Week 2 Chapte3 Cost-Volume Relationship

Week 2 Chapte3 Cost-Volume Relationship

Managerial Accounting for Managers 3rd Edition, Noreen, Brewer,Garrison

 

Problem 3-22  Marlin Company  Sales Mix; Multiproduct Break-Even Analysis (LO 3-9)

1.       Marlin Company, a wholesale distributor, has been operating for only a few months. The company sells three products – sinks, mirrors, vanities.  Budgeted sales by product and in total for the coming month are shown below:

Product

Sinks                  Mirrors                 Vanities                              Total

Percentage of sales………        48%                          20%                            32%

Sales……………………………. $ 240,000   100%    $100, 000  10%   $160, 000   100%   $500, 000   100%

Variable expenses……….       72,000     30%         80, 000   80%       88, 000     55%     240, 000     48%

Contribution  Margin….. $ 168,000     70%     $  20,000   20%    $ 72,000     45%     260, 000     52%

Fixed expenses……………                                                                                                                              223, 600

Net operating income….                                                                                                                            $ 36, 400

 

 

                                                                     Fixed Expenses   =         $223,600  =   $430,000

       Dollar sales to break-even =               CM ration                     0.52

 

As shown by  these data, net operating income is budgeted at $36,400 for the month, and break-even at $430,000.

 

Assume that actual sales for month total $ 500,000 as planned. Actual sales by products are:

Sink,  $160,000;   Mirror, $200,000;   and vanities,  $140,000

 

Required:

1.       Prepare a contribution format income statement for the month based on actual sales data

Present the income statement in the format shown above.

 

2.       Compute the Break-Even Point in sales dollars for the month, based on your actual data.

3.       Considering the fact that the company met its $500,000 sales budget for the month, the president is shocked at the results shown on your income statement in (1) above.

Prepare a brief memo for the president explaining why both the operating results and the Break-Even-Point in sales dollars are different from what was budgeted.

 

 

 

 

 

 

 

 

Problem : 3 – 25  Break-Even Analysis: Pricing  ( LO 3-1, LO 3-4, LO 3-6)

 

Demer holdings AG of Zurich, Switzerland  has just  introduced a new fashion watch  for which

The company is trying to find an optional selling price.  Marketing studies suggest that the  company can increase sales by  5,000 units for each  SFr 2 per unit reduction  in the selling price. (SFr2 denotes 2 Swiss Francs).  The company ‘s present  selling price is SFr90 per unit, and variable expenses are SFr60 per unit.  Fixed expenses are SFr840,000 per year. The present annual sales volume (at the SFr90 selling price) is 25,000 units.

 

Required:

1.       What is present yearly net operating  income or loss?

2.       What is the present Break – Even –Point in units  and in Swiss Francs sales?

3.       Assuming that the marketing  studies are correct, what is the maximum profit that the company can earn yearly? At how many  units, and  at what selling price  per unit would the company generate  this profit?

4.        What would be the Break-Even-Point in units and in Swiss Francs sales using the selling price you determined in (3) above (i.e., the selling price at the level  of maximum profits) ?

Why is this Break-Even-Point different from the Break-Event-Point you computed in (2) above?

 

 

Problem 3 – 26  Changes in cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety ( LO 3 -4, LO 3 -6, LO 3 – 7, LO 3 -8)

 

Frieden  Company’s  contribution format income statement for the most recent month is given below:

 

Sales (40,000 units)  ………………………………………..  $ 800, 000

Variable expenses …………………………………………..      560, 000

Contribution margin ………………………………………..     240, 000

Fixed expenses ……………………………………………….      192, 000

Net operating income ……………………………………..  $   48, 000

 

The industry in which Frieden Company operates is quite sensitive to cyclical movements in the economy. Thus profits vary considerable from year to year according to general economic conditions. The company has a large amount of unused  capacity and is studying ways of improving profits.

 

REQUIRED:

1.       New equipment has come  on the market that would allow Frieden Company to automate a portion of its operations. Variable expenses would be reduced by $6 per unit. However, fixed expenses would increase to a total of $432,000 each month. Prepare two contribution format income statements, one showing present operations and one showing how operations would appear if the new equipment is purchased.  Show an amount column, a Per Unit column, and a Percent Column on each statement. Do not show percentages for the fixed expenses.

2.       Refer to the income statements in (1) above.  For both present operations and the proposed new operations, compute (a) the degree of operating leverage. (b) the Break-Even Point in dollars, and (c) the margin of safety in both dollars and percentage terms.

3.       Refer again, to the data in (1) above. As a manager, what factor would be paramount in your mind in deciding whether to  purchase the new equipment? (Assume that ample funds are available to make the purchase).

4.       Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the company’s marketing strategy should be changed. Instead of paying sales commissions, which are included in variable expenses, the marketing manager suggests that salespersons be paid fixed salaries and that the company invest heavily in advertising. The marketing manager claims that this new approach would increase unit sales by 50% without any change in selling price; the company’s  new monthly fixed expenses would be $240,000; and its net operating income would increase by 25%.

 

Compute the Break-Event-Point in dollar sales for the company under the new marketing strategy.

