SELECT SOLUTIONS CH.2
EXERCISE 2-24 (20 MINUTES)
1.
Advertising costs: Period cost, fixed
2.
Straight-line depreciation: Product cost, fixed, manufacturing overhead
3.
Wages of assembly-line personnel: Product cost, variable, direct labor
4.
Delivery costs on customer shipments: Period cost, variable
5.
Newsprint consumed: Product cost, variable, direct material
6.
Plant insurance: Product cost, fixed, manufacturing overhead
7.
Glass costs: Product cost, variable, direct material
8.
Tire costs: Product cost, variable, direct material
9.
Sales commissions: Period cost, variable
10.
Wood glue: Product cost, variable, either direct material or manufacturing
overhead (i.e., indirect material) depending on how significant the cost is
11.
Wages of security guards: Product cost, variable, manufacturing overhead
12.
Salary of financial vice-president: Period cost, fixed
EXERCISE 2-25 (10 MINUTES)
The general formula for solving all three cases is as follows:
Beginning
inventory of
finished goods
+
Cost of goods
manufactured
during period
–
Ending
inventory of
=
finished goods
Cost-ofgoods sold
expense
EXERCISE 2-25 (CONTINUED)
Using this formula, we can find the missing amounts as follows:
I
Beginning inventory of finished goods ............... $ 21,000*
Add: Cost of goods manufactured ....................... 104,750
Subtract: Ending inventory of finished goods ....
24,500
Cost of goods sold ................................................ $101,250
Case
II
$ 18,000
142,500
12,000
$148,500*
III
$ 3,500
159,000*
10,500
$152,000
*Amount missing in exercise.
EXERCISE 2-26 (10 MINUTES)
1.
Hours worked ........................................................................................................
Wage rate ..............................................................................................................
Total compensation ..............................................................................................
2.
Classification:
Direct labor (36 hours  $16) ..........................................................................
Overhead (idle time: 4 hours  $16) ..............................................................
Total compensation ........................................................................................
40
 $ 16
$640
$576
64
$640
EXERCISE 2-27 (10 MINUTES)
1.
Regular wages (40 hours  $17) .......................................................................
Overtime wages (3 hours  $22).......................................................................
Total compensation ...........................................................................................
2.
Overtime hours ..................................................................................................
Overtime premium per hour ($22  $17) ..........................................................
Total overtime premium ....................................................................................
3.
Classification:
Direct labor (43 hours  $17) .......................................................................
Overhead (overtime premium: 3 hours  $5) .............................................
Total compensation .....................................................................................
EXERCISE 2-28 (25 MINUTES)
1.
ALHAMBRA ALUMINUM COMPANY
$ 680
66
$ 746
3 hrs.
$ 5
$ 15
$ 731
15
$ 746
SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X1
Direct material:
Raw-material inventory, January 1 ........................................
Add: Purchases of raw material .............................................
Raw material available for use ...............................................
Deduct: Raw-material inventory, December 31.....................
Raw material used ...................................................................
Direct labor....................................................................................
Manufacturing overhead:
Indirect material ......................................................................
Indirect labor ...........................................................................
Depreciation on plant and equipment ...................................
Utilities .....................................................................................
Other ........................................................................................
Total manufacturing overhead ...............................................
Total manufacturing costs ...........................................................
Add: Work-in-process inventory, January 1 ...............................
Subtotal .........................................................................................
Deduct: Work-in-process inventory, December 31 ....................
Cost of goods manufactured .......................................................
2.
$ 55,000
240,000
$295,000
75,000
$220,000
420,000
$ 12,000
22,000
110,000
23,000
35,000
202,000
$842,000
110,000
$952,000
125,000
$827,000
ALHAMBRA ALUMINUM COMPANY
SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X1
Finished-goods inventory, January 1 ...........................................................
Add: Cost of goods manufactured ................................................................
Cost of goods available for sale ....................................................................
Deduct: Finished-goods inventory, December 31........................................
Cost of goods sold .........................................................................................
$160,000
827,000
$987,000
155,000
$832,000
EXERCISE 2-28 (CONTINUED)
3.
ALHAMBRA ALUMINUM COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X1
Sales revenue .................................................................................................
Less: Cost of goods sold ...............................................................................
Gross margin ..................................................................................................
Selling and administrative expenses ............................................................
Income before taxes .......................................................................................
Income tax expense (at 35%) .........................................................................
Net income ......................................................................................................
$1,210,000
832,000
$ 378,000
105,000
$ 273,000
95,550
$ 177,450
4.
The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is
available on your Instructors CD and on the Hilton, 8e website: www.mhhe.com/hilton8e
EXERCISE 2-30 (15 MINUTES)
Number of Muffler Replacements
600
700
800
Total costs:
Fixed costs ..................................................................
