ACC 310F Lecture Notes - Lecture 2: Cash Flow, Contribution Margin, Scatter Plot

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peartrout82

23 Apr 2018

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Classification reading (i) company"s cost structure is estimating the company"s variable and fixed portions of a company"s costs. (a) most companies use past records to project for future. (i) Begin by examining the extent to which costs have varied with change in activity level. (ii) use a scatterplot with cost on. Total cost = fixed cost + (variable cost per record x number of records sold) (iii) Account classification (a) systematic categorizing costs as fixed or variable. (i) (ii) (iii) Estimate the change in variable costs by first adding all variable costs up. Then divide the total variable costs by the volume of activity within the same timespan, and you will have estimated the unit variable cost. Finally, multiply the unit variable cost by the change in activity to estimate the total variable cost. (b) known to be time consuming and requires experience to properly classify the sometimes subjective costs, many companies use regression analysis. (i)

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EXERCISE 12-1 Identifying Relevant Costs [L012-1] A number of costs are listed below that may be relevant in decisions faced by the management of Svahn, AB, a Swedish manufacturer of sailing yachts: Case 1 Not Case 2 Not Relevant Relevant Punimen med en ramen en Item Relevant Relevant a. Sales revenue ........ b. Direct materials ........................ c. Direct labor .......... d. Variable manufacturing overhead ........ e. Depreciation-Model B100 machine ..... f. Book value-Model B100 machine ......... g. Disposal value-Model B100 machine h. Market value-Model B300 machine (cost) ... i. Fixed manufacturing overhead (general). i. Variable selling expense ........ k. Fixed selling expense ........ 1. General administrative overhead ...... Required: Copy the information above onto your answer sheet and place an X in the appropriate column to indicate whether each item is relevant or not relevant in the following situations. Requirement 1 relates to Case 1 above, and requirement 2 relates to Case 2. 1. The company chronically has no idle capacity and the old Model B100 machine is the com- pany's constraint. Management is considering purchasing a Model B300 machine to use in addition to the company's present Model B 100 machine. The old Model B100 machine will continue to be used to capacity as before, with the new Model B300 machine being used to expand production. This will increase the company's production and sales. The increase in volume will be large enough to require increases in fixed selling expenses and in general administrative overhead, but not in the fixed manufacturing overhead. The old Model B100 machine is not the company's constraint, but management is consider- ing replacing it with a new Model B300 machine because of the potential savings in direct materials with the new machine. The Model B100 machine would be sold. This change will have no effect on production or sales, other than some savings in direct materials costs due to less waste.

TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the companyâs products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,200 hours of welding time is available annually on the machine. Because each drum requires 0.8 hours of welding machine time, annual production is limited to 2,750 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department has provided the following financial data concerning the WVD drums:

WVD Drums

Selling price per drum $ 176.00

Cost per drum:

Direct materials $46.40

Direct labor ($18 per hour) 4.50

Manufacturing overhead 5.05

Selling and administrative expense 17.30 73.25

Margin per drum $ 102.75

Management believes 3,250 WVD drums could be sold each year if the company had sufficient manufacturing capacity. As an alternative to adding another welding machine, management has considered buying additional drums from an outside supplier. Harcor Industries, Inc., a supplier of quality products, would be able to provide up to 1,900 WVD-type drums per year at a price of $150 per drum, which TufStuff would resell to its customers at its normal selling price after appropriate relabeling.

Megan Flores, TufStuffâs production manager, has suggested that the company could make better use of the welding machine by manufacturing bike frames, which would require only 0.2 hours of welding machine time per frame and yet sell for far more than the drums. Megan believes that TufStuff could sell up to 3,700 bike frames per year to bike manufacturers at a price of $77 each. The accounting department has provided the following data concerning the proposed new product:

Bike Frames

Selling price per frame $ 77.00

Cost per frame:

Direct materials $19.40

Direct labor ($18 per hour) 22.50

Manufacturing overhead 17.65

Selling and administrative expense 8.40 67.95

Margin per frame $ 9.05

The bike frames could be produced with existing equipment and personnel. Manufacturing overhead is allocated to products on the basis of direct labor-hours. Most of the manufacturing overhead consists of fixed common costs such as rent on the factory building, but some of it is variable. The variable manufacturing overhead has been estimated at $1.24 per WVD drum and $2.50 per bike frame. The variable manufacturing overhead cost would not be incurred on drums acquired from the outside supplier.

Selling and administrative expenses are allocated to products on the basis of revenues. Almost all of the selling and administrative expenses are fixed common costs, but it has been estimated that variable selling and administrative expenses amount to $1.04 per WVD drum whether made or purchased and would be $2.30 per bike frame.

All of the companyâs employeesâdirect and indirectâare paid for full 40-hour workweeks and the company has a policy of laying off workers only in major recessions.

Required:

1. Would you be comfortable relying on the financial data provided by the accounting department for making decisions related to the WVD drums and bike frames?

Yes

2. Compute the contribution margin per unit for [assume direct labor is a fixed cost]: (Do not round intermediate calculations. Round your answers to 2 decimal places.)

