PROBLEM 5-20 Various CVP Questions: Break-Even Point; Cost Structure; Target Sales [LO5-1, L05-3, LO5-4, L05-5, LO5-6, L05-8] Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $15 per ball, of which 60% is direct labor cost. Last year, the company sold 30,000 of these balls, with the following results: Sales (30,000 balls) ...... Variable expenses ...... Contribution margin .... Fixed expenses .. Net operating income ..... $750,000 450,000 300,000 210,000 $ 90,000 Required: 1. Compute (a) the CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year's sales level. 2. Due to an increase in labor rates, the company estimates that variable expenses will increase by $3 per ball next year. If this change takes place and the selling price per ball remains con- stant at $25, what will be the new CM ratio and break-even point in balls? 3. Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $90,000, as 5. last year? Refer again to the data in (2) above. The president feels that the company must raise the sell- ing price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year, what selling price per ball must it charge next year to cover the increased labor costs? Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company's new CM ratio and new break-even point in balls? Refer to the data in (5) above. a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $90,000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 30,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage. c. If you were a member of top management, would you have been in favor of constructing the new plant? Explain. 6.
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EXERCISE 5-14 Break-Even and Target Profit Analysis (L05-3, L05-4, L05-5, L05-6] Lindon Company is the exclusive distributor for an automotive product that sells for $40 per unit and has a CM ratio of 30%. The company's fixed expenses are $180,000 per year. The company plans to sell 16,000 units this year. Required: 1. What are the variable expenses per unit? 2. Using the equation method: a. What is the break-even point in unit sales and in dollar sales? b. What amount of unit sales and dollar sales is required to earn an annual profit of $60,000? C. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4 per unit. What is the company's new break-even point in unit sales and in dollar sales? 3. Repeat (2) above using the formula method.
PROBLEM 14-9 Understanding a Statement of Cash Flows (L014-1, L014-2] Brock Company is a merchandiser that prepared the statement of cash flows and income statement provided below: Brock Company Statement of Cash Flows-Indirect Method $ 275 Operating Activities Net income ... Adjustments to convert net income to a cash basis: Depreciation ........ Increase in accounts receivable.... Decrease in inventory ........ Decrease in accounts payable .......... Decrease in accrued liabilities ........ Increase in income taxes payable ................ Gain on sale of equipment... Net cash provided by operating activities ........... boa Investing Activities Additions to property, plant, and equipment ......... Proceeds from sale of equipment .... Net cash used in investing activities .............. long & nô Financing Activities Issuance of bonds payable ..... Issuance of common stock ............ Cash dividends paid ......... Net cash provided by financing activities ........... Net increase in cash and cash equivalents .......... Beginning cash and cash equivalents ............ Ending cash and cash equivalents ............ 34 Brock Company Income Statement Net sales .......... Cost of goods sold ............. .............. Gross margin ................ ............ Selling and administrative expenses ............. Net operating income ........... Nonoperating items: Gain on sale of equipment .... Income before taxes ... Income taxes . . . . . . . . $5,200 2,980 2,220 1,801 419 423 Net income .......................... $ 275 Required: Assume that you have been asked to teach a workshop to the employees within Brock Compa- ny's Marketing Department. The purpose of your workshop is to explain how the statement of cash flows differs from the income statement. Your audience is expecting you to explain the logic underlying each number included in the statement of cash flows. Prepare a memo that explains the format of the statement of cash flows and the rationale for each number included in Brock's state- ment of cash flows.
CASE 2-27 Scattergraph Analysis: Selection of an Activity Base [LO2-5] Angora Wraps of Pendleton, Oregon, makes fine sweaters out of pure angora wool. The business is seasonal, with the largest demand during the fall, the winter, and Christmas holidays. The company must increase production each summer to meet estimated demand. The company has been analyzing its costs to determine which costs are fixed and variable for planning purposes. Below are data for the company's activity and direct labor costs over the last year. Thousands of Units Produced Number of Paid Days Direct Labor Cost Month January February .. March 75 April ..... May ..... $14,162 $12,994 $15,184 $15,038 $15,768 $15,330 $13,724 $14,162 $15,476 $15,476 June ..... 102 July ....... August ... September October ............. 136 138 132 November .... December ... Na $12,972 $14,074 o The number of workdays varies from month to month due to the number of weekdays, holi- days, and days of vacation in the month. The paid days include paid vacations in July) and paid holidays (in November and December). The number of units produced in a month varies depend- ing on demand and the number of workdays in the month. The company has eight workers who are classified as direct labor. Required: 1. Plot the direct labor cost and units produced on a scattergraph. (Place cost on the vertical axis and units produced on the horizontal axis.) 2. Plot the direct labor cost and number of paid days on a scattergraph. (Place cost on the vertical axis and the number of paid days on the horizontal axis.) 3. Which measure of activity-number of units produced or paid days—should be used as the activity base for explaining direct labor cost? Explain.
