Practice Test #3

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University of Winnipeg
Business And Administration
Debbie Mortimer

DEPARTMENT OF BUSINESS AND ADMINISTRATION BUS2003 Test 3 November 1, 2010 Name:____________________________________________________ Student Number: __________________________________________ Instructions: Please answer the following questions on the examination test sheets. If you need more room, please use the back of the pages. Show your calculations in detail. Grading: Q1 /9 Q2 /14 Q3 / 13 Q4 / 19 Total /55 Question One: (9 marks; 1 mark each) Use the following to answer parts a-c: Maxwell Company has a total expense per unit of $2.00 per unit at the 16,000-unit level of activity, and total expense per unit of $1.95 at the 21,000-unit level of activity. a) What is the best estimate of the variable cost per unit for Maxwell Company? A) $0.56. B) $1.79. C) $1.95. D) $2.00. Ans: B b) What is the best estimate of the total fixed cost per period for Maxwell Company? A) $ 3,360. B) $29,190. C) $32,000 D) $40,950. Ans: A c) What is the best estimate of the total expected costs at the 19,000 level of activity for Maxwell Company? A) $37,050. B) $37,370. C) $38,000. D) $39,830. Ans: B Use the following information to answer parts d-f: Porter Company has provided the following data for the second quarter of the most recent year: Sales $300,000 Fixed Manufacturing Overhead $ 55,000 Direct Labour $ 72,500 Fixed Selling Expenses $ 46,250 Variable Manufacturing Overhead $ 41,000 Variable Administrative Expenses $ 48,000 Direct Materials $ 51,500 Fixed Administrative Expenses $ 44,500 Variable Selling Expenses $ 49,750 Assume that direct labour is a variable cost and that there were no beginning or ending inventories. d) What was the total contribution margin of Porter Company for the second quarter? A) $ 37,250. B) $ 87,000. C) $176,000. D) $211,000. Ans: A e) What was the gross margin for Porter Company for the second quarter? A) $(12,500). B) $ 80,000. C) $ 131,500. D) $ 135,000. Ans: B f) Average maintenance costs are $1.50 per machine hour at an activity level of 8,000 machine hours and $1.20 per machine hour at an activity level of 13,000 machine hours. Assuming that this activity is within the relevant range, total expected maintenance cost for a budgeted activity level of 10,000 machine hours would be closest to which of the following? A) $11,433. B) $13,440. C) $15,000. D) $16,128. Ans: B Use the following information to answer parts g-i: An income statement for Crandall's Bookstore for the first quarter of the current year is presented below: CRANDALL's BOOKSTORE Income Statement for the First Quarter of the Current Year Sales $800,000 Less: Cost of Goods Sold $560,000 Gross Margin $240,000 Less: Operating Expenses: Selling $98,000 Administrative $98,000 $196,000 Operating Income $ 44,000 On average, a book sells for $50. Variable selling expenses are $5.50 per book, with the remaining selling expenses being fixed. The variable administrative expenses are 3% of sales, with the remainder being fixed. g) . What is the contribution margin for Crandall's Bookstore for the first quarter? A) $128,000. B) $152,000. C) $240,000. D) $688,000. Ans: A h) Using the contribution approach, what is the operating income for the first quarter? A) $ 44,000. B) $128,000. C) $152,000. D) $240,000. Ans: A i) What is the cost formula for operating expenses with X equal to the number of books sold? A) Y = $84,000 + $7.00X. B) Y = $84,000 + $8.50X. C) Y = $98,000 + $7.00X. D) Y = $98,000 + $8.50X. Ans: A Question Two: (14 marks) Part A (12 marks) The Accounting Department of Archer Company, a merchandising company, has prepared the following analysis: The Accounting Department feels that billing expense is a mixed cost, containing both fixed and variable cost elements. A tabulation has been made of billing expense and sales in units over the last several months, as follows: The Accounting Department now plans to develop a cost formula for billing expense so that a contribution-type income statement can be prepared for management's use. Required: a) Using the high-low method, provide the cost formula for billing expense. (4 marks) b) Assume that the company plans to sell 30,000 units during July at a selling price of $100 per unit. Prepare a budgeted income statement for the month, using the contribution format. Assume a 40% tax rate. (6 marks) c) Explain how devising cost formulas (cost models) can be useful for management decision making. (2 marks) Question Two Solution Part A: a. Variable expense = $42,000 – 30,000 17,000 – 9,000 = $1.50 per unit (2 marks) Fixed expense = $42,000 - $1.50 x 17,000 = $16,500 OR = $30,000 - $1.50 x 9,000 = $16,500 (1 mark) Formula: X = units sold Billing expense = $1.50(X) + $16,500 (1 mark) b. Archer Company Budgeted Income Statement For the month of June Sales (30,000 x $100) $3,000,000 0.5 marks Variable Expenses: COGS (30,000 x $56) 1,680,000 0.5 marks Commissions (12% x $3,000,000) 360,000 0.5 marks Billing (30,000 x $1.50) 45,000 0.5 marks cwf Contribution Margin 915,000 0.5 marks Fixed Expenses: Advertising 300,000 0.5 marks Administrative 160,000 0.5 marks Depreciation 62,000 0.5 marks Billing 16,500 0.5 marks cwf Net Income before tax 376,500 0.5 marks Tax expense (40%) 150,600 0.5 marks Net Income 22
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