ACC 3123 / EXAM 2 / FALL 2010
(VERSION A/B/C)
Q ANSWER Q ANSWER
B
$23.50/UNIT
1 PRODUCT
9
(+$60,000)
2 $98,823.5294
10 BUY (+$10,000)
BRUSHES
3 $67,741.9355
11 320,000
+ 0 COMBS)
4 $20,800
12 DECREASE
($227,000)
5 $3/UNIT
13 $52.00
6 $40,000
14 $96,429
$240,000
$62,768
7
15
DECREASE
8 ($155,000)
Q 1. Ritz Company makes three products from a joint input that have the following information:
Units
Produced
50,000
30,000
45,000
Product A
Product B
Product C
Sales Value per
unit at split off
$10
$8
$7
Total Additional
processing costs
$400,000
$300,000
$180,000
Sales value per unit after
additional processing
$15
$20
$10.50
The joint cost incurred to produce the three products to the split off point is $600,000. Which
products should be processed further?
SOLUTION:
Units
Produced
Product A
Sales
Value per
unit at
split off
50,000
$10
Product B
Product C
30,000
45,000
Q 2-3:
$8
$7
Total
Additional
processing
costs
$400,000
Sales value per
PROCESS
unit after
FURTHER
additional
processing
$15 ($150,000)
$300,000
$20  $60,000
$180,000
$10.50 ($22,500)
IOWA INDUSTRIES
Iowa Industries makes corn oil and corn meal from corn in a joint process. The corn oil can be
further processed into margarine, and the corn meal can be further processed into corn muffin mix.
The joint cost incurred to process the corn to the split off point was $140,000. Information on the
quantities, value, and further processing costs for the joint product appears below:
Corn Oil
Corn Meal
Quantity
Sales value at
split off
Estimated further
processing cost.
800,000 lbs.
1,500,000 lbs.
$0.30/lb.
$0.15/lb.
$0.15/lb.
$0.45/lb.
Final Sales
Value after
processing
$0.60/lb.
$0.55/lb.
Q2.
Assume that the joint cost is allocated to the products based on the approximate net
realizable value of each product. How much joint cost should be assigned to the corn oil?
Quantity
ADDL
COSTS
FINAL
VALUE
Corn
Oil
800,000
$0.15
$0.60
Corn
Meal
1,500,000
$0.45
APPX NRV
RATIO
ALLOCATION
$360,000.00
0.70588235
$98,823.5294
$150,000.00
$510,000.00
0.29411765
$41,176.4706
$0.55
Q 3.
Assume that the joint cost is allocated to the products based on the relative sales value at
split-off of each product. How much joint cost should be assigned to the corn meal?
Quantity
AT
SPLIT OFF
VALUE
AT SPLIT
OFF
Corn
Oil
800,000
$0.30 $240,000.00
Corn
Meal
1,500,000
$0.15 $225,000.00
RATIO
ALLOCATION
0.516129032
$72,258.0645
0.483870968
$67,741.9355
$465,000.00
Q 4: Value Pro produces and sells a single product. Information on its costs follow:
Variable costs:
SG&A
$2 per unit
Production
$4 per unit
Fixed costs:
SG&A
$12,000 per year
Production
$15,000 per year
In the upcoming year, Value Pro estimates that it will produce and sell 4,000 units. The variable
costs per unit and the total fixed costs are expected to be the same as in the current year.
However, it anticipates a sales price of $16 per unit. What is Value Pro's projected margin of
safety (in dollars) for the coming year?
Profit at 4,000 units
Gross Sales = $16 * 4,000 units = $64,000
Contribution Margin = $(16 - 6) = $10/unit
Breakeven
10*x - $27,000 = $0  x=2,700 units
Break Even Sales = 2,700*16=$43,200
$(64,000 - 43,200) = $20,800
Q 5. Meixner Manufacturing incurs annual fixed costs of $250,000 in producing and selling a single
product. Estimated unit sales are 125,000. An after-tax income of $75,000 is desired by
management. The company projects its income tax rate at 40 percent. What is the maximum
amount that Meixner can expend for variable costs per unit and still meet its profit objective if
the sales price per unit is estimated at $6?
Before Tax Income: $75,000 / 0.60 = $125,000
Fixed Costs:
250,000
Contribution Margin:
$375,000
Projected Sales
less: Contribution Margin
Variable Costs
$375,000 / 125,000 units
$750,000
375,000
$375,000
$3/unit
Q 6. Adams Company uses 10,000 units of a part in its production process. The costs to make a part
are: direct material, $12; direct labor, $25; variable overhead, $13; and applied fixed overhead,
$30. Adams has received a quote of $55 from a potential supplier for this part. If Adams buys the
part, 70 percent of the applied fixed overhead would continue. Adams Company would be better
off by $______?
Cost to buy: $55/unit * 10,000 units = $550,000
Cost to manufacture: $(12+25+13+9)= $59/unit
Incremental difference in favor of buying: $4/unit * 10,000 units = $40,000
Q 7. Gamble Company has only 25,000 hours of machine time each month to manufacture its two
products. Product X has a contribution margin of $50, and Product Y has a contribution margin
of $64. Product X requires 5 hours of machine time, and Product Y requires 8 hours of machine
time. If Gamble Company wants to dedicate 80 percent of its machine time to the product that
will provide the most income, the company will have a total contribution margin of
Assume 80% of capacity applied to Product X
X: 20,000 hrs/5 hrs per unit
Y: 5,000 hrs/8 hrs per unit
4,000 units * $50 CM/unit
625 units * $64 CM/unit
Total
$200,000
40,000
$240,000
======
Q 8. Perry Company has 3 divisions: R, S, and T. Division R's income statement shows the following
for the year ended December 31:
Sales
Cost of goods sold
Gross profit
Selling expenses
Administrative expenses
Net loss
$1,000,000
(800,000)
$ 200,000
$100,000
250,000
(350,000)
$ (150,000)
Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are
avoidable if the division is closed. All of the selling expenses relate to the division and would be
eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied
from corporate costs (unavoidable). If Division R were eliminated, how would Perry’s income
change?