EXERCISE 3-8 Applying Overhead; Computing Unit Product Cost [L03-2, LO3-3] A company assigns overhead cost to completed jobs on the basis of 125% of direct labor cost. The job cost sheet for Job 313 shows that $10,000 in direct materials has been used on the job and that $12,000 in direct labor cost has been incurred. A total of 1,000 units were produced in Job 313. Required: What is the total manufacturing cost assigned to Job 313? What is the unit product cost for Job 313?
EXERCISE 12-16 Identification of Relevant Costs [LO12-1] Bill has just returned from a duck hunting trip. He has brought home eight ducks. Bill's friend, John, disapproves of duck hunting, and to discourage Bill from further hunting, John has presented him with the following cost estimate per duck: $150 58 Camper and equipment: Cost, $12,000; usable for eight seasons; 10 hunting trips per season. ........... Travel expense (pickup truck): 100 miles at $0.31 per mile (gas, oil, and tires-$0.21 per mile; depreciation and insurance-$0.10 per mile) ....... Shotgun shells (two boxes) Boat: Cost, $2,320, usable for eight seasons; 10 hunting trips per season Hunting license Cost, $30 for the season; 10 hunting trips per season .......... Money lost playing poker: Loss, $24 (Bill plays poker every weekend) .................. Bottle of whiskey: Cost, $15 (used to ward off the cold) ........... Total cost .. Cost per duck ($272 = 8 ducks) .... $272 Required: 1. Assuming that the duck hunting trip Bill has just completed is typical, what costs are relevant to a decision as to whether Bill should go duck hunting again this season? 2. Suppose that Bill gets lucky on his next hunting trip and shoots 10 ducks in the amount of time it took him to shoot 8 ducks on his last trip. How much would it have cost him to shoot the last two ducks? Explain. 3. Which costs are relevant in a decision of whether Bill should give up hunting? Explain.
18 Accounting for expenses as capital expenditures: a. Increases current income because it charges current period operating expenses over future accounting periods b. Decreases current income because it charges future period operating expenses to the current period C. Increases current income because it charges future period operating expenses to the current period d. Decreases current income because it charges current period operating expenses over future accounting periods e. None of the above The correct answer is 'a'.
EXERCISE 3-10 Applying Overhead to a Job [LO3-2] Sigma Corporation applies overhead cost to jobs on the basis of direct labor cost. Job V, which was started and completed during the current period, shows charges of $5,000 for direct materials, $8,000 for direct labor, and $6,000 for overhead on its job cost sheet. Job W, which is still in pro- cess at year-end, shows charges of $2,500 for direct materials and $4,000 for direct labor. Required: Should any overhead cost be added to Job W at year-end? If so, how much? Explain.
EXERCISE 3-1 Compute the Predetermined Overhead Rate [LO3-1] Harris Fabrics computes its predetermined overhead rate annually on the basis of direct labor- hours. At the beginning of the year, it estimated that 20,000 direct labor-hours would be required for the period's estimated level of production. The company also estimated $94,000 of fixed manu- facturing overhead expenses for the coming period and variable manufacturing overhead of $2.00 per direct labor-hour. Harris's actual manufacturing overhead for the year was $123,900 and its actual total direct labor was 21,000 hours. Required: Compute the company's predetermined overhead rate for the year.
15-3 Assume that two companies in the same industry have equal earnings. Why might these companies have different price-earnings ratios? If a company has a price-earnings ratio of 20 and reports earnings per share for the current year of $4, at what price would you expect to find the stock selling on the market?
EXERCISE 12-10 Make or Buy a Component [LO12-3] For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against this move, however, pointing out that the cost to produce the starters would be greater than the current $8.40 per unit purchase price: Per Unit Total Direct materials ................ Direct labor ........... ...... Supervision .......... Depreciation ......... Variable manufacturing overhead ... Rent ......... Total production cost ........... $3.10 2.70 1.50 1.00 0.60 0.30 $9.20 $60,000 $40,000 $12,000 A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient idle tools and machinery that no new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is $80.000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: Prepare computations showing how much profits will increase or decrease as a result of making the starters.
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