Variable costs ..............................................................
Total costs .............................................................
Cost per muffler replacement:
Fixed cost ....................................................................
Variable cost ................................................................
Total cost per muffler replacement ......................
*Rounded.
(a) $56,000
(c) 24,000
(e) $80,000
$56,000
28,000
$84,000
(b) $56,000
(d) 32,000
(f) $88,000
(g) $ 93.33 * (h) $ 80
(j) 40.00
(k)
40
(m) $133.33
(n) $120
(i) $ 70
(l)
40
(o) $110
EXERCISE 2-30 (CONTINUED)
Explanatory Notes:
(a)
Total fixed costs do not vary with activity.
(c)
Variable cost per replacement = $28,000/700 = $40
Total variable cost for 600 replacements = $40  600 = $24,000
(g)
Fixed cost per replacement = $56,000/600 = $93.33 (rounded)
(j )
Variable cost per replacement = $24,000/600 = $40
EXERCISE 2-31 (5 MINUTES)
Thomas Cleverly’s expenditure is a sunk cost. It is irrelevant to any future decision
Cleverly may make about the land.
EXERCISE 2-32 (15 MINUTES)
1.
Phone bill, January: $200 + ($.15  7,000) ........................................
Phone bill, February: $200 + ($.15  8,000) .......................................
$1,250
$1,400
2.
Cost per call, January: $1,250/7000 ...................................................
Cost per call, February: $1,400/8000 .................................................
$ .179 (rounded)
$ .175
3.
Fixed component, January .................................................................
Variable component, January: $.15  7,000 ......................................
Total .....................................................................................................
$ 200
1,050
$1,250
4.
Since each phone call costs $.15, the marginal cost of making the 7,001st call is $.15.
5.
The average cost of a phone call in January (rounded) is $.179 ($1,250/7,000).
EXERCISE 2-33 (5 MINUTES)
1.
The $12,500 is the opportunity cost associated with using the computer in the
Department of Education for work in the governor's office.
2.
The $12,500 leasing cost should be assigned to the governor's office. It was
incurred as a result of activity in that office.
EXERCISE 2-34 (10 MINUTES)
1.
Your decision to see the game really cost you $100, the amount forgone when you
refused to sell the ticket. A convenient way to think about this is as follows: You
could have sold the ticket for $100, thereby resulting in a profit on the deal of $25
($100 sales proceeds minus $75 out-of-pocket purchase cost). Instead, you went
to the game, which left you relieved of your $75 out-of-pocket cost. The difference
between the $75 reduction in your wealth and the $25 profit you could have had is
$100. Thus, $100 is the true cost of going to the game.
2.
The $100 is an opportunity cost. At the time you made the decision to attend the
game, the $75 you actually had paid for the ticket is a sunk cost. It is not relevant
to any future decision.
EXERCISE 2-35 (5 MINUTES)
Annual cost using European component: $9,100  15 ............................................
Annual cost using Part A200: ($4,900 + $650)  15 ..................................................
Annual differential cost ..............................................................................................
$136,500
83,250
$ 53,250
EXERCISE 2-36 (15 MINUTES)
1.
The marginal cost of a flight would include the aircraft fuel, wages of the flight
crew and airport maintenance personnel, and the food and beverages consumed
by the passengers and crew.
2.
The marginal cost would include the additional wages or commissions earned by
the agency employees and the additional electricity used for light, heat, and
computer equipment.
3.
The marginal cost of the skis would include the direct material. It is unlikely that
labor and other costs would change with the addition of only one more product
unit.
EXERCISE 2-36 (CONTINUED)
4.
The marginal cost would include any food and beverages consumed by the
passenger and perhaps an imperceptible increase in fuel costs.
5.
In most cases, only the cost of the food and beverage consumed by the customer
would be a marginal cost. It is unlikely that the restaurant would need to employ
additional service personnel, dishwashers, and so on.
solutions to Problems
PROBLEM 2-37 (25 MINUTES)
1.
a.
Total prime costs:
Direct material ...................................................................................
Direct labor:
Wages ............................................................................................
Fringe benefits ..............................................................................
Total prime costs ..............................................................................
b.
$
57,500
70,000
22,500
50,000
15,000
4,500
27,500
20,000
$ 267,000
Total conversion costs:
Direct labor ($242,500 + $47,500) .....................................................
Manufacturing overhead ..................................................................
Total conversion costs .....................................................................
d.
242,500
47,500
$ 1,340,000
Total manufacturing overhead:
Depreciation on factory building .....................................................
Indirect labor: wages ........................................................................
Production supervisor's salary ........................................................
Service department costs ................................................................
Indirect labor: fringe benefits...........................................................
Fringe benefits for production supervisor ......................................
