ACC 406 Lecture Notes - Cost Driver, Fixed Cost, Variable Cost
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#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? |
Need help with my case study for my managerial accouting class,any help will be greatly appreciated.
Part 1 15 points
Cingle Company LLC produces gadgets at one manufacturingfactory. Corporate headquarters are located at the same site.Historical cost information shows the average costs at thefollowing production levels .
Production in units | 3,000 | 3,750 | 4,500 |
Cost of goods manufactured | |||
Direct Materials | $ 198,000 | $ 247,500 | $297,000 |
Direct Labor | 126,000 | 157,500 | 189,000 |
Overhead | |||
Building depreciation-factory | 5,000 | 5,000 | 5,000 |
Equipmentlease | 4,500 | 4,500 | 4,500 |
Factorysupplies | 1,600 | 1,930 | 2,260 |
Indirect Labor | 5,500 | 5,500 | 5,500 |
Quality InspectionCosts | 13,360 | 14,200 | 15,040 |
Selling and Administrative Expenses | |||
Shipping | 45,500 | 51,875 | 58,250 |
Advertisingexpense | 50,000 | 50,000 | 50,000 |
Salaries andcommissions | 137,000 | 155,000 | 173,000 |
Insuranceexpense | 10,000 | 10,000 | 10,000 |
Total | $ 596,460 | $ 703,005 | $ 809,550 |
A. Identify each ofthe companyâs costs as being variable, fixed or mixed with respectto the number of units produced. Explain why you chose that costbehavior. [Hint: What happens to total cost if the cost behavior isfixed, is variable, is mixed? What happens to cost / unit if costbehavior is fixed, is variable, is mixed?] Show all computationsneeded to determine cost behavior.
NOTE: If the cost is mixed, please use thechart in part B to detail your explanation.
Use the chart below:
Cost | Fixed | Variable | Mixed | Explanation |
Direct Materials | X | The total cost increases but cost/unit ($66) remainsconstant. | ||
Direct Labor | ||||
Building depreciation-factory | ||||
Equipment lease | ||||
Factory supplies | ||||
Indirect Labor | ||||
Quality Inspection Costs | ||||
Shipping | ||||
Advertising expense | ||||
Salaries and commissions | ||||
Insurance expense |
B. Using the high-lowmethod, separate each mixed cost into variable and fixed elements.State the cost formula for each mixed cost. Show all your work andcomputations.
Use the chart below:
Mixed Cost (Name) | Cost Formula (Y = a + bx form) | Supporting Computations |
C. Determine the expectedtotal costs (identify each cost separately) at a production levelof 5,000 widgets. Show computations. You should arrive at a totalcost figure.
Use the chart below:
Cost | Supporting Computations | |
Direct Materials | ||
Direct Labor | ||
Building dep-factory portion | ||
Equipment lease | ||
Factory supplies | ||
Indirect Labor | ||
Quality Inspection Costs | ||
Shipping | ||
Advertising expense | ||
Salaries and commissions | ||
Insurance expense | ||
TOTAL COST |
D. State the costequation for the total costs of the entire company in the form Y =a + bx. Using alternative one or alternative two below, show howyou determined the cost equation. (Note: you should have oneequation such that someone could determine expected total cost forany activity level within the relevant range.)
Company â Wide Cost equation:
Use the chart below (Alternative one) which shows the fixed costportion and the variable rate for each cost itemor use the high- low method (Alternative two) fordetermining the cost equation. You need to choose only onealternative.
Alternative one: (use the information and chartfrom part A and the information from part B. Input the $ amounts inappropriate columns and total the columns of the chart. Using thechart information, state the cost equation in the Y = a + bxform.)
Fixed Cost | Variable Rate ($/unit) | |
Direct Materials | ||
Direct Labor | ||
Building dep-factory portion | ||
Equipment lease | ||
Factory supplies | ||
Indirect Labor | ||
Quality Inspection Costs | ||
Shipping | ||
Advertising expense | ||
Salaries and commissions | ||
Insurance expense | ||
TOTAL COST |
Alternativetwo: High-low method and supporting, labeledcomputations.
Part Two 20 points
Goggle Company manufactures a special virtual reality gogglethat can be used underwater. The companyâs contribution formatincome statement for last year is below:
Total | Per Unit | % of Sales | |
Sales (10,000 units) | $750,000 | $75 | 100% |
Variable Expenses | 450,000 | 45 | ? |
Contribution Margin | 300,000 | $30 | ? |
Fixed Expenses | 170,000 | ||
Net Operating Income | $130,000 |
Goggle Company is ready to take off and expand its market share.Management has asked for several items to be analyzed in order tomake good decisions.
Calculate the companyâs contribution margin ratio and thevariable expense ratio.
Compute the companyâs break-even point in both units and insales dollars. You may use either the equation method or theformula method.
Management is predicting a 20% increase in sales next year,staying within the relevant range for the company. How much willthe companyâs net operating income increase?
Refer to the original data. Assume that management would like toearn a profit of at least $55,000. How many units will have to besold to meet this target profit?
Refer to the original data. Compute the company's margin ofsafety in both dollar and percentage form.
Compute the company's degree of operating leverage at thepresent level of sales.
Assume that through a more intense effort by the sales staff,the company's sales increase by 8% next year. By what percentagewould you expect net operating income to increase? Use the degreeof operating leverage to obtain your answer.
Verify your answer to (b) by preparing a new contribution formatincome statement showing an 8% increase in sales.
In an effort to increase sales and profits, management isconsidering the use of a higher quality virtual reality system thanthe current system. The new system would increase variable costs by$15 per unit, but management could eliminate one quality inspectorwho is paid a salary of $30,000 per year. Management believes theycan increase the selling price by $30 per unit.
Assuming that changes are made as described above, prepare aprojected contribution format income statement for next year. Showdata on a total, per unit, and percentage basis.
Compute the company's new break-even point in both units anddollars of sales. Use the formula method.
Would you recommend that the changes be made? Why or whynot?