ACC 3200 Practice Problems for the Final Exam 1.

The following data refers to the Daniels division of Tippett Inc. Daniels sells variable-speed drills. The standard drill sells for $ 40, and Daniels plans sales of 30,000 units in 2005. Tippett treats Daniels as an investment center with total attributable investment of $ 800,000. Daniels' annual fixed costs are $ 200,000. Variable cost per standard drill is $ 24. The firm's required rate of return on investment is 15%. The manager is evaluated based on Residual Income. What is the planned Return on Investment in 2005? NOI = ($40 - $24) * 30,000 - $200,000 = $280,000 ROI = $280,000/$800,000 = 35% _______35%

1.1

1.2

A one-time external special order is received to buy from Daniel, 10,000 units of the standard drill at $30 each. If the order is accepted, Daniels will have to incur additional annual fixed costs of $30,000. Based on the effect on Residual Income for the first year, will the manager accept this order? Effect on RI for first year __+$30,000_______ Will accept: RI = ($30 - $24) * 10,000 - $30,000 = $30,000 Yes or No

2. Cierra, Inc. manufactures computer chips. Currently, the costs per unit are as follows: direct materials direct labor variable manufacturing overhead fixed manufacturing overhead Total $ 1.00 10.00 5.00 8.00 $ 24.00

Chips Corp., has contacted Cierra with an offer to sell to Cierra 10,000 of the chips for $22.00 per chip. If Cierra accepts the proposal, $50,000 of the fixed overhead will be eliminated. Should Cierra make or buy the chips? Justify your answer with calculations. Make Buy Cost of buying $22 Cost of making DM+DL+VOH $16 FOH $8 $3 Total cost $24 $25 To make.

3. Succulent juice Company manufactures and sells premium tomato juice by the gallon. Succulent just finished its first year of operations. The following data relates to this first year of operations. Number of Gallons Produced 80,000 Number of Gallons sold 70,000 Sales Price $3.00/gallon Unit Product Cost (variable costing) $1.45/gallon Contribution Margin $84,000 Total Fixed Manufacturing Overhead $? Total fixed Selling & Administrative $ 25,000 Variable Sales and Administrative $? Inventory value under absorption costing $29,500 # of gallons in FG inventory = 80,000 70,000 = 10,000 Product cost per unit (absorption costing) = $29,500 /10,000 = $2.95 CM = Sales Variable manufacturing cost Variable S&A = $84,000 = $210,000 - $1.45 * 70,000 Variable S&A = $84,000 Variable S&A = $24,500 3.1 Prepare an Income statement for Succulent using the Absorption Costing Method. (Hints: How many units were in inventory? What was the cost per unit? Why is the CM only $84,000? ). Sales COGS ($3 * 70,000) ($2.95 * 70,000) $210,000 $206,500 $3,500 $49,500

Gross Margin Selling and Administrative Costs $25,000 + $24,500 Net Income

$(46,000)

3.2 Explain in one or two sentences, the key difference between the net income under Absorption and the net income under Variable costing. Determine the variable costing net income. Do not prepare a variable costing income statement. FOH deferred to FG inventory = ($2.95 - $1.45) *10,000 = $15,000

Variable costing income = Absorption costing income - $15,000 = - $46,000 - $15,000 = $(61,000) 4. Karen Galactic, a sales representative for a large chemical company, gets paid a sales commission, that is, a percentage of her sales. However, she has decided to spend less time traveling. She is going to spend only 160 hours per month with her customers. To do this she will have to give up some of her clients. The following information is from her last full months sales activities.
Corporate Customers(CC) Number of customers Small Professional Businesses (SB) Partnerships (PP) 10 50 80 $2,000 $1,000 Commission percentage $500 5% 7% Average time per customer 4 hours hours $10 $50 $20 10% 2 hours Cost of traveling to site Commission per customer Commission per hour $10 $100 $25 $10 $70 $35 2.5

Average sale per customer

Required: 4.1

To maximize her sale commissions, how many customers of CC, SB and PP should she retain?
CC_10______ SB_50_______ PP__8_____

40 hours

100 hours

20 hours

Karen can hire an associate who can work up to 100 hours a month at $19 per hour (and do exactly the same job as Karen). Karen will have to reimburse the associate for travel costs. 4.2 What is the expected incremental profit or loss if Karen hires the associate?

Additional commission: $20 *100 = $2,000 Associate salary: $19 * 100 = - $1,900 Reimbursement of cost of traveling: 100/2.5 = 40 * $10 =- $400 Net effect $(300)

5. Smoothit Inc is facing a problem with their 4th quarter earnings on December 25. Their earnings target is $2,500,000 and the data so far is as follows: Sales Revenue Variable COGS Fixed OH Fixed S&A Variable S&A $25,000,000 ($500/unit) $10,000,000 ($200/unit) $10,000,000 $ 2,000,000 5% Commission on Sales

Smoothit has had a policy of having zero inventories at the end of each quarter. No further sales are possible during the year and all the units produced so far have been sold. The CEO is planning to cut the sales commission to meet the earnings target, but the accountant, Mr. Shady Helper, plans on suggesting producing items for inventory. 5.1 How much will the sales commissions have to be cut in order to meet the earnings target? 3% Earnings before variable S&A = 25M 10M 10M 2M = $3M Earnings target = $2.5 M Variable S&A needs to be expensed = $3M - $2.5 M = $500,000 Sales commission = $500,000/$25,000,000 = 2% Sales commission should be cut by 3%. 5.2 How many items need to be produced for inventory to meet the earnings target if the sales commission is left unchanged at 5%? FOH needs to be expensed = $25M - $10M - $2M - $25 * 5% - $2.5M = $9.25M FOH to be deferred to FG inventory = $10 - $9.25M = $0.75 M FOH per unit = $9.25M/50,000 = $185 # of units need to be produced = $10M /$185 = 54,054 4,054 units will be left in FG inventory. 5.3 Comment on the ethics of each of these strategies. Cutting sales commission may demotivate the sales people. Overproduction is unethical.

