Chapter 18



Chapter 18

5B)

1. Unit selling price of E [($8 × 20%) + ($11 × 80%)] $10.40

Unit variable cost of E [($3 × 20%) + ($4.50 × 80%)] 4.20

Unit contribution margin $ 6.20

Break-even sales (units) = [pic]

Break-even sales (units) = [pic] = 53,000 units

2. 53,000 units of E × 20% = 10,600 units of 12״ pizzas

53,000 units of E × 80% = 42,400 units of 16״ pizzas

3. [pic] = 62,000 units

*Unit selling price of E [($8 × 80%) + ($11 × 20%)] $8.60

Unit variable cost of E [($3 × 80%) + ($4.50 × 20%)] 3.30

Unit contribution margin $5.30

The break-even point increases because the mix is weighted toward the low contribution margin per unit product.

SA1)

In an absolute sense, Brian’s actions are devious. He is clearly attempting to use the

first four-year scenario, which is favorable, as a way to market the partnerships.

They are really longer-term investments. After the first four years, the risk

increases dramatically. The break-even occupancy becomes much more difficult to

achieve at 85% than it does at 60%. Focusing on the 60% and remaining silent

about the increase to 85% is deceptive. One might argue “let the buyer beware.”

After all, the information is in the fine print. A little spadework would reveal the

longer-term reality of these partnerships. This is not a compelling argument.

Clearly, Brian is putting some favorable spin on this offering. It’s likely that this

will come back to haunt him in a court of law. Some investors may claim they were

defrauded by less than complete disclosure. Brian has a responsibility to provide

objective information. The integrity standard requires that Brian communicate

constraints that would preclude the successful performance of an activity. Also,

Brian must communicate unfavorable as well as favorable information. Clearly, the

increase in the mortgage rate and its impact on the break-even point is unfavorable

information that should be given as much visibility as the favorable 60% break-even

information.

Ch 21: 3A Ch 22: 1B, 4B, SA 1 Ch 23: 1B, 2B, 3B, 6B Ch 24: 4B, 6B, SA1 Ch 25: 5B, 6B, SA1 Ch 26: 1B, 3B, 5B, 6B Ch 27: 2B, 3B, 4B

Chapter 19

6B)

1.

SIGNAL ELECTRONICS COMPANY

Contribution Margin Analysis

For the Year Ended December 31, 2006

Increase in the amount of sales attributed to:

Quantity factor:

Increase in number of units sold in 2006 500

Planned sales price in 2006 × $120.00 $60,000

Price factor:

Decrease in unit sales price in 2006 $(8.00)

Number of units sold in 2006 × 5,500 (44,000)

Net increase in amount of sales $ 16,000

Increase in the amount of variable cost of

goods sold attributed to:

Quantity factor:

Increase in number of units sold in 2006 500

Planned variable cost per unit in 2006 × $65.00 $32,500

Price factor:

Decrease in variable cost per unit in 2006 $(3.00)

Number of units sold in 2006 × 5,500 (16,500)

Net increase in amount of variable cost of

goods sold $16,000

Increase in the amount of variable selling and

administrative expenses attributed to:

Quantity factor:

Increase in number of units sold in 2006 500

Planned variable selling and

administrative cost per unit in 2006 × $15.00 $ 7,500

Price factor:

Increase in variable selling and

administrative cost per unit in 2006 $2.00

Number of units sold in 2006 × 5,500 11,000

Net increase in variable selling and

administrative expenses $ 18,500

Net increase in amount of variable costs 34,500

Decrease in contribution margin $(18,500)

2. No, the president is not correct in saying that the variable cost of goods sold got out of control in 2006. The majority of the increase in the variable cost of goods sold was due to the quantity factor. Specifically, the increase of 500 units in the quantity of product sold increased the variable cost of goods sold by $32,500, based upon planned unit costs. Actually, the unit cost of the variable cost of goods sold decreased $3.00, which had a favorable effect of $16,500 on the contribution margin.

The president is correct in saying that an investigation of the increase in variable selling and administrative expenses is needed. Of the $18,500 increase in these expenses, only $7,500 was due to the quantity factor. The unit cost increase of $2.00 for selling and administrative expenses does raise concern. This increase may have been caused by additional selling expenses associated with the increased sales. The increase in selling and administrative expenses could also have been caused by increased marketing and advertising expenditures to promote the price decrease. Thus, the increase in sales may not have been caused entirely by the lowering of the unit sales price. If this is the case, the president should exercise caution in deciding to lower the selling price further to increase sales. In addition, the reduction in sales price does not generate sufficient volume to compensate for the quantity factor of the variable costs. Thus, reducing the price further will not likely be a successful strategy.

