# Average unit contribution margin = \$1.50

Class Problem Solutions for Exam 3

M14-14 a. 4 f. 9 k. 8 or 12 (Slope of total costs increases.) b. 2 c. 7 d. 5 e. 11 g. 6 h. 1 i. 7 j. 2 l. 3 m. 10

E14-20 a.

Variable costs = (\$8,500  \$4,300)/(400  100)

= \$14 per mile

Fixed costs or

= \$8,500  \$14(400)

= \$4,300  \$14(100)

=

=

\$2,900

\$2,900

Monthly labor = \$2,900 + \$14 X costs where: X = miles mowed and cleaned b.

\$10,000

\$8,000

Total labor costs

\$6,000

\$4,000

\$2,000

\$0

0

Representative values

100 200 300

Miles mowed and cleaned

400

Variable costs = (\$8,500

\$4,500)/(400

200)

= \$20 per mile

Fixed costs or

=

=

\$8,500

\$4,500

\$20(400)

\$20(200)

=

=

\$500

\$500

Monthly labor = \$500 + \$20 X costs where: X = miles mowed and cleaned

E14-20 (cont.) c. The equation used in (a) is influenced by the unusually high costs incurred in October when only 100 miles were mowed and cleaned. The October activity is low, perhaps due to the reduced growth of grass and less highway litter after the end of the summer vacation season. Employees may have had extra time and may have paced their work to fill the available time. The effect of including the October observation in the high-low cost estimate is to understate the variable costs and to overstate the fixed costs.

The effect of basing a cost-estimating equation on this observation is to overstate the variable costs and to understate the fixed costs. d. The effect of a 7 percent wage increase is to increase the amount of each cost element by 7 percent.

Total costs = \$535 + \$21.40X

M15-15 a.

Selling price

Variable costs

Contribution margin

\$5.00 per hot dog

4.50 per hot dog

\$0.50

Break-even point = \$250,000/\$0.50 = 500,000 hot dogs b.

\$5,000

Total revenues and

Total costs

(000)

\$4,000

\$3,000

\$2,000

\$1,000

\$0

0 250 500 750 1,000

Unit sales (000)

Note: The three lines for variable costs, total costs, and revenues are difficult to distinguish because of the scale of operations.

M15-15 (cont.) c.

Total

Profit

or

(Loss)

(000)

\$350

\$250

\$150

\$50

(\$50)

(\$150)

(\$250)

(\$350)

0 250 500 750 1,000

Total units (000) d.

It is easier to determine profit or loss at any volume with a profit-volume graph than with a cost-volumeprofit graph. This is especially true in situations, such as this, where the unit contribution margin is small and the scale of activity is large. Although a profit-volume graph provides a clear illustration of profits, it does not illustrate revenues and costs. Hence, a manager using a profit-volume graph does not see the relationship between revenues, costs, and profits.

M15-16

Product

A

B

C

Unit

Contribution Mix

Margin

\$1

2

3

Sales

(units)*

6

3

1

10

*B = 3C and A = 2B, so A = 3

2 = 6

Average unit contribution margin = \$1.50

Weight

\$1

6/10 = \$0.60

2

3/10 = 0.60

3

1/10 = 0.30

\$1.50

Break-even unit sales volume = \$112,500/\$1.50 = 75,000 units

Units of A at break-even = 75,000

6/10 = 45,000

E15-17 a.

For the Month of May 2008

Sales (6,000  \$50) \$300,000

Less variable costs:

Direct materials (6,000  \$5)

Direct labor (6,000  \$10)

\$ 30,000

60,000

Factory overhead (6,000  \$10) 60,000

\$5) 30,000 (180,000)

Contribution margin

Less fixed costs:

120,000

Profit b.

Manitoba Company

Contribution Income Statement

Fixed costs =

\$60,000

20,000 (60,000)

\$ 60,000

\$350,000

\$300,000

\$250,000

Total revenues and

Total costs

\$200,000

\$150,000

\$100,000

\$50,000

\$0

0

Profit =

\$60,000

Variable costs =

\$180,000

2,000 4,000 6,000 8,000 10,000

Unit sales

Note: The instructor might extend this assignment in class, computing the break-even point, the margin of safety, and the impact on profits of a change in sales.

E15-18 a.

Sales

Variable costs

Contribution margin

\$750,000

(412,500)

\$337,500

Contribution margin ratio = \$337,500/\$750,000 = 0.45

Annual break-even dollar sales volume = \$210,000/0.45 = \$466,667 b.

Annual margin of safety in dollars:

Sales

Break-even sales dollars

\$750,000

(466,667)

Margin of safety \$283,333 c.