Multiple Choice Problems 6. Which of the following would be relevant in the decision to sell or throw out obsolete inventory? Direct material costs assigned to the inventory ) ) ) ) e) yes yes no no None of the above Fixed overhead costs assigned to the inventory yes no yes no

7. Vanikoro Corporation currently has two divisions which had the following operating results for the year ended December 31: Sales Variable costs Contribution margin Divisional fixed costs Segment margin Allocated fixed costs Net income (loss) Cork Division Rubber Division $600,000 $300,000 310,000 200,000 $290,000 $100,000 110,000 60,000 $180,000 $40,000 100,000 50,000 $ 80,000 $(10,000)

Since the Rubber Division sustained a loss during the year, the president of Vanikoro is considering the elimination of this division. If the Rubber Division was dropped at the beginning of the year, how much higher or lower would Vanikoros total net income have been for the year? a)$10,000 higher b)$40,000 lower c)$50,000 higher d)$100,000 lower e)$100,000 higher

8. The Freed Company produces three products, X, Y, Z, from a single raw material input. Product Y can be sold at the split-off point for total revenues of $50,000, or it can be processed further at a total cost of $16,000 and then sold for $68,000. Product Y: Process further: $68,000 - $16,000 = $52,000 a. b. c. d. e. Should be sold at the split-off point, rather than processed further. Would increase the company's overall net operating income by $18,000 if processed further and then sold. Would increase the company's overall net operating income by $68,000 if processed further and then sold. Would increase the company's overall net operating income by $2,000 if processed further and then sold. None of the above

9. Oaks Company maintains a cafeteria for its employees. For June, variable food costs were budgeted at $48 per employee, based on a budgeted level of 1,000 employees in operating departments. During the month, an average of 1,100 employees worked in operating departments. The cafeteria's total food costs for the month came to $57,750. How much food cost should be charged to the operating departments at the end of the month for performance evaluation purposes? Budgeted Rate * Actual # of employee $48 * 1,100 a. $57,750 b. $52,500 c. $48,000 d. $52,800 e. None of the above

The Hudson Block Company has a trucking department that delivers stones to two plants. The budgeted costs for the trucking department are $340,000 per year in fixed costs and $0.30 per ton variable cost. Last year, 70,000 tons of crushed stone were budgeted to be delivered to the West Plant and 100,000 tons of crushed stone to the East Plant. During the year, the trucking department actually delivered 75,000 tons of crushed stone to the West Plant and 90,000 tons to the East Plant. Its actual costs for the year were $65,000 variable and $350,000 fixed. The company allocates fixed and variable costs separately. The level of budgeted fixed costs is determined by the peak-period requirements. The West Plant requires 40% of the peak-period capacity and the East Plant requires 60%. 10. The amount of fixed trucking department cost that should be allocated to the West Plant at the end of the year for performance evaluation purposes is: a.$160,000. b.$204,000. c.$140,000. d.$136,000 e.$158,500

$340,000 * 40% 11. How much of the actual trucking department cost should not be charged to the plants at the end of the year for performance evaluation purposes? a.$10,000 b.$25,500 c.$0 d.$15,700 e. None of the above

FC should be charged to the two plants: $340,000 VC should be charged to the two plants: $0.30 * (75,000 + 90,000) = $49,500 Total cost should be charged: $389,500 Actual cost incurred: $65,000 + $350,000 = $415,000 Cost should not be charged to the plants: $25,500 12. The Thomas Company has two service departments and two operating departments. The following
data are available for a recent period: Service Departments Operating Departments Custodia Finishin Cafeteria l Assembly g Overhead costs.......... $80,000 $60,000 $75,000 $86,500 Number of employees................. 30 60 360 180 Square feet occupied. 18,000 25,000 60,000 90,000 Thomas allocates service department costs by the step method in the following order: Cafeteria costs are allocated first, based on number of employees; Custodial Department costs are allocated second, based on square feet occupied. No distinction is made between fixed and variable costs. After all allocations, total amount of overhead cost contained in the Finishing Department will be: A) $156,800 B) $151,300 C) $154,600 D) $138,450 E) None of above. 1) Cafeteria to Custodial: $80,000 * 60/(60 + 360+180) = $8,000 Cafeteria to Finishing: $80,000 * 180/(60 + 360+180) = $24,000 Total custodial cost: $68,000 2) Custodial to Finishing: $68,000 * 90,000/(60,000 + 90,000) = $40,800

Total cost in Finishing: $86,500 + 24,000 + 40,800 = $151,300

13. Curly Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 16,000 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows:

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 1 minutes on the machine that is the company's current constraint. If the component were bought, this machine time would be freed up for use on another product that requires 2 minutes on the constraining machine and that has a contribution margin of $8.10 per unit. When deciding whether to make or buy the component, what is the maximum price the company would pay if it decides to buy? A. $20.60 B. $17.52 C. $24.65 D. $21.57 E. $23.52 Cost of buying
Avoidable cost if buying from outside Variable manufacturing cost FOH Additional opportunity cost if buying from outside

-P
8.1 + 6.4 + 1.7 = $16.2 4.4 * 30% = $1.32 8.1/2 = 4.05

P = $16.2 + $1.32 + $4.05 = $21.57