SA1)

Peters has performed the task requested by the division manager. However, Peters has not exercised good judgment, to the point of bordering on unethical behavior. Peters should question the wisdom of manipulating the amount of inventory solely for purposes of meeting numerical profit targets. The Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management states that the management accountant should “recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.” In addition, the management accountant should “communicate unfavorable as well as favorable information and professional judgments or opinions.” The absorption costing income statements could mislead the senior management overseeing the division managers. It may erroneously conclude that the division has become more efficient. Moreover, it may not be wise for the division to build more inventory. The excess inventory may need to be sold at a later date at “fire sale” prices. Thus, the division actually may be worse off in the long run by building the excess inventory. Peters has a responsibility to communicate these concerns to the general manager. As a last resort, Peters may need to report the concerns to the company’s senior management if the division manager refuses to respond favorably.

Chapter 21

P21-3A)

a. Direct Materials Cost Variance

Price variance:

Actual price $ 4.80 per pound

Standard price 4.50 per pound

Variance—unfavorable $ 0.30 per pound

× actual quantity, 73,100 $ 21,930

Quantity variance:

Actual quantity 73,100 pounds

Standard quantity 72,000 pounds

Variance—unfavorable 1,100 pounds

× standard price, $4.50 4,950

Total direct materials cost variance—unfavorable $ 26,880

b. Direct Labor Cost Variance

Rate variance:

Actual rate $17.88

Standard rate 18.00

Variance—favorable $ (0.12) per hour

× actual time, 18,500 $ (2,220)

Time variance:

Actual time 18,500 hours

Standard time 18,000 hours

Variance—unfavorable 500 hours

× standard rate, $18 9,000

Total direct labor cost variance—unfavorable $ 6,780

c. Factory Overhead Cost Variance

Variable factory overhead controllable variance:

Actual variable factory overhead cost incurred $ 42,870

Budgeted variable factory overhead for 18,000 hrs. 43,200

Variance—favorable $ (330)

Fixed factory overhead volume variance:

Normal capacity at 100% 20,000 hours

Standard for amount produced 18,000

Productive capacity not used 2,000 hours

Standard fixed factory overhead cost rate × $3.75

Variance—unfavorable 7,500

Total factory overhead cost variance—unfavorable $7,170

Alternative Computation of Overhead Variances

Factory Overhead

| | | | |

|Actual Costs |117,870 |110,700 |Applied Costs |

|($42,870 + $75,000) | | | |

|Balance | | |[18,000 × ($2.40 + $3.75)] |

|(underapplied) |7,170 | | |

| | | | |

Actual Factory Budgeted Factory Applied Factory

Overhead Overhead for Amount Overhead

Produced

$117,870 Variable cost (18,000 × $2.40) $ 43,200 $110,700

Fixed cost 75,000

Total $118,200

$330 F $7,500 U

Controllable Volume

Variance Variance

$7,170 U

Total Factory Overhead

Cost Variance

Chapter 22

P22-1B)

1.

Budget Performance Report—Manager, Eastern District

For the Month Ended September 30, 2006

Over Under

Budget Actual Budget Budget

Sales salaries $ 542,300 $ 541,600 $ 700

System administration salaries 296,400 296,100 300

Customer service salaries 101,300 118,700 17,400

Billing salaries 65,300 64,900 400

Maintenance 179,500 180,500 1,000

Depreciation of plant and equipment 61,000 61,000

Insurance and property taxes 27,300 27,400 100

Total $1,273,100 $1,290,200 18,500 $1,400

2. The customer service salaries exceed the budget by approximately 17% of budget ($17,400/$101,300). The manager should request additional detailed information about the customer service department. There are several possible reasons for the budget variance. The manager should determine if the cause is related to an increase in salaries or an increase in people. If the latter, the manager may wish to determine if there has been an increase in customer service problems, hence a need to hire additional people. Such information could be used by the manager to solve customer service complaints and to reduce the number of future complaints.

This solution is applicable only if the P.A.S.S. Software that accompanies the text is used.

