CASES BEFORE FINAL EXAM
Question 1:
Island Company makes two products, ABC and DEF. Present revenue, costs,
and sales data for the two products are as follow:
Detailed information
Selling price per unit
Variable expenses per unit
Number of units sold annually
Product ABC
Product DEF
JOD 15
JOD 9
20,000
JOD 100
JOD 20
5,000
Fixed expenses are JOD 475,800 per year. The president of your company
asked you to analyze the following aspects:
1. Prepare the income statement and the break-even point in JODs for
the Company based upon the mix of sales mentioned in the above
Table. What will the income statement and the break-even point in
JODs if the company has developed a new product called GHI. The
Company can sell 10,000 units at JOD 45 per unit. The variable
expenses would be JOD 36 per unit.
2. The president of your company examined your figures and says,
"There is something strange here. Our fixed costs haven't changed,
and you show greater total contribution margin if we add the new
product, but you also show our break-even point going up. With greater
contribution margin, the break-even point should go down, not up.
You’ve made a mistake somewhere". Explain to your president what
has happened.
Question 2:
Maz Company Manufacturers a variety of engines for use in heavy
equipment. The company has always produced all the necessary parts for its
engines, including all the carburetors. An outside supplier has offered to sell
one type of carburetor to Maz for a cost of JOD 35 per unit. To evaluate this
offer, Maz Company has gathered the following information relating to its own
cost of producing the carburetor internally:
Elements
Per unit
15,000 Units per year
Direct materials
JOD 14
JOD 210,000
Direct labor
JOD 10
JOD 150,000
Variable manufacturing overhead
JOD 3
JOD 45,000
Fixed manufacturing overhead
(Allocated)
JOD 9
JOD 135,000
Fixed manufacturing overhead
(Traceable)
JOD 6
JOD 90,000
Total costs
JOD 42
JOD 630,000
The fixed manufacturing overhead (traceable) consists of: One-third
supervisory salaries, two-third depreciation of special equipment with no
resale value. The capacity to analyze the case is 15,000 units.
Required:
•
If Maz Company has no alternative use for the facilities that are now
being used to produce the carburetors, should the outside suppliers’
offer be accepted.
•
Suppose that the carburetors were purchased, Maz company could
use the freed capacity to launch a new product. The segment margin of
the new product would be JOD 150,000 per year. Should Maz accept
the offer to buy the carburetors?
Question 3:
Irbid Manufacturing Company has presented the following budgeted
information for the year 2016:
Direct materials costs
JOD 840,000
Direct labor costs
JOD 200,000
Manufacturing overhead costs
JOD 600,000
Administrative overhead costs
JOD 328,000
Budgeted production units
600,000 unit
Budgeted machine hours
50,000 hours
Budgeted labor hours
5,000 hours
Starting year 2015, the company has spent heavily on advanced technological
machinery and reduced its workforce inside the factory. Therefore, the
president of the company is thinking about changing the base for
manufacturing overhead allocation to ABC system and uses one Activity rate
only. The activity drivers available for this Company are direct labor hours and
machine hours. The administrative overhead is to be allocated arbitrary based
upon prime costs basis and this overhead cost is considered a period cost.
Required:
Based upon the above information, the president of the company asked you
as a Senior Manager to:
1. Advice which Activity rate that you think the company should consider
giving reasons for your decision and calculate the best activity rate.
2. In January 2016, the company received an offer to produce a batch from
Product A. This batch requires the following:
•
•
•
•
•
•
Direct materials JOD 3788.
Direct labor JOD 1100.
Direct costs JOD 422.
Machine hours 120 hours.
Labor hours 40 hours.
Manufacturing overhead costs for this batch will be determined and
allocated based upon the rate you have selected and calculated in
requirement 1 above.
The president of the company asked you to price this batch, given that the
company’s’ profit margin is 10% of the selling price.
Question 4:
Majdy Manufacturing Company has three products, all of which require the
same production facilities. Financial data on the three products are as follows:
Costs
Labor costs
Materials costs
Variable overhead costs
Product X
JOD 13
JOD 9
JOD 8
Product Y
JOD 21
JOD 12
JOD 12
Product Z
JOD 23
JOD 15
JOD 16
All three of the products use just one type of raw material, which is the same
material for all three products. This material costs JOD 12 per kilo and is
scarce, such that the amount of all three products that can be produced falls
well below the amounts that the market would take. The company decided to
evaluate the contribution margin for each product based upon the quantities
used per product. Product X is sold in a market where the selling price per
unit is fixed at JOD 60.
Required:
As a manager, you are required to recommend to the Top Management the
price at which the business would need to sell products Y and Z such that it
would be equally in terms of contribution margin to produce and sell a unit of
the three products.
Question 5:
Ma’moun Manufacturing Company normally produces and sells 30,000 units
of product (X) each month. Product (X) is a small electrical relay used as a
component part in the automotive industry. The selling price is JOD 22 per
unit, variable costs are JOD 14 per unit, fixed manufacturing overhead costs
total JOD 150,000 per month, and fixed selling costs total JOD 30,000 per
month.