3. As soon as your analysis was shown to the top management team at TufStuff, several managers got into an argument concerning how direct labor costs should be treated when making this decision. One manager argued that direct labor is always treated as a variable cost in textbooks and in practice and has always been considered a variable cost at TufStuff. After all, âdirectâ means you can directly trace the cost to products. âIf direct labor is not a variable cost, what is?â Another manager argued just as strenuously that direct labor should be considered a fixed cost at TufStuff. No one had been laid off in over a decade, and for all practical purposes, everyone at the plant is on a monthly salary. Everyone classified as direct labor works a regular 40-hour workweek and overtime has not been necessary since the company adopted Lean Production techniques. Whether the welding machine is used to make drums or frames, the total payroll would be exactly the same. There is enough slack, in the form of idle time, to accommodate any increase in total direct labor time that the bike frames would require.

a. Compute the contribution margin per welding hour for [assume direct labor is a fixed cost]: (Round your final answers to 2 decimal places.)

b. Determine the number of WVD drums (if any) that should be purchased and the number of WVD drums and/or bike frames (if any) that should be manufactured. [Assume direct labor is a fixed cost]

c. What is the increase in net operating income that would result from this plan over current operations? (Do not round intermediate calculations.)

4. Redo requirements (2) and (3) making the opposite assumption about direct labor from the one you originally made. In other words, if you treated direct labor as a variable cost, redo the analysis treating it as a fixed cost. If you treated direct labor as a fixed cost, redo the analysis treating it as a variable cost.

a. Compute the contribution margin per unit for [assume direct labor is a variable cost]: (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. Compute the contribution margin per welding hour for [assume direct labor is a variable cost]: (Round your final answers to 2 decimal places.)

c. Determine the number of WVD drums (if any) that should be purchased and the number of WVD drums and/or bike frames (if any) that should be manufactured. [Assume direct labor is a variable cost]

d. What is the increase in net operating income that would result from this plan over current operations? (Do not round intermediate calculations.)

olivebear137

The original questions are (i've already completed them)...

CD7 EXCELTutorial

CURRENT DESIGNS

Current Designs faces anumber of important decisions that require incremental analysis.Consider each

of the following situationsindependently.

Situation 1

Recently, Mike Cichanowski,owner and CEO of Current Designs, received a phone call from thepresident

of a brewing company. He wascalling to inquire about the possibility of Current Designsproducing "floating

coolers" for a promotion hiscompany was planning. These coolers resemble a kayak but are aboutone-third

the size. They are used tofloat food and beverages while paddling down the river on a weekendleisure trip.

The company would be interestin purchasing 100 coolers for the upcoming summer. It is willing topay $250

per cooler. The brewingcompany would pick up the coolers upon completion of theorder.

Mikemet with Diane Buswell, controller, to identify how much it wouldcost Current Designs to produce

the coolers. After carefulanalysis, the following costs were identified.

Current Designs would be ableto modify an existing mold to produce the coolers. The cost ofthese

modifications would beapproximately $2,000.

Instructions

(a)

Prepare an incremental analysis to determinewhether Current Designs should accept this special order to

produce the coolers.

(b)

Discuss additonal factors that Mike and Dianeshould consider if Current Designs is currently operating at

full capacity.

Situation 2

Current Designs is alwaysworking to identify ways to increase efficiency while becoming moreenvironmentally

conscious. During a recentbrainstorming session, one employee suggested to Diane Buswell,controller, that the

company should considerreplacing the current rotomold oven as a way to realize savingsfrom reduced energy

consumption. The ovenoperates on natural gas, using 17,000 therms of natural gas for anentire year. A new,

energy-efficient rotomoldoven would operate on 15,000 therms of natural gas for an entireyear. After seeking out

price quotes from a fewsuppliers, Diane determined that it would cost approximately$250,000 to purchase a new,

energy-efficient rotomoldoven. She determines that the expected useful life of the new ovenwould be 10 years, and

it would have no salvagevalue at the end of its useful life. Current Designs would be ableto sell the current oven for

$10,000

Instructions

(a)

Prepare an incremental analysis to determine ifCurrent Designs should purchase the new rotomold oven,

assuming that the average price for natural gasover the next 10 years will be $0.65 per therm.

(b)

Diane is concerned that natural gas prices mightincrease at a faster rate over the next 10 years. If thecompany

projects that the average natural gas price of thenext 10 years could be as high as $0.85 per therm, discuss

how that might change your conclusion in (a).

I need help with the part below!


After you have completed CD7,consider the following additional questions.
1.	Assume in situation 1, the unit selling pricechanged to $195, fixed overhead changed to $1,800 and
	the cost of modifications changed to $3,000. Showthe impact of these changes on decision to accept or
	reject the special order.

2.	Assume in situation 2, the purchase price of thenew oven changed to $100,000. Would this change
	the decision to retain or replace the oven?

3.	Assume in situation 3, that the estimated numberof seats to be produced changed to 3,500 and the cost topurchase
	one seat from an outside supplier changed to $55.Should Current Designs make or buy the seats?

ACC 310F Lecture Notes - Lecture 2: Cash Flow, Contribution Margin, Scatter Plot

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