EASTERN DISTRICT

Budget Report

For the Period Ended September 30, 2006

Difference

Budget Actual from Budget %

Operating revenue $ 1,900,000 $ 1,973,200 $ 73,200 3.85

Operating expenses:

Software engineer salaries $ 542,300 $ 543,600 $ 1,300 0.24

System administration

salaries 296,400 297,100 700 0.24

Logistics salaries 101,300 118,700 17,400 17.18

Marketing salaries 65,300 66,100 800 1.23

Warehouse wages 179,500 180,500 1,000 0.56

Equipment depreciation 61,000 61,000

Insurance and property tax 27,300 27,400 100 0.37

Total operating expenses $ 1,273,100 $ 1,294,400 $ 21,300 1.67

Net income $ 626,900 $ 678,800 $ 51,900 8.28

P22-4B)

1. [pic] = Profit margin × Investment turnover

[pic] = [pic] × [pic]

Golf Equipment Division: ROI = [pic] × [pic]

ROI = 14.5% × 1.20

ROI = 17.40%

2.

SCOTTISH PRIDE INC.—GOLF EQUIPMENT DIVISION

Estimated Income Statements

For the Year Ended January 31, 2006

Proposal 1 Proposal 2 Proposal 3

Sales $ 2,400,000 $ 2,150,000 $ 2,400,000

Cost of goods sold 1,361,000 1,163,500 1,241,000

Gross profit $ 1,039,000 $ 986,500 $ 1,159,000

Operating expenses 727,000 707,000 727,000

Income from operations $ 312,000 $ 279,500 $ 432,000

Invested assets $ 1,500,000 $ 1,720,000 $ 2,500,000

3. [pic] = Profit margin × Investment turnover

[pic] = [pic] × [pic]

Proposal 1: ROI = [pic] × [pic]

ROI = 13% × 1.60

ROI = 20.80%

Proposal 2: ROI = [pic] × [pic]

ROI = 13% × 1.25

ROI = 16.25%

Proposal 3: ROI = [pic] × [pic]

ROI = 18% × 0.96

ROI = 17.28%

4. Proposal 1 would yield a rate of return on investment of 20.8%.

5. Rate of return on investment (ROI) = Profit margin × [pic]

20% = 14.5% × Required investment turnover

Required investment turnover = 1.38 (20% ÷ 14.5%)

Current investment turnover = 1.20

Increase in investment turnover = 0.18

or

15% Increase (0.18 ÷ 1.20)

SA-1)

This scenario is a negotiation between two divisions. Dan is not behaving unethically by attempting to get a good price from the Can Division. He is not behaving unethically because he refuses market price. This may not seem “fair,” but price negotiation is a very typical business activity and is part of Dan’s job. It would be unethical only if the Food Division refused to deal with the Can Division to purposefully hurt the Can Division’s performance, so that Food could look good in comparison. This claim could only be supported if the Food Division’s refusal to purchase from the Can Division was economically unsound. For example, maybe there are no transportation costs because the Can Division plant is on site. In this case, the total cost to the Food Division would be less by purchasing from the Can Division. Refusing to do so could be the basis for claiming an ethical breach.

The Food Division has overall profit responsibility and authority. This means that the Food Division has the choice of purchasing from the inside or the outside. The Food Division should have incentives to purchase from the inside in order to maximize overall corporate income. This means that the transfer price should be set below market price in order to give Dan an incentive to purchase from the Can Division. Bonnie’s refusal to budge on market price will likely hurt the Can Division and the company as a whole. If there are no alternative buyers, the Can Division should negotiate with the Food Division and accept a price lower than market price. This produces a win-win for both divisions. Thus, although neither party appears to be behaving unethically, Bonnie’s price position appears to be the weakest.

Chapter 23

P23-1B)

1.

Proposal to Operate Retail Store

July 1, 2006

Differential revenue from alternatives:

Revenue from operating store $ 1,584,0001

Revenue from investment bonds 270,0002

Differential revenue from operating store $ 1,314,000

Differential cost of alternatives:

Costs to operate store $ 1,152,0003

Cost of store equipment less residual value 220,000

Differential cost of operating store 1,372,000

Differential loss from operating store $ (58,000)

1 (9 yrs. × $84,000) + (9 yrs. × $92,000)

2 6% × $250,000 × 18

3 $64,000 × 18

2. The proposal should be rejected.

3. Total estimated revenue from operating store $ 1,584,000

Total estimated expenses to operate store:

Costs to operate store, excluding depreciation $ 1,152,000

Cost of store equipment less residual value 220,000 1,372,000

Total estimated income from operating store $ 212,000*

*The $212,000 income could also be determined by subtracting the $58,000 loss from operating the store as derived in (1) from the $270,000 of investment income forgone by electing to operate the store.