Employment-contract strikes in the companies that purchase the bulk of the
product (X) units have caused Ma’moun Company’s sales to temporarily drop
to only 8,000 units per month. Ma’moun Company estimates that the strikes
will last for two months, after which time sales of product (X) should return to
normal. Due to the current low level of sales, Ma’moun Company is thinking
about closing its own plant during the strike, which would reduce its fixed
manufacturing overhead costs by JOD 45,000 per month and its fixed selling
costs by 10%. Start-up costs at the end of the shutdown period would total
JOD 8,000. The Company has no inventories on hand.
Required:
If the strikes continue for 2 months, would you recommend that the Company
closes its own plant? Explain
Question 6:
A business bought a machine three years ago for JOD 12,000. The future of
this machine is now under consideration. As a Manager of the Business, can
JOD 12,000 ever be the relevant cost of this machine in the context of the
current decision?
Question 7:
A business has some components (code named X15) for which the business
is used in production. The business paid JOD 3.50 each when this was
bought a month ago (in April 2019). Do you consider the JOD 3.50 the ‘past’
cost, the ‘historic’ cost or the ‘sunk’ cost?
In May 2019, the business will use the component X15 in a contract that is
currently under consideration. This component now has a replacement cost of
JOD 3.40 each and is in constant use by the business. It could be sold for
JOD 3.00. It could be used as a substitute for another item of inventory, which
will cost JOD 3.15, needed elsewhere in the business.
As a manager, you are required to determine the opportunity cost of each X15
for the contract? Explain why.
Question 8:
Jordan Valley Corporation has two divisions: Garden Division and Farm
Division. The following report is for the most recent operating period of 2018:
Total Company Garden Division
Farm Division
JOD 390,000
JOD 270,000
JOD 120,000
Variable expenses
95,400
59,400
36,000
Contribution margin
294,600
210,600
84,000
Traceable fixed expenses
223,000
165,000
58,000
Segment margin
71,600
JOD 45,600
JOD 26,000
Common fixed expense
46,800
Net operating income
JOD 24,800
Sales
As a manager at the company and your responsibilities are planning and
directing the company, you are required to:
1. Determine the break-even in JOD sales for the Garden Division's and for
the Farm Division's.
2. Determine the company's overall break-even in JOD sales.
3. What would be the company's overall net operating income if the
company operated at its two division's break-even points?
Question 9:
Eagle Company's quality cost report is to be based on the following data:
Description of Quality costs
Amount in JOD
Quality data gathering and analysis
59,000
Test and inspection of raw materials
48,000
Final product testing and inspection
27,000
Depreciation of test equipment
30,000
Cost of field service and handling complaints
52,000
Disposal of defective products
13,000
Downtime caused by quality problems
52,000
Technical support provided to suppliers
18,000
Returns arising from quality problems
39,000
The company is currently evaluating the cost of their quality system; therefore,
you are required to determine the total prevention cost appearing on the quality
cost report and the total appraisal cost appearing on the quality cost report.
Question 10:
A company is planning a new product. Market research information suggests
that the product should sell 10,000 units at JOD 21.00/unit. The company
seeks to make a mark-up of 40% product cost. It is estimated that the lifetime
costs of the product will be as follows: Design and development costs JOD
50,000, Manufacturing costs JOD 10 per unit, and End of life costs JOD
20,000. The company estimates that if it were to spend an additional JOD
15,000 on design, manufacturing costs unit could be reduced.
Required:
(a) What is the target cost of the product?
(b) What is the original lifecycle cost per unit and is the product worth making
on that basis?
Question 11:
Karak Ltd makes two products, Product “R” and Product “W”. Information
relating to each of these products is set out below:
Information
Product “R”
Product “W”
Selling price per unit
JOD 52
JOD 91
Annual sales volume
15,000 units
18,000 units
200
800
Labor time per unit
2 hours
5 hours
Labor rate per hour
JOD 10
JOD 10
Material cost per unit
JOD 25
JOD 30
Size of each production batch
750
1,000
Bought-in parts per unit
2
1
Number of sales invoices issued each year
Machine set-ups per batch
2
5
The Finance Director of Karak Ltd has recently produced the following
analysis of overheads and their relevant cost drivers:
Type of overhead
Cost driver
Cost (JOD)
Bought-in parts handling costs
Number of bought-in parts
96,000
Materials handling costs
Number of production batches
38,000
Sales invoicing costs
Number of invoices issued
20,000
Machine set-up costs
Number of machine set-ups
26,000
All other overheads
Labour hours
60,000
Total overhead costs
240,000
Required:
(a) Calculate the total cost per unit and profit per unit for each product using:
(1) Traditional overhead absorption (based on labor hours)
(2) The activity-based costing method.
(b) Comment on your findings.