Week 2 Chapter 3 Cost-Volume Relationship
Managerial Accounting for Managers 3rd Edition,
Noreen, Brewer,Garrison
Problem 3-22 Marlin Company Sales Mix; Multiproduct
Break-Even Analysis (LO 3-9)
1. Marlin Company, a wholesale
distributor, has been operating for only a few months. The company sells three
products – sinks, mirrors, vanities. Budgeted sales by product and in total for
the coming month are shown below:
Product
Sinks Mirrors Vanities Total
Percentage of sales……… 48% 20%
32%
Sales……………………………. $ 240,000 100%
$100, 000 10% $160, 000 100% $500, 000 100%
Variable expenses………. 72,000 30% 80,
000 80% 88,
000 55% 240,
000 48%
Contribution Margin….. $ 168,000
70% $ 20,000 20% $ 72,000 45% 260, 000 52%
Fixed expenses…………… 223,
600
Net operating income…. $ 36, 400
Fixed Expenses = $223,600 =
$430,000
Dollar sales to break-even = CM ration 0.52
As shown by these data, net
operating income is budgeted at $36,400 for the month, and break-even at
$430,000.
Assume that actual sales for
month total $ 500,000 as planned. Actual sales by products are:
Sink, $160,000; Mirror, $200,000;
and vanities, $140,000
Required:
1. Prepare a contribution format
income statement for the month based on actual sales data
Present the income statement in
the format shown above.
2. Compute the Break-Even Point
in sales dollars for the month, based on your actual data.
3. Considering the fact that the
company met its $500,000 sales budget for the month, the president is shocked
at the results shown on your income statement in (1) above.
Prepare a brief memo for the
president explaining why both the operating results and the Break-Even-Point in
sales dollars are different from what was budgeted.
Problem : 3 - 25 Break-Even Analysis: Pricing ( LO 3-1, LO
3-4, LO 3-6)
Demer holdings AG of Zurich,
Switzerland has just introduced a new fashion watch for which
The company is trying to find an
optional selling price. Marketing studies suggest that the company can increase
sales by 5,000 units for each SFr 2 per unit reduction in the selling price.
(SFr2 denotes 2 Swiss Francs). The company ‘s present selling price is SFr90
per unit, and variable expenses are SFr60 per unit. Fixed expenses are
SFr840,000 per year. The present annual sales volume (at the SFr90 selling
price) is 25,000 units.
Required:
1. What is present yearly net
operating income or loss?
2. What is the present Break –
Even –Point in units and in Swiss Francs sales?
3. Assuming that the marketing studies
are correct, what is the maximum profit that the company can earn yearly? At
how many units, and at what selling price per unit would the company generate
this profit?
4. What would be the
Break-Even-Point in units and in Swiss Francs sales using the selling price you
determined in (3) above (i.e., the selling price at the level of maximum
profits) ?
Why is this Break-Even-Point
different from the Break-Event-Point you computed in (2) above?
Problem 3 – 26 Changes in cost Structure; Break-Even Analysis;
Operating Leverage; Margin of Safety ( LO 3 -4, LO 3 -6, LO 3 – 7, LO 3 -8)
Frieden Company’s contribution
format income statement for the most recent month is given below:
Sales (40,000 units)
……………………………………….. $ 800, 000
Variable expenses
………………………………………….. 560,
000
Contribution margin
……………………………………….. 240, 000
Fixed expenses
………………………………………………. 192,
000
Net operating income
…………………………………….. $ 48, 000
The industry in which Frieden
Company operates is quite sensitive to cyclical movements in the economy. Thus
profits vary considerable from year to year according to general economic
conditions. The company has a large amount of unused capacity and is studying
ways of improving profits.
REQUIRED:
1. New equipment has come on the
market that would allow Frieden Company to automate a portion of its
operations. Variable expenses would be reduced by $6 per unit. However, fixed
expenses would increase to a total of $432,000 each month. Prepare two
contribution format income statements, one showing present operations and one
showing how operations would appear if the new equipment is purchased. Show an
amount column, a Per Unit column, and a Percent Column on each statement. Do
not show percentages for the fixed expenses.
2. Refer to the income statements
in (1) above. For both present operations and the proposed new operations,
compute (a) the degree of operating leverage. (b) the Break-Even Point in
dollars, and (c) the margin of safety in both dollars and percentage terms.
3. Refer again, to the data in
(1) above. As a manager, what factor would be paramount in your mind in
deciding whether to purchase the new equipment? (Assume that ample funds are
available to make the purchase).
4. Refer to the original data.
Rather than purchase new equipment, the marketing manager argues that the
company’s marketing strategy should be changed. Instead of paying sales
commissions, which are included in variable expenses, the marketing manager
suggests that salespersons be paid fixed salaries and that the company invest
heavily in advertising. The marketing manager claims that this new approach
would increase unit sales by 50% without any change in selling price; the
company’s new monthly fixed expenses would be $240,000; and its net operating
income would increase by 25%.
Compute the Break-Event-Point in
dollar sales for the company under the new marketing strategy.
Do you agree with the marketing
manager’s proposal?
