Exam 3 Class Problem Solutions
M14-13
a.
b.
c.
d.
e.
8
8
11
1
11
f.
g.
h.
i.
j.
8
7
5
2
3
k. 12
l. 5
m. 4
n. 3
o. 8
E14-20
a. Variable costs
=
=
($9,000  $4,800)/(400  100)
$14 per mile
Fixed costs
or
=
=
$9,000  $14(400)
$4,800  $14(100)
= $3,400
= $3,400
Monthly labor costs = $3,400 + $14X
where: X = miles mowed and cleaned
b.
Representative
values
$10,000
$8,000
Total labor $6,000
cost
$4,000
$2,000
$0
0
200
400
Miles mowed & cleaned
Variable costs
=
=
($9,000  $5,000)/(400  200)
$20 per mile
Fixed costs
=
$9,000  $20(400) = $1,000
600
or
=
$5,000  $20(200) = $1.000
Monthly labor costs = $1,000 + $20X
where: X = miles mowed and cleaned
E14-20 (concluded)
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 = $1,070 + $21.40X
M15-15
a. Selling price
Variable costs
Contribution margin
$5.00 per hot dog
3.50 per hot dog
$1.50
Break-even point
=
$750,000/$1.50
= 500,000 hot dogs
250
1,000
b.
$5,000
Total
revenues
and
Total
costs
(000)
$4,000
$3,000
$2,000
$1,000
$0
0
500
750
Unit sales (000)
c.
Total
Profit
or
(Loss)
(000)
$750
$600
$450
$300
$150
$0
($150) 0
($300)
($450)
($600)
($750)
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-volume-profit 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
Margin
$1
2
3
Sales Mix
(units)*
6
3
1
10
Weight
$1 x 6/10 =
2 x 3/10 =
3 x 1/10 =
$0.60
0.60
0.30
$1.50
*B = 3C and A = 2B, so A = 3 x 2 = 6
Average unit contribution margin = $1.50
Break-even unit sales volume = $112,500/$1.50 = 75,000 units
Units of A at break-even = 75,000 x 6/10 = 45,000
EXERCISES
E15-17
a.
Alberta Company
Contribution Income Statement
For the Month of May 2012
Sales (6,000 x $40)
Less variable costs:
Direct materials (6,000 x $10)
Direct labor (6,000 x $2)
Manufacturing overhead (6,000 x $5)
Selling and administrative (6,000 x $5)
Contribution margin
Less fixed costs:
Manufacturing overhead
Selling and administrative
Profit
$240,000
$ 60,000
12,000
30,000
30,000
40,000
20,000
(132,000)
108,000
(60,000)
$ 48,000
b.
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
(450,000)
$300,000
Contribution margin ratio = $300,000/$750,000 = 0.40
Annual break-even dollar sales volume = $210,000/0.40 = $525,000
b. Annual margin of safety in dollars:
Sales
$750,000
Break-even sales dollars
(525,000)
Margin of safety
$225,000
c. To determine the variable and total cost lines, it is necessary to compute
the variable cost ratio:
Variable cost ratio
=
Variable costs
Sales
=
$450,000
$750,000
=
0.60
At a volume of $1,000,000 sales dollars, variable costs are $600,000.
Profit =
$1,000,000
Fixed costs =
$210,000
$750,000
$90,000
Total Revenues and
Total Costs
$500,000
Variable costs
=
$250,000
$0
$0
$250,000
$500,000
Total Revenues
d. Revised annual break-even dollar sales:
($210,000 + $35,000)/0.40 = $612,500
$750,000
$1,000,000
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.
M16-18
Relevant cost analysis
Increase in revenues:
Sell complete sailboats
Sell sailboat hulls
Costs of masts, sales, and rigging
Advantage (disadvantage) of further processing
$6,000
(5,000)
$ 1,000
(1,500)
$ (500)
An alternative analysis treats the selling price of the uncompleted hulls as
an opportunity cost:
Revenues from complete sailboats
Costs:
Outlay costs of masts, sails, and rigging
Opportunity cost of not selling hull
Advantage (disadvantage) of further processing
$ 6,000
$1,500
5,000
(6,500)
$ (500)
E16-22
Cost to make:
Variable costs (10,000 units  $24.00)
Fixed costs (10,000 units  $5.00)
Rent income (opportunity cost)
Cost to buy (10,000 units  $32.00)
Advantage (disadvantage) of buying
Making has an advantage of $5,000.
$240,000
50,000
25,000
$315,000
(320,000)
$ (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
Costs:
Outlay cost of additional processing
Opportunity cost of not selling F
Advantage of further processing
$12
$4
5
(9)
$ 3
Product F should be processed further into product G.
E16-26
a.
Unit contribution margin
Labor hours per unit
Contribution per labor hour
X
$ 60
 4
$ 15
Y
$ 50
 2
$ 25
Z
$ 30
 4
$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 criterion is:
Labor hours available
Labor hours per unit
Weekly production
Unit contribution margin
Weekly contribution
Highest
Unit
Selling Price
Z
220
 4
55
 $30
$1,650
Highest
Highest
Contribution Contribution
per Unit
per Labor Hour
X
Y
220
220
 4
 2
55
110
 $60
 $50
$3,300
$5,500
E16-26 (concluded)
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.
c. The decision to produce 12 units of Z will result in a weekly opportunity
cost of $1,200. This is the net benefits that would have been derived
from producing 20 units of Y.
Labor hours to produce 12 units of Z (12 units  4 hours per unit) 48
Labor hours per unit of Y

2
Required reduction in the production of Y
24
Unit contribution margin for Y
 $50
Opportunity cost
$1,200
Producing 12 units of Z will reduce profits by $840 from their maximum
possible amount.