Total overtime premiums paid .........................................................
Cost of idle time: production employees ........................................
Total manufacturing overhead .........................................................
c.
$ 1,050,000
$ 290,000
267,000
$ 557,000
Total product costs:
Direct material ...................................................................................
Direct labor ........................................................................................
Manufacturing overhead ..................................................................
Total product costs ...........................................................................
$1,050,000
290,000
267,000
$1,607,000
PROBLEM 2-37 (CONTINUED)
e.
Total period costs:
Advertising expense .........................................................................
Administrative costs .........................................................................
Rental of office space for sales personnel .....................................
Sales commissions ...........................................................................
Product promotion costs .................................................................
Total period costs .............................................................................
2.
$
49,500
75,000
7,500
2,500
5,000
$ 139,500
The $7,500 in rental cost for sales office space is an opportunity cost. It measures
the opportunity cost of using the former sales office space for raw-material
storage.
Solutions to Cases
CASE 2-59 (50 MINUTES)
1.
a. The previous purchase price of the endor on hand, $10.00 per gallon, and the
average cost of the endor inventory, $9.50 per gallon, are sunk costs. These
costs were incurred in the past and will have no impact on future costs. They
cannot be changed by any future action and are irrelevant to any future
decision. Although the current price of endor is $11.00 per gallon, no endor
will be purchased at this price. Thus, it too is irrelevant to the current special
order. If the order is accepted, the required 900 gallons of endor will be
replaced at a cost of $11.50 per gallon. Therefore, the real cost of endor for the
special order is $10,350 (900  $11.50).
b. The $40,000 paid by Alderon for its stock of tatooine is a sunk cost. It was
incurred in the past and is irrelevant to any future decision. The current
market price of $22 per kilogram is irrelevant, since no more tatooine will be
purchased. If the special order is accepted, Alderon will use 1,400 kilograms of
its tatooine stock, thereby losing the opportunity to sell its entire 1,900kilogram stock for $28,000. Thus, the $28,000 is an opportunity cost of using
the tatooine in production instead of selling it to Solo Industries. Moreover, if
Alderon uses 1,400 kilograms of tatooine in production, it will have to pay
$2,000 for its remaining 500 kilograms to be disposed of at a hazardous waste
facility. This $2,000 disposal cost is an out-of-pocket cost.
The real cost of using the tatooine in the special order is $30,000 ($28,000
opportunity cost + $2,000 out-of-pocket cost).
CASE 2-59 (CONTINUED)
2.
a.
CopyFast Company would be indifferent to acquiring either the small-volume
copier, 1500S, or the medium-volume copier, 1500M, at the point where the costs
for 1500S and 1500M are equal. This point may be calculated using the following
formula, where X equals the number of copies:
(Variable costS  X) + fixed costS = (variable costM  X) + fixed costM
1500S
1500M
$.07X + $4,000 = $.045X + $5,500
$.025X = $1,500
X = 60,000 copies
The conclusion is that the company would be indifferent to acquiring either the
1500S or 1500M machine at an annual volume of 60,000 copies.
b.
A decision rule for selecting the most profitable copier, when the volume can be
estimated, would establish the points where management is indifferent to each
machine. The volume where the costs are equal between alternatives can be
calculated using the following formula, where X equals the number of copies:
(Variable costS  X) + fixed costS = (variable costM  X) + fixed costM
For the 1500S machine compared to the 1500M machine:
1500S
1500M
$.07X + $4,000 = $.045X + $5,500
$.025X = $1,500
X = 60,000 copies
For the 1500M machine compared to the 1500L machine:
1500M
1500L
$.045X + $5,500 = $.025X + $10,000
$.02X = $4,500
X = 225,000 copies
CASE 2-59 (CONTINUED)
The decision rule is to select the alternative as shown in the following chart.
Anticipated Annual Volume
060,000
60,000225,000
225,000 and higher
3.
Optimal Model Choice
1500S
1500M
1500L
The projected donations from the wildlife show amount to $200,000 (10 percent of
the TV audience at $20,000 per 1 percent of the viewership). The projected
donations from the manufacturing series amount to $150,000 (15 percent of the
TV audience at $10,000 per 1 percent of the viewership). Therefore, the differential
revenue is $50,000, with the advantage going to the wildlife show. However, if the
manufacturing show is aired, the station will be able to sell the wildlife show to
network TV. Therefore, airing the wildlife show will result in the incurrence of a
$50,000 opportunity cost.
The conclusion, then, is that the station's management should be indifferent
between the two shows, since each would generate revenue of $200,000.
Wildlife show (10  $20,000)
$200,000 donation
Manufacturing show (15  $10,000)
Manufacturing show (sell wildlife show)
$150,000 donation
50,000 sales proceeds
$200,000 total revenue