Problem 4-17 Applying Overhead; Under applied or Over
applied Overhead; Income Statement (LO 4-2, LO 4-4, LO 4-5)
Durnham Company uses a job-order
costing system. The following transactions took place last year:
a. Raw materials requisitioned
for use in production, $40,000 (80% direct and 20% indirect).
b. Factory utility costs incurred,
$14,600.
c. Depreciation recorded on plant
and equipment, $28,000. Three-fourths of the depreciation relates to factory
equipment, and the remsinder relates to selling and administrative equipment.
d. Costs for salaries and wages
incurred as follows:
Direct
labor……………. $ 40,000
Indirect labor……….. 18,000
Sales commissions… 10,000
Administrative salaries 25,000
e.
Insurance costs incurred, $3,000 (80% relates to factory operations, and 20%
relates to selling and administrative activities).
f. Miscellaneous selling and
administrative expenses incurred, $18,000.
g. Manufacturing overhead was
applied to production. The company applies overhead on the basis of 150% of
direct labor cost.
h. Goods that cost $130,000 to
manufacture according to their job cost sheets were transferred to the finished
goods warehouse.
i. Goods that had cost $120,000
to manufacture according to their job cost sheets were sold for $200,000.
REQUIRED:
1. Determine the underapplied or
overapplied overhead for the year.
2. Prepare an income statement
for the year. (HINT: No calculkations are required to determine the cost of
goods sold before any adjustment for underapplied or overapplied overhead).
Problem 4-18 Applying Overhead in a Service Company (LO
4-2, LO 4-4, LO 4-5)
Heritage Gardens provides
complete garden designs and landscaping services. The company uses a job-order
costing system to track the costs of its landscaping projects.
The table below provides data
concerning the three landscaping projects that were in progress during May.
There was no work in process at the beginning of May.
Project
Williams Chandler Nguyen
Designer Hours…………… 200 80 120
Direct Materials…………….. $ 4,800 $
1,800 $3,600
Direct labor……………………. $ 2,400 $
1,000 1,500
Actual overhead costs were
$16,000 for May. Overhead costs are applied to projects on the basis of
designer-hours became most of the overhead is related to the costs of the
garden design s studio. The predetermined overhead rate is $45 per
designer-hour. The William and Chandler projects were completed in May.
REQUIRED:
1. Compute the amount of overhead
cost that would have been applied to each project during Ma.
2. Determine the cost of goods
manufactured for May.
3. What is the accumulated cost
of the work in process at the end of the month?
4. Determine the underapplied or
Overapplied Overhead for May.
Problem 4-22 Multiple Departments; Overhead Rates;
Underapplied or Overapplied
(LO 4-1, LO 4-2, LO 4-3, LO 4-4)
Winkle, Kotter, and Zale is a
small law firm that contains 10 partners and 10 support persons. The firm
employs a job-order costing system to accumulate costs chargeable to each
client, and it is organized into two departments – the Research and Documents
Department and the Litigation Department. The firm uses predetermined overhead
rates to charge the costs of these departments to its clients. At the beginning
of the current year, the firm’s management made the following estimates for the
year:
Department
Research and Documents Litigation
Research – hours……………………………………..
20,000 _
Direct attorney-hours………………………………
9,000 16,000
Materials and
supplies……………………………. $ 18,000 $5,000
Direct attorney cost…………………………………
$430,000 $800, 000
Departmental overhead
cost………………….. $700,000 $320, 000
The
predetermined overhead rate in the Research and Documents Department is based
on research-hours, and the rate in the Litigation Department is based on direct
attorney cost.
The costs charged to each client
are made up of three elements: materials and su[[lies used, direct attorney
costs incurred, and an applied amount of overhead from each department in which
work is performed on the case.
Cae
618-3 was initiated on February 10 and completed on June 30. During this
period, the following costs and time on the case.
Department
Research and Documents Litigation
Research – hours…………………………………..
18 _
Direct attorney…………………………………….. 9
42
Materials and supplies …………………………
$ 50 $30
Direct attorney cost………………………………
$410 $2,100
REQUIRED:
1. Compute the predetermined
overhead rates used during the year in the Research and documents Department
and Litigation Department.
2. Using the rate you computed in
(1) above, compute the total overhead cost applied to Case 618-3.
3. What would be the total cost
charged to Case 618-3? Show computation by department and in total for the
case.
4. At the end of the year, the
firm’s records revealed the following actual cost and operating data for all
cases handled during the year:
Department
Research and Documents Litigation
Research – hours…………………………………..
23,000 _
Direct attorney-hours……………………………
8 ,000 15,000
Materials and supplies………………………….
$19,000 $ 6,000
Direct attorney cost …………………………….
$400, 000 $275,000
Departmental overhead
cost……………….. $770,000 $300,000
Determine the amount of underapplied
or overapplied overhead cost in each department for the year.
TUTORIAL
PREVIEW
1.
Prepare a contribution format income statement for the month based on actual
sales data Present the income statement in the format shown above.
Product
|
||||||||
Sinks
|
Mirrors
|
Vanities
|
Total
|
|||||
Percentage of total sales
|
32%
|
40%
|
28%
|
100%
|
||||
Sales
|
$160,000
|
100%
|
$200,000
|
100%
|
$140,000
|
100%
|
$500,000
|
100%
|
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