To determine the variable and total cost lines, it is necessary to compute the variable cost ratio:

Variable = Variable costs = \$412,500 = 0.55

cost ratio Sales \$750,000

At a volume of \$1,000,000 sales dollars, variable costs are \$550,000.

\$1,000,000

\$750,000

Profit =

\$127,500

Fixed costs =

\$210,000

\$500,000

\$250,000

Variable costs =

\$412,500

\$0

\$0 \$250,000 \$500,000 \$750,000 \$1,000,000 \$1,250,000

Total Revenues d.

Revised annual break-even dollar sales:

(\$210,000 + \$35,000)/0.45 = \$544,444

M16-17

The current production volume is 100,000 units (\$4,400,000/\$44).

The variable production costs are (\$3,200,000

\$800,000)/100,000 = \$24.

Hence, at a unit selling price of \$30, the order provides a contribution of \$6 per unit and a total contribution of \$75,000 (\$6

12,500).

Even if it is profitable, the large sale to the hospital supply company may take away some of the attention of management from regular customers, and it may upset regular customers who learn of the lower price, resulting in pressure to lower overall prices.

E16-22

Cost to make:

Variable costs (10,000 units

\$24.00) \$240,000

Fixed costs (10,000 units  \$5.00)

Rent income (opportunity cost)

\$32.00)

50,000

25,000 \$315,000

320,000

\$ (5,000)

Making has an advantage of \$5,000.

E16-25

Information is provided about the cost of raw material D and the cost of processing this material into E and

F. However, students should recognize that these are joint costs incurred prior to the decision point.

Consequently, they are irrelevant to a decision to sell product F or to process it further.

Revenues from G \$12

Costs:

Opportunity cost of not selling F

Product F should be processed further into product G.

\$ 4

5 (9)

\$ 3

E16-26 a.

X Y Z

Unit contribution margin \$ 60 \$ 50 \$ 30

Labor hours per unit

4

2

4

Contribution per labor hour \$ 15 \$ 25 \$7.5

1. Product Z has the highest unit selling price.

2. Product X has the highest unit contribution margin.

3. Product Y has the highest contribution per labor hour.

The weekly contribution obtained with the use of each criteria is:

Highest Highest Highest

Unit Selling Contribution Contribution

Labor hours available

Labor hours per unit

Weekly production

Unit contribution margin

Weekly contribution

Price

Z

200

4

50

\$30

\$1,500 per Unit per Labor Hour

X

200

4

50

\$60

\$3,000

Y

200

2

100

\$50

\$5,000 b. To achieve short-run profit maximization, a for-profit organization should allocate limited resources in a manner that maximizes the contribution per unit of constraining factor.

E16-26 (cont.) c. The decision to produce 10 units of Z will result in a weekly opportunity cost of \$1,000. This is the net benefits that would have been derived from producing 20 units of Y.

Labor hours to produce 10 units of Z (10 units

4 hours per unit)

Labor hours per unit of Y

Required reduction in the production of Y

Unit contribution margin for Y

Opportunity cost

40

2

20

\$50

\$1,000

Producing 10 units of Z will reduce profits by \$700 from their maximum possible amount.

Contribution from Z (10 units

\$30)

Opportunity cost

Net disadvantage of producing 10 units of Z

\$ 300

(1,000)

\$ (700) d.

First, there may not be enough demand to allocate all limited resources to the most profitable product.

Second, even if there is sufficient demand, it may be advisable to produce and sell some less profitable products for the sake of offering a full line of products and giving customers alternatives. Third, less profitable products may be offered if they are complimentary to the more profitable products. In some cases, what appears to be the main and most profitable product is actually the secondary product in terms of profits. For example, The warehouse retailers, such as Sam’s and Costco, essentially break even on the merchandise they sell in their stores, and make most of their profit on membership fees. Similarly, some retailers earn more profit on warranty programs sold than on the products for which the warranties are offered.

E17-24 a. The basic accounting problem that Arton and Yount are arguing about stems from the use of actual overhead rates when there are wide fluctuations in the volume of activity. In periods of high activity, fixed overhead is spread over a large number of units, producing a relatively low per-unit cost assignment. In periods of low activity, fixed overhead is spread over a small number of units, producing a relatively high per-unit cost assignment. Daytona should use a predetermined overhead rate to avoid variations in costs assigned to identical products because of seasonal variations in manufacturing overhead.

In addition to the accounting problem, Daytona Parts Company also has a pricing problem. Cost-based pricing should be used as a guideline, not an inflexible rule. Management should adjust cost-based prices in response to market conditions. If competitors are lowering their prices, Daytona should consider doing the same. Likewise, if competitors are raising their prices, Daytona should consider the desirability of a similar action. In any case, management should strive to avoid frequent price changes.

