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ACC406 - MIDTERM # 1 (WINTER 2006) [A. CHAN] (2).doc

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ACC 406
Anthony Chan

RYERSON UNIVERSITY SCHOOL OF BUSINESS MANAGEMENT ACC 406 INTRODUCTORY MANAGEMENT ACCOUNTING TEST WINTER 2006 INSTRUCTIONS TO STUDENTS: 1. This test consists of 6 questions (12 pages). 2. Marks total 76. 3. All questions must be answered on this paper in the spaces following the questions. Pages are not to be separated and all pages must be submitted without exception. 4. Calculator (model Royal XE24) may be used. 5. No textbooks or notes may be used. 6. DO NOT USE RED PEN ON ANY OF THESE PAGES. INSTRUCTOR: Professor Anthony Chan Student Name: __________________________ Signature: ______________________________ Student Number: ________________________ Question 1 (14 marks) Nike and Reebok both plan to introduce a new sports shoe using a revolutionary new leather product. Nike plans to use a heavily automated production process to produce its shoes while Reebok plans to use a labour-intensive production process. The following revenue and cost relationships are provided: Nike Shoes Reebok Shoes Variable Unit Data: Selling price $100.00 $100.00 Direct materials $18.00 $18.00 Direct labour $5.00 $20.00 Overhead $5.00 $20.00 Selling and Admin $2.00 $2.00 Annual Fixed Costs: Overhead $400,000 $160,000 Selling and Admin $90,000 $90,000 Required: (1) Compute the contribution margin per unit for each company. (2) Assuming each company sells 8,800 pairs of shoes, compute each firm's net income. (3) Which firm will have more stable profits when sales change? Why? Ans: (1) Contribution margin per unit: Nike Shoes Reebok Shoes Revenue $100 $100 Less variable costs: DM $18 $18 DL 5 20 OH 5 20 S&A 2 2 Total variable costs 30 60 Contribution margin $70 $ 40 (2) Net income = (unit sales x unit contribution margin) – fixed costs: Total CM (8,800 x $70) $616,000 (8,800 x $40) $352,000 Less fixed costs 490,000 250,000 Net income $126,000 $102,000 (3)The lower the fixed costs, the more stable will be net income. Since Reebok has approximately half the fixed costs of Nike, its earnings should be more stable. Note also that Reebok's unit contribution margin is considerably less than Nike's. As sales rise, Nike will gain contribution margin (and thus profit) faster than Reebok and of course when sales fall will lose contribution margin faster than Reebok. Question 2 (17 marks) On January 31, 2006, Phile Company had an accidental fire. As a result, some accounting RECORDS about direct materials, work-in-process, and finished goods inventories were destroyed. The company did have access to certain incomplete accounting records, which revealed the following: 1. Beginning inventories, January 1, 2006: Direct materials $32,000 Work-in-process $68,000 Finished Goods $30,000 2. Key ratios for the month of January 2006: Gross profit = 20% of sales Prime costs = 70% of total manufacturing costs added Factory overhead = 40% of conversion costs Ending work-in-process is always 10% of the total manufacturing costs added 3. All costs are incurred uniformly in the manufacturing process. 4. Actual operations data for the month of January 2006: Sales $900,000 Direct materials purchases $320,000 Direct labour incurred $360,000 Required: 1. From the above data, reconstruct a statement of cost of goods manufactured for January 2006. 2. Calculate the ending finished goods inventory value on January 31, 2006. Answers: 1. Beginning Materials Inventory $32,000 Purchases $320,000 Materials Available for Use $352,000 Less: Ending Materials Inventory $152,000 Materials Used $200,000 Direct Labour $360,000 Overhead $240,000 Total Manufacturing Costs Added $800,000 Beginning Work-in-process $68,000 Total Manufacturing Costs $868,000 Less: Ending Work-in-process $80,000 Cost of Goods Manufactured $788,000 Question 2 (cont.) 2. Beginning Finished Goods Inventory $30,000 Cost of Goods Manufactured 788,000 Goods Available for Sale 818,000 Less: Ending Finished Goods Inventory 90,000 Cost of Goods Sold 720,000 Question 3 (15 marks) The Buffet Company produces and sells t-shirts. Income statements for two activity levels are provided below: Volume (units) 20,000 30,000 Revenue $300,000 $450,000 Cost of goods sold $120,000 $180,000 Gross margin $180,000
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