ACTG 2020 Chapter Notes - Chapter 6: Gross Margin, Earnings Before Interest And Taxes, Contribution Margin
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Need help with my case study for my managerial accouting class,any help will be greatly appreciated.
Part 1 15 points
Cingle Company LLC produces gadgets at one manufacturingfactory. Corporate headquarters are located at the same site.Historical cost information shows the average costs at thefollowing production levels .
Production in units | 3,000 | 3,750 | 4,500 |
Cost of goods manufactured | |||
Direct Materials | $ 198,000 | $ 247,500 | $297,000 |
Direct Labor | 126,000 | 157,500 | 189,000 |
Overhead | |||
Building depreciation-factory | 5,000 | 5,000 | 5,000 |
Equipmentlease | 4,500 | 4,500 | 4,500 |
Factorysupplies | 1,600 | 1,930 | 2,260 |
Indirect Labor | 5,500 | 5,500 | 5,500 |
Quality InspectionCosts | 13,360 | 14,200 | 15,040 |
Selling and Administrative Expenses | |||
Shipping | 45,500 | 51,875 | 58,250 |
Advertisingexpense | 50,000 | 50,000 | 50,000 |
Salaries andcommissions | 137,000 | 155,000 | 173,000 |
Insuranceexpense | 10,000 | 10,000 | 10,000 |
Total | $ 596,460 | $ 703,005 | $ 809,550 |
A. Identify each ofthe companyâs costs as being variable, fixed or mixed with respectto the number of units produced. Explain why you chose that costbehavior. [Hint: What happens to total cost if the cost behavior isfixed, is variable, is mixed? What happens to cost / unit if costbehavior is fixed, is variable, is mixed?] Show all computationsneeded to determine cost behavior.
NOTE: If the cost is mixed, please use thechart in part B to detail your explanation.
Use the chart below:
Cost | Fixed | Variable | Mixed | Explanation |
Direct Materials | X | The total cost increases but cost/unit ($66) remainsconstant. | ||
Direct Labor | ||||
Building depreciation-factory | ||||
Equipment lease | ||||
Factory supplies | ||||
Indirect Labor | ||||
Quality Inspection Costs | ||||
Shipping | ||||
Advertising expense | ||||
Salaries and commissions | ||||
Insurance expense |
B. Using the high-lowmethod, separate each mixed cost into variable and fixed elements.State the cost formula for each mixed cost. Show all your work andcomputations.
Use the chart below:
Mixed Cost (Name) | Cost Formula (Y = a + bx form) | Supporting Computations |
C. Determine the expectedtotal costs (identify each cost separately) at a production levelof 5,000 widgets. Show computations. You should arrive at a totalcost figure.
Use the chart below:
Cost | Supporting Computations | |
Direct Materials | ||
Direct Labor | ||
Building dep-factory portion | ||
Equipment lease | ||
Factory supplies | ||
Indirect Labor | ||
Quality Inspection Costs | ||
Shipping | ||
Advertising expense | ||
Salaries and commissions | ||
Insurance expense | ||
TOTAL COST |
D. State the costequation for the total costs of the entire company in the form Y =a + bx. Using alternative one or alternative two below, show howyou determined the cost equation. (Note: you should have oneequation such that someone could determine expected total cost forany activity level within the relevant range.)
Company â Wide Cost equation:
Use the chart below (Alternative one) which shows the fixed costportion and the variable rate for each cost itemor use the high- low method (Alternative two) fordetermining the cost equation. You need to choose only onealternative.
Alternative one: (use the information and chartfrom part A and the information from part B. Input the $ amounts inappropriate columns and total the columns of the chart. Using thechart information, state the cost equation in the Y = a + bxform.)
Fixed Cost | Variable Rate ($/unit) | |
Direct Materials | ||
Direct Labor | ||
Building dep-factory portion | ||
Equipment lease | ||
Factory supplies | ||
Indirect Labor | ||
Quality Inspection Costs | ||
Shipping | ||
Advertising expense | ||
Salaries and commissions | ||
Insurance expense | ||
TOTAL COST |
Alternativetwo: High-low method and supporting, labeledcomputations.
Part Two 20 points
Goggle Company manufactures a special virtual reality gogglethat can be used underwater. The companyâs contribution formatincome statement for last year is below:
Total | Per Unit | % of Sales | |
Sales (10,000 units) | $750,000 | $75 | 100% |
Variable Expenses | 450,000 | 45 | ? |
Contribution Margin | 300,000 | $30 | ? |
Fixed Expenses | 170,000 | ||
Net Operating Income | $130,000 |
Goggle Company is ready to take off and expand its market share.Management has asked for several items to be analyzed in order tomake good decisions.
Calculate the companyâs contribution margin ratio and thevariable expense ratio.
Compute the companyâs break-even point in both units and insales dollars. You may use either the equation method or theformula method.
Management is predicting a 20% increase in sales next year,staying within the relevant range for the company. How much willthe companyâs net operating income increase?
Refer to the original data. Assume that management would like toearn a profit of at least $55,000. How many units will have to besold to meet this target profit?