Sales foregone
COGS avoided
Variable
Fixed
Selling Expense Avoided
Administrative Expense Avoided
Decrease in income
$(1,000,000)
$600,000
120,000
720,000
100,000
25,000
$(155,000)
=========
Q 9. Pratt Company is currently operating at a loss of $15,000. The sales manager has received a
special order for 5,000 units of product, which normally sells for $35 per unit. Costs associated
with the product are: direct material, $6; direct labor, $10; variable overhead, $3; applied fixed
overhead, $4; and variable selling expenses, $2. The special order would allow the use of a
slightly lower grade of direct material, thereby lowering the price per unit by $1.50 and selling
expenses would be decreased by $1. If Pratt wants this special order to increase the total net
income for the firm to $10,000, what sales price must be quoted for each of the 5,000 units?
In order to increase income to $10,000, there must be an increase of $25,000 or $5 per unit.
Direct materials
Direct Labor
Variable Overhead
Variable Selling Exp
Production Costs
Additional profit per unit
Sales price/unit
$ 4.50
10.00
3.00
1.00
$18.50
5.00
$23.50
=====
Q 10. West Company produces a part that has the following costs per unit:
Direct material
Direct labor
Variable overhead
Fixed overhead
Total
$8
3
1
5
$17
Zest Corporation can provide the part to West for $19 per unit. West Company has determined
that 60 percent of its fixed overhead would continue if it purchased the part. However, if West no
longer produces the part, it can rent that portion of the plant facilities for $60,000 per year. West
Company currently produces 10,000 parts per year. Which alternative is preferable and by what
margin?
Purchase price from Zest
Rent Revenue Received
Variable Costs Avoided
Fixed Overhead Avoided
Difference in Favor of Buying
$(190,000)
60,000
120,000
20,000
$ 10,000
Q 11. Glamorous Grooming Corporation makes and sells brushes and combs. It can sell all of either
product it can make. The following data are pertinent to each respective product:
Units of output per machine hour
Selling price per unit
Product cost per unit
Direct material
Direct labor
Variable overhead
Allocated Fixed Costs
Brushes
8
$12.00
Combs
20
$4.00
$1.00
2.00
0.50
$8.00
$1.20
0.10
0.05
$1.00
The company has 40,000 machine hours available for production. What sales mix will maximize
profits?
Brushes have a contribution margin of $8.50 per unit and 8*8.50=$68/hour; combs
have a contribution margin of $2.65 per unit and 20*2.65=$53/hour. Brushes have
bigger CM per hour (constrained resource).
The combination of 320,000 brushes (=8*40,000) and 0 combs provides the highest
profit.
Q 12. Green Industries has two sales territories-East and West. Financial information for the two
territories is presented below:
Sales
Direct costs:
Variable
Fixed
Allocated common costs
Net income (loss)
East
$980,000
West
$750,000
(343,000)
(450,000)
(275,000)
$(88,000)
(225,000)
(325,000)
(175,000)
$ 25,000
Because the company is in a start-up stage, corporate management feels that the East sales
territory is creating too much of a cash-drain on the company and it should be eliminated. If the
East territory is discontinued, one sales manager (whose salary is $40,000 per year) will be
relocated to the West territory. By how much would Green's income change if the East territory
is eliminated?
Sales foregone in East
Variable costs avoided
Fixed costs avoided
Decrease in income from
eliminating East territory
$(980,000)
343,000
410,000
$(227,000)
========
Q13: Jones Corp. has a capacity to produce 40,000 units. Its product sells for $50 per unit and the
variable costs incurred in manufacturing and selling the product are as follows on a per unit
basis: Direct materials = $10; Direct labor = $20; Variable manufacturing OH = $5; Sales
commission = $3. Annual fixed manufacturing OH is $500,000 and annual fixed S G & A costs
are $200,000. A customer has proposed a special order to purchase 10,000 units. If Jones
accepts the order, the company would not have to pay its sales people their normal commission
of $3 per unit, but the company would incur extra shipping cost of $5 per unit. Assume that
Jones is operating at full capacity and will have to divert sales from regular customers, if the
offer is accepted. What is the minimum price per unit below which Jones should reject the
order?
Ans:
50-3+5=$52
Q14-15: The following information relates to Two-4-One Corp.
Service Departments
Service A
Service B
Production Departments
Production C
Production D
Costs
$70,000
$90,000
$16,000
$21,000
Number of employees is the cost driver for service department A and square-feet is the cost driver
for service department B. The cost drivers are distributed as followed:
Department
A
B
C
D
Square-feet
1,000
1,500
4,000
3,000
Number of employees
5
15
45
25
Q14: How much of the total Service Department Costs will be allocated to Production Department
C (using the direct method).
Q15: How much of the total Service Department Costs will be allocated to Production Department
D (using the step-down method).