P23-2B)

1.

Proposal to Replace Machine

August 11, 2006

Annual manufacturing costs associated with present machine $ 345,000

Annual manufacturing costs associated with proposed

new machine 276,000

Annual reduction in manufacturing costs $ 69,000

Number of years applicable × 8

Cost reduction attributable to difference in manufacturing costs $ 552,000

Proceeds from sale of present machine 190,000

$ 742,000

Cost of new machine 580,000

Differential income anticipated from replacement, 8-year total $ 162,000

2. Other factors to be considered include:

a. Are there any improvements in the quality of work turned out by the new machine?

b. What effect does the federal income tax have on the decision?

c. What opportunities are available for the use of the $390,000 of funds ($580,000 less $190,000 sales price of old machine) that are required to purchase the new machine?

After considering such factors as those listed above, the net cost reduction anticipated over the 8-year period may not be sufficient to justify the replacement. For example, if there is an opportunity to invest the $390,000 ($580,000 – $190,000) of additional funds required for the replacement in a project that earns a return of 6%, the amount of the return over the 8-year period would be $187,200 ($390,000 × 6% × 8), which is more advantageous than the replacement, other factors being equal.

P23-3B)

1.

Proposals for Sales Promotion Campaign

April 5, 2006

Cologne Perfume

Differential revenue from proposals $520,0001 $585,0002

Differential cost of proposals:

Direct materials $ 80,000 $108,000

Direct labor 40,000 54,000

Variable factory overhead 30,000 36,000

Variable selling expenses 160,000 180,000

Sales promotion expenses 90,000 90,000

Differential cost of proposals $400,000 $468,000

Differential income from proposed sales

promotion campaign $120,000 $117,000

1 10,000 units × $52

2 9,000 units × $65

2. The sales manager’s tentative decision should be opposed. The sales manager erroneously considered the full unit costs instead of the differential (additional) revenue and differential (additional) costs. An analysis similar to that presented in (1) would lead to the selection of cologne for the promotional campaign, since this alternative will contribute $3,000 more to operating income than would be contributed by promoting perfume.

P23-6B)

1.

High Good Regular

Grade Grade Grade

Selling price $350 $325 $300

Variable conversion cost per unit

($8 per process hour) $ 96 $ 96 $ 80

Direct materials cost per unit 140 125 120

$236 $221 $200

Contribution margin per unit $114 $104 $100

2. The contribution margin per unit may give false signals when an organization has production bottlenecks. Instead, Mohawk Valley should use the contribution margin per bottleneck hour to determine relative product profitability, as follows:

High Good Regular

Grade Grade Grade

Contribution margin per unit $ 114 $104 $100

Furnace (bottleneck) hours per unit ÷ 6 ÷ 4 ÷ 2

Contribution margin per furnace hour $ 19 $ 26 $ 50

Unlike the analysis in (1), this analysis shows Regular Grade steel to be the most profitable product, while High Grade steel is the least profitable. The reason is that Regular Grade steel delivers more contribution margin per bottleneck hour than does High Grade or Good Grade steel ($50 vs. $19 and $26).

3. One way to revise the pricing would be to increase the price to the point where all three products produce profitability equal to the highest profit product. This would be determined as follows:

Revised price of High Grade steel:

[pic] = [pic]

$50 = (Revised price of High Grade – $236) ÷ 6 hrs.

$300 = (Revised price of High Grade – $236)

$536 = Revised price of High Grade

High Grade steel would require a revised price of $536 in order to deliver the same contribution margin per bottleneck hour as does Regular Grade steel.

Revised price of Good Grade steel:

[pic] = [pic]

$50 = (Revised price of Good Grade – $221) ÷ 4 hrs.

$200 = (Revised price of Good Grade – $221)

$421 = Revised price of Good Grade

Good Grade steel would require a revised price of $421 in order to deliver the same contribution margin per bottleneck hour as does Regular Grade steel.

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