Refer to the original data. Compute the company's margin ofsafety in both dollar and percentage form.
Compute the company's degree of operating leverage at thepresent level of sales.
Assume that through a more intense effort by the sales staff,the company's sales increase by 8% next year. By what percentagewould you expect net operating income to increase? Use the degreeof operating leverage to obtain your answer.
Verify your answer to (b) by preparing a new contribution formatincome statement showing an 8% increase in sales.
In an effort to increase sales and profits, management isconsidering the use of a higher quality virtual reality system thanthe current system. The new system would increase variable costs by$15 per unit, but management could eliminate one quality inspectorwho is paid a salary of $30,000 per year. Management believes theycan increase the selling price by $30 per unit.
Assuming that changes are made as described above, prepare aprojected contribution format income statement for next year. Showdata on a total, per unit, and percentage basis.
Compute the company's new break-even point in both units anddollars of sales. Use the formula method.
Would you recommend that the changes be made? Why or whynot?
1) All of the following are examples of product costs except:
depreciation on the company's administrative offices.
salary of the plant manager.
insurance on the factory equipment.
rental costs of the factory facility.
2) Period costs:
are treated as expenses in the period they are incurred
are directly traceable to products
include direct labor
are also referred to as manufacturing overhead costs
.
3) Axle and Wheel Manufacturing currently produces 1,000 axles per month. The following per unit data apply for sales to regular customers:
Direct materials $30
Direct manufacturing labor 5
Variable manufacturing overhead 10
Fixed manufacturing overhead 40
Total manufacturing costs $85
The plant has capacity for 2,000 axles and is considering expanding production to 1,500 axles. What is the total cost of producing 1,500 axles?
a. $85,000
b. $170,000
c. $107,500
d. $102,500
4) In the preparation of the schedule of Cost of Goods Manufactured, the accountant incorrectly included as part of manufacturing overhead the rental expense on the firm's retail facilities. This inclusion would:
overstate period expenses on the income statement.
overstate the cost of goods sold on the income statement.
understate the cost of goods manufactured.
have no effect on the cost of goods manufactured.
5) In CVP analysis, focusing on target net income rather than operating income:
a. will increase the breakeven point
b. will decrease the breakeven point
c. will not change the breakeven point
d. does not allow calculation of breakeven point
6) A variable cost is constant if expressed on a per unit basis but the total dollar amount changes as the number of units increases or decreases.
a. True
b. False
7) As activity increases within the relevant range, fixed costs remain constant on a per unit basis.
a. True
b. False
8) Which of the following statements is correct with regard to a CVP graph?
A CVP graph shows the maximum possible profit.
A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.
A CVP graph assumes that total expense varies in direct proportion to unit sales.
A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.
9) How would the following costs be classified (product or period) under variable costing at a retail clothing store?
| Cost of purchasing clothing | Sales commissions | |
| a. | Product | Product |
| b. | Product | Period |
| c. | Period | Product |
| d. | Period | Period |
10) The principal difference between variable costing and absorption costing centers on:
whether variable manufacturing costs should be included as product costs.
whether fixed manufacturing costs should be included as product costs.
whether fixed manufacturing costs and fixed selling and administrative costs should be included as product costs.
none of these.
11) Joe has a hot dog cart that he parks on the NY sidewalk and sells hotdogs during the day. The variable cost of a hot dog is $.90. The selling price of the hot dog is $2.00. The fixed cost is $3,000 per month which covers the loan for the cart and the salary Joe needs to make to live. How many hotdogs must Joe sell in one month in order to break even?
3,300 hot dogs
3,000 hot dogs
2,727.27 hot dogs
2,728 hot dogs
12) Shun Corporation manufactures and sells a hand held calculator. The following information relates to Shun's operations for last year:
| Unit product cost under variable costing.......................... | $5.20 per unit | |
| Fixed manufacturing overhead cost for the year.............. | $260,000 | |
| Fixed selling and administrative cost for the year............ | $180,000 | |
| Units (calculators) produced and sold.............................. | 400,000 |
What is Shun's unit product cost under absorption costing for last year?
$4.10
$4.55
$5.85
$6.30.
Use the following information to answer questions 13 to 15:
Barnett Company uses the weighted-average method in its process costing system. The company adds materials at the beginning of the process in Department M. Conversion costs were 75% complete with respect to the 4,000 units in work in process at May 1 and 50% complete with respect to the 6,000 units in work in process at May 31. During May, 14,000 units were started, 12,000 units were completed and transferred to the next department.
13) Calculate the number of equivalent units for materials.
10,000 units
12,000 units
14,000 units
15,000 units
18,000 units
14) Calculate the number of equivalent units for conversion?
10,000 units
12,000 units
14,000 units
15,000 units
18,000 units
15) An analysis of the costs relating to work in process at May 1 and to production activity for May follows:
| Materials | Conversion | ||
| Work in process 5/1....................... | $13,800 | $3,740 | |
| Costs added during May................ | $42,000 | $26,260 |
The total cost per equivalent unit for May was:
$5.02
$5.10
$5.12
$5.25