Finally, if the market for Daytona’s products is highly competitive, management should use the market price as a starting point to determine allowable product costs, rather than basing prices on costs. This approach, known as target costing, is discussed in Module 22. b.

Cost estimating equation for total manufacturing overhead:

Variable costs = (\$237,500

\$200,000)/(27,500

20,000) = \$5.00

Fixed costs = \$200,000

(20,000

\$5.00) = \$100,000

Total costs = \$100,000 + \$5 X c.

Predetermined rate for 2009:

Predetermined = \$100,000 + \$5(25,000) = \$9.00 per direct labor hour

Overapplied manufacturing overhead at the end of 2009 is \$20,000:

\$9) (270,000)

Written off to Cost of Goods Sold.

Allocated among Work-in-Process, Finished Goods Inventory, and Cost of Goods Sold.

E17-25 a.

Raw Materials Inventory Accounts Payable

Beginning Balance 9,000 40,000 (2) 61,000 (1)

(1) 58,000

Wages Payable

31,800 (3)

Work-in-Process Inventory

Beginning Balance 5,000 85,000 (8)

(2) 40,000

(3) 27,000

(7) 22,500

Other Payables

3,600 (6)

Ending Balance 9,500 Manufacturing Supplies

Beginning Balance 500 3,000 (4)

Finished Goods Inventory (1) 3,000

Beginning Balance 25,000 96,000 (9)

Ending Balance 14,000 Beginning Balance -0- 22,500 (7)

Cost of Goods Sold

(3) 4,800

(4) 3,000

(9) 96,000 (5) 15,000

(6) 3,600

Accumulated Depreciation-

Factory Assets

15,000 (5) b.

The balances in Work-in-Process Inventory and Finished Goods Inventory are the amounts in their respective “T” accounts at the end of November: Work-in-Process Inventory, \$9,500, and Finished Goods

Inventory, \$14,000.

M18-16

Activity cost calculations:

Machine setup cost = \$600,000

12,000 setup hours = \$50 per setup hour

Material handling cost = \$120,000

2,000 tons = \$60 per ton of materials

Machine operation = \$500,000

10,000 = \$50 per machine hour

Product costs:

Direct materials

Direct labor

Machine setups

(3 setup hours

\$50)

Material handling

(12.5 tons

\$60)

Machine operation

(4 hours

\$50)

Total job costs

Units produced

Cost per unit produced

M21-19

C23 Cams

\$30,000

5,000

150

750

200

\$36,100

500

\$ 72.20

U2 Shafts

(7 setup hours

\$50)

(8 tons

\$60)

(5 machine hours

\$50)

\$20,000

10,000

350

480

250

\$31,080

300

\$103.60

The Music Shop

Purchases Budget

January - May, 2010

January February March April May

Purchase units:

Budgeted sales 130,000

Plus desired end. inv.* 64,000

160,000 200,000 210,000 180,000

80,000 84,000 72,000 96,000

Total inventory needs 194,000

Less beginning inv. (40,000)

240,000

(64,000)

284,000

(80,000)

282,000 276,000

(84,000) (72,000)

Purchases 154,000 176,000 204,000 198,000 204,000

*For example, 40% of the following month's sales, 240,000 × 0.40 for May.

Purchase dollars

(\$5 per unit):

January February March April May

Budgeted cost of. sales \$650,000

Plus desired end. inv.* 320,000

Purchase dollars

\$ 800,000 \$1,000,000 \$1,050,000 \$ 900,000

400,000 420,000 360,000 480,000

Total inventory needs 970,000

Less beginning inv. (200,000)

1,200,000 1,420,000

(320,000) (400,000)

1,410,000 1,380,000

(420,000) (360,000)

\$770,000 \$ 880,000 \$1,020,000 \$ 990,000 \$1,020,000

*For example, 40% of the following month's sales, \$1,050,000 x 0.40 for March.

