DEPARTMENT OF BUSINESS AND ADMINISTRATION
November 1, 2010
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.
/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?
b) What is the best estimate of the total fixed cost per period for Maxwell Company?
A) $ 3,360.
c) What is the best estimate of the total expected costs at the 19,000 level of activity for Maxwell
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:
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.
e) What was the gross margin for Porter Company for the second quarter?
B) $ 80,000.
C) $ 131,500.
D) $ 135,000.
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?
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:
for the First Quarter of the Current Year
Less: Cost of Goods Sold $560,000
Gross Margin $240,000
Less: Operating Expenses:
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
g) . What is the contribution margin for Crandall's Bookstore for the first quarter?
h) Using the contribution approach, what is the operating income for the first quarter?
A) $ 44,000.
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
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.
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
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)
Budgeted Income Statement
For the month of June
Sales (30,000 x $100) $3,000,000 0.5 marks
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
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