 

Do you agree with the marketing manager’s proposal?

 

 

Problem 4-17 Applying Overhead;  Under applied or Over applied Overhead; Income Statement (LO 4-2, LO 4-4, LO 4-5)

 

Durnham  Company uses a job-order costing system. The following transactions took place last year:

a.       Raw materials requisitioned for use in production, $40,000 (80% direct and 20% indirect).

b.      Factory utility costs incurred,  $14,600.

c.       Depreciation recorded on plant and equipment, $28,000. Three-fourths of the depreciation relates to factory equipment, and the remsinder relates to selling and administrative equipment.

d.      Costs for salaries and wages incurred as follows:

Direct labor……………. $  40,000

Indirect labor………..       18,000

Sales commissions…       10,000

Administrative salaries   25,000

 

e.      Insurance costs incurred, $3,000 (80% relates to factory operations, and 20% relates to selling and administrative activities).

f.        Miscellaneous selling and administrative expenses incurred, $18,000.

g.       Manufacturing overhead was applied to production. The company applies overhead on the basis of 150% of direct labor cost.

h.      Goods that cost $130,000 to manufacture according to their job cost sheets were transferred to the finished goods warehouse.

i.         Goods that had cost $120,000 to manufacture according to their job cost sheets were sold for $200,000.

 

REQUIRED:

1.       Determine the underapplied or overapplied overhead for the year.

2.       Prepare an income statement for the year. (HINT: No calculkations are required to determine the cost of goods sold before any adjustment for underapplied or overapplied overhead).

 

 

Problem 4-18  Applying Overhead in a Service Company  (LO 4-2, LO  4-4, LO 4-5)

 

Heritage Gardens provides complete garden designs and landscaping services. The company uses a job-order costing system to track the costs of its landscaping projects.

The table below provides data concerning the three landscaping projects that were in progress during May. There was no work in process at the beginning of May.

 

 

                                Project

                          Williams               Chandler         Nguyen

 

Designer Hours……………               200                            80                  120

Direct Materials……………..     $ 4,800                    $ 1,800            $3,600

Direct labor…………………….     $ 2,400                    $ 1,000              1,500

 

 

 

Actual overhead costs were $16,000 for May.  Overhead costs are applied to projects on the basis of designer-hours became most of the overhead is related to the costs of the garden design s studio. The predetermined overhead rate is $45 per designer-hour. The William and Chandler projects were completed in May.

 

REQUIRED:

1.       Compute the amount of overhead cost that would have been applied to each project during Ma.

2.       Determine the cost of goods manufactured for May.

3.       What is the accumulated cost of the work in process at the end of the month?

4.       Determine the underapplied or Overapplied Overhead for May.

 

Problem 4-22 Multiple Departments; Overhead Rates; Underapplied or Overapplied

(LO 4-1, LO 4-2, LO 4-3, LO 4-4)

 

Winkle, Kotter, and Zale is a small law firm that contains 10 partners and 10 support persons. The firm employs a job-order costing system to accumulate costs chargeable to each client, and it is organized into two departments – the Research and Documents Department and the Litigation Department. The firm uses predetermined overhead rates to charge the costs of these departments to its clients. At the beginning of the current year, the firm’s management made the following estimates for the year:

 

 

            Department

                                                                        Research and Documents        Litigation

Research – hours……………………………………..                 20,000                                  _

Direct attorney-hours………………………………                    9,000                            16,000

Materials and supplies…………………………….               $ 18,000                             $5,000

Direct attorney cost…………………………………              $430,000                        $800, 000

Departmental overhead cost…………………..              $700,000                        $320, 000

 

The predetermined overhead rate in the Research and Documents Department is based on research-hours, and the rate in the Litigation Department is based on direct attorney cost.

 

The costs charged to each client are made up of three elements: materials and su[[lies used, direct attorney costs incurred, and an applied amount of overhead from each department in which work is performed on the case.

 

Cae 618-3 was initiated on February 10 and completed on June 30. During this period, the following costs and time on the case.

 

            Department

                                                                               Research and Documents       Litigation

Research – hours…………………………………..                              18                         _

Direct attorney……………………………………..                                    9                          42

Materials and supplies …………………………                               $ 50                        $30

Direct attorney cost………………………………                              $410                    $2,100

 

REQUIRED:

 

1.      Compute the predetermined overhead rates used during the year in the Research and documents Department and Litigation Department.

2.      Using the rate you computed in (1) above, compute the total overhead cost applied to Case 618-3.

3.      What would be the total cost charged to Case 618-3? Show computation by department and in total for the case.

4.       At the end of the year, the firm’s records revealed the following actual cost and operating data for all cases handled during the year:

 

Department

                                                                        Research and Documents             Litigation

Research – hours…………………………………..                 23,000                                      _

Direct attorney-hours……………………………                   8 ,000                                    15,000

Materials and supplies………………………….                $19,000                                    $ 6,000

Direct attorney cost …………………………….             $400, 000                                 $275,000

Departmental overhead cost………………..             $770,000                                 $300,000

 

Determine the amount of underapplied or overapplied overhead cost in each department for the year. 

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