Contribution from Z (12 units  $30)
Opportunity cost
Net disadvantage of producing 12 units of Z
$ 360
(1,200)
$ (840)
This can also be computed as the difference between the hourly
contribution of Y and Z times the 48 labor hours that would be required
to product 12 units of Z, or ($25 - $7.50)  48 = $840.
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
Case 1
Sales
Direct materials
Direct labor
Total direct costs
Conversion cost
Manufacturing overhead
Current manufacturing costs
Work in process, beginning
Work in process, ending
Cost of goods manufactured
Finished goods inventory, beginning
Finished goods inventory, ending
Cost of goods sold
Gross profit
Selling and administrative expenses
Net income
Case 2
$80,000 $72,000 (2)
15,000
19,000
5,000
13,000 (3)
20,000 (1)
32,000
13,000 (2)
26,000
8,000
13,000 (4)
28,000 (3)
45,000 (5)
7,000
10,000
5,000
23,000 (6)
30,000 (4)
32,000
9,000
8,000
6,000
5,000 (7)
33,000 (5)
35,000
47,000 (6)
37,000 (1)
20,000
15,000
27,000 (7)
22,000
Case 3
Case 4
$120,000 $95,000 (2)
65,000 (6)
21,000
20,000
9,000 (3)
85,000 (5)
30,000
30,000 (7)
58,000 (7)
10,000
49,000 (6)
95,000
79,000
29,000 (4)
21,000
21,000
18,000 (5)
103,000 (3)
82,000
7,000
12,000
8,000
14,000 (4)
102,000 (2)
80,000
18,000
15,000
6,000 (1)
7,000 (1)
12,000
8,000
Solution steps are indicated by the number next to each solved item. There
are other correct solution steps.
E17-25
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 perunit 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.
E17-25 (concluded)
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 Chapter 10.
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 + $5X
c. Predetermined rate for 2012:
Predetermined Overhead rate =
$100,000 + $5(25,000) = $9.00 per direct labor hour
25,000
d. Overapplied manufacturing overhead at the end of 2012 is $20,000:
Actual overhead
Applied overhead (30,000  $9)
Overapplied overhead
$250,000
(270,000)
$ (20,000)
e. The overapplied overhead may be:
 Written off to Cost of Goods Sold.
 Allocated among Work-in-Process, Finished Goods Inventory, and
Cost of Goods Sold.
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
Manufacturing overhead:
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
C23 Cams
U2 Shafts
$30,000
5,000
$20,000
10,000
150
750
200
$36,100
 500
$ 72.20
(7 setup hours  $50)
(8 tons  $60)
350
480
(5 machine hours  $50)
250
$31,080
 300
$103.60
M21-19
The Music Shop
Purchases Budget
January - May, 2012
Purchase units:
Budgeted sales
Plus desired end. inv.*
Total inventory needs
Less beginning inv.
Purchases
January
February
March
130,000
64,000
194,000
(40,000)
154,000
160,000
80,000
240,000
(64,000)
176,000
200,000
84,000
284,000
(80,000)
204,000
April
May
210,000 180,000
72,000
96,000
282,000 276,000
(84,000) (72,000)
198,000 204,000
*For example, 40% of the following month's sales, 240,000 × 0.40 for May.
January
Purchase dollars
($5 per unit):
February
March
April
May
Budgeted cost of. sales $650,000 $ 800,000 $1,000,000 $1,050,000 $ 900,000
Plus desired end. inv.*
320,000
400,000
420,000
360,000
480,000
Total inventory needs
970,000 1,200,000 1,420,000 1,410,000 1,380,000
Less beginning inv.
(200,000) (320,000) (400,000) (420,000) (360,000)
Purchase dollars
$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.
M21-20
Wilson's Retail Company
Cash Budgets
February, March, and April
February
March
Cash balance, beginning
$ 30,000
Cash receipts:
60% of current month's sales
135,000
40% of previous month's sales 120,000
Total receipts
255,000
Cash available
285,000
Budgeted disbursements:
80% of previous
month's sales
Operating expenses
Total disbursements
Cash balance, ending
240,000
41,000
(281,000)
$ 4,000
April
$ 4,000
$ (7,000)
120,000
90,000
210,000
214,000
105,000
80,000
185,000
178,000
180,000
41,000
(221,000)
$ (7,000)
160,000
41,000
(201,000)
$ (23,000)
M21-21
Wooly Rug Company
Production Budget
For the Months of July, August, & September, 2012
July
Budgeted sales - sq. yards
Plus desired ending inventory*
Total inventory requirements
Less beginning inventory
Budgeted production – sq. yards
*40 percent following month’s sales
200,000
72,000
272,000
(100,000)
172,000
August September October
180,000 150,000 160,000
60,000
64,000
240,000 214,000
(72,000) (60,000)
168,000 154,000
M21-21 (concluded)
Wooly Rug Company
Purchases Budget
For the Months of July & August, 2012
July
Current needs for production
(5 lb. per sq. yard)
Plus desired ending inventory*
Total requirements
Less beginning inventory
Purchases in pounds
August
860,000
252,000
1,112,000
(400,000)
712,000
840,000
321,000
1,161,000
(252,000)
909,000
September
770,000
*30 percent of following month’s production requirements.
P22-32
a. Materials price variance (usage basis) =
=
=
=
or
Materials price variance (purchase basis)
AQ × (AP  SP)
7,000 yds. × ($4.90  $5.00)
7,000 yds. × $0.10
$700 F
=
=
=
=
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
P22-32 (concluded)
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
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.
Direct materials
Direct labor
Total standard variable cost
for 1,700 tents
*(2 hours × $12)
Standard
Cost per Unit
$20
×
24*
×
Units
Produced
1,700
=
1,700
=
Total
Standard Cost
$34,000
40,800
$74,800