M2120

Wilson's Retail Company

Cash Budgets

February, March, and April

February March April

Cash balance, beginning

Cash receipts:

\$ 30,000 \$ 4,000 \$ (7,000)

60% of current month's sales

40% of previous month's sales

135,000 120,000 105,000

120,000 90,000 80,000

255,000 210,000 185,000

285,000 214,000 178,000

Total receipts

Cash available

Budgeted disbursements:

80% of previous

month's sales

Operating expenses

Total disbursements

Cash balance, ending

240,000

41,000

180,000

41,000

160,000

41,000

(281,000) (221,000) (201,000)

\$ 4,000 \$ (7,000) \$ (23,000)

M21-21

Wooly Rug Company

Production Budget

For the Months of July, August, & September, 2009

Budgeted sales - sq. yards

July

200,000

August September October

180,000 150,000 160,000

Plus desired ending inventory* 72,000 60,000 64,000

Total inventory requirements 272,000 240,000 214,000

Less beginning inventory (100,000) (72,000) (60,000)

Budgeted production – sq. yards 172,000 168,000 154,000

*40 percent following month’s sales

Wooly Rug Company

Purchases Budget

For the Months of July & August, 2009

Current needs for production

July August September

(5 lb. per sq. yard)

Plus desired ending inventory*

Total requirements

Less beginning inventory

860,000

252,000

(400,000)

840,000

321,000

1,112,000 1,161,000

(252,000)

770,000

Purchases in pounds 712,000 909,000

*30 percent of following month’s production requirements.

P22-29 a.

Materials price variance (usage basis) = AQ × (AP

SP)

= 7,000 yds. × (\$4.90 

\$5.00)

= 7,000 yds. × \$0.10

= \$700 F or

Materials price variance (purchase basis) = AQ × (AP 

SP)

= 9,000 yds. × (\$4.90

\$5.00)

= 9,000 yds. × \$0.10

= \$900 F

Materials quantity variance = SP × (AQ - SQ)

= \$5.00 × (7,000 

6,800*)

= \$5.00 × 200

= \$1,000 U

*SQ = 1,700 tents × 4 yards per tent = 6,800

Labor rate variance = AH × (AR 

SR)

= 3,600 × (\$12.50 

\$12.00)

= 3,600 × \$0.50

= \$1,800 U

Labor efficiency variance = SR × (AH

SH)

= \$12 × (3,600

3,400*)

= \$12 × 200

= \$2,400 U

*SH = 1,700 tents × 2 labor hours per tent = 3,400

P22-29 (cont.) b.

Direct materials price variance: Buying in larger quantities, resulting in discounts; buying lower quality goods than standard; using competitive bids.

Direct materials quantity variance: Inefficient workers on machines; old, inefficient machines; inferior raw materials.

Labor rate variance: Higher paid workers than in budget, unexpected wage increases, using different skilled workers than in budget.

Labor efficiency variance: Unskilled workers, using inferior quality materials, new workers.

Note: A possible explanation for any of the variances could be incorrect standards. c.

Standard Cost Units Total

Direct materials

Direct labor

per Unit Produced Standard Cost

\$20 ×  

1,700 = \$34,000

24* × 1,700 = 40,800

Total standard variable cost

for 1,700 tents

*(2 hours × \$12)

\$74,800

P22-30 a.

Actual Cost Standard Cost

Direct materials (\$2,378/1,000 bags) \$2.378

(8,000 lbs./1,000 bags × \$0.30)

Direct labor (\$450/1,000 bags) 0.450

\$2.400

(48 hrs./1,000 bags × \$8.50) 0.408

(16 hrs./1,000 bags × \$10.00)

0.225

0.160

\$2.968 Total variable costs per bag \$3.053 b.

Materials price variance = Actual cost

AQ × SP

= \$2,378

(8,300 × \$0.30)

= \$2,378

\$2,490

= \$112 F

Materials quantity variance = SP × (AQ 

SQ)

= \$0.30 × (8,300

8,000)

= \$0.30 × 300

= \$90 U

Labor rate variance = Actual costs

AH × SR

= \$450

(45 × \$8.50)

= \$450

\$382.50

= \$67.50 U

Labor efficiency variance = SR × (AH

SH)

= \$8.50 × (45

48)

= \$25.50 F

Variable overhead spending variance = Actual cost

(AH × SR)

= \$225

(18 hrs. × \$10)

= \$225

\$180

= \$45 U

Variable overhead efficiency variance = SR × (AH

SH)

= \$10 × (18 

16)

= \$20 U

P22-30 (cont.) c.

Materials price variance: materials quality below standard, purchased in larger than standard quantities, bargain purchases.

Materials quantity variance: material quality below standard, higher than normal waste, lower-skilled labor, inefficient machinery.

Labor rate variance: use of higher-skilled workers, rate changes not reflected in standards.

Labor efficiency variance: use of high-quality materials, higher machine efficiency, higher worker efficiency.

Variable overhead spending variance: excessive prices paid for variable overhead items and/or excessive consumption of variable overhead items.

Variable overhead efficiency variance: inefficient machinery resulting from poor maintenance or inefficient use of machinery by workers.

Note: A possible explanation for any of the variances could be incorrect standards.