturing overhead | $220,000 | |||
| How much fixed manufacturing overhead will be expensed during the year (included in Cost of Goods Sold) using full costing? | ||||
| A. | $220,000 | |||
| B. | $200,000 | |||
| C. | $20,000 | |||
| D. | $10,000 | |||
| #10 | If the required rate of return is greater than the internal rate of return of a potential investment, the company should judge the investment as acceptable. | |||
| A. | This is a True statement | |||
| B. | This is a False statement | |||
| C. | Not enough information provided. | |||
| #11 | The basic concept involved in time value of money calculations is that | |||
| A. | it is better to receive a dollar in the future than to receive a dollar today | |||
| B. | incremental revenues must exceed incremental costs. | |||
| C. | it is better to receive a dollar today than to receive a dollar in the future. | |||
| D. | it can only be applied to positive cash flows | |||
| #12 | Hanson Sports has three product lines: footballs, basketballs, and bats. Common costs are allocated based on relative sales. A product line income statement for the year ended December 31, 2016 follows: | ||||
| Footballs | Basketballs | Bats | Total | ||
| Sales | $600,000 | $800,000 | $400,000 | $1,800,000 | |
| Cost of goods sold | 260,000 | 400,000 | 230,000 | 890,000 | |
| Gross margin | 340,000 | 400,000 | 170,000 | 910,000 | |
| Less other variable costs | 85,000 | 120,000 | 80,000 | 285,000 | |
| Contribution margin | 255,000 | 280,000 | 90,000 | 625,000 | |
| Less direct salaries | 50,000 | 60,000 | 45,000 | 155,000 | |
| Less common fixed costs | 85,000 | 100,000 | 55,000 | 240,000 | |
| Net income | $120,000 | $120,000 | -$10,000 | $230,000 | |
| Since the profit for bats is a net loss, the company is considering dropping this product line. What is the incremental $ effect on total net income of dropping the Bats line? | |||||
| #13 | Right Air Supply sells a specialized air filter that has a variable cost of $10 each. | ||||
| Fixed costs are estimated to be $700,000 across all levels of sales shown below. | |||||
| Units Sold | Unit Price | CM per unit x Qty | Fixed Costs | Profit | |
| 90,000 | $33 | 700,000 | |||
| 100,000 | $31 | 700,000 | |||
| 110,000 | $30 | 700,000 | |||
| 120,000 | $28 | 700,000 | |||
| Which price should Right Air Supply charge to maximize profits? | |||||
| #14 | Randolph Corporation sells a single product at a price of $275 per unit. Variable cost per unit is $135 and fixed costs total $356,860. If sales are expected to be $825,000, what is the companyâs margin of safety? | ||||
| #15 | Roger Excavating Company experienced the following costs in 2016: | ||||
| Direct materials | $1.75 per unit | ||||
| Direct labor | $2.00 per unit | ||||
| Variable manufacturing overhead | $2.50 per unit | ||||
| Variable selling | $0.75 per unit | ||||
| Fixed manufacturing overhead | $50,000 | ||||
| Fixed selling | $15,000 | ||||
| Fixed administrative | $5,000 | ||||
| During 2016, the company manufactured 100,000 units and sold 80,000 units. If the average selling price per unit was $22.65, what is the amount of the companyâs contribution margin per unit? | |||||
