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Cost Accounting Foundations And Evolutions 6th Edition Michael R. Kinney, Jenice Prather-Kinsey, Cecily A. Raiborn - Solutions
Incremental sales) Marlins Industries has annual sales of $1,250,000 with variable expenses of 60 percent of sales and fixed expenses per month of $25,000. By how much must annual sales increase for Marlins Industries to have pre-tax income equal to 30 percent of sales?LO.1
((:VP; taxes) Jack McDeonary has a small plant that makes gasoline-powered golf carts. The selling price is $4,000 each, and costs are as follows:McDeonary’s income is taxed at a 35 percent rate.a. How many golf carts must McDeonary sell to earn $500,000 after tax?b. What level of revenue is
(Volume and pricing) Rae Ditzy is the county commissioner of Geismer. She had decided to institute tolls for local ferry boat passengers. After the tolls had been in effect for four months, Astra Astute, county accountant, noticed that collecting $725 in tolls incurred a daily cost of $900. The
(Comprehensive) Compute the answers to each of the following indepen¬ dent situations.a. Orlando Ray sells liquid and spray mouthwash in a sales mix of 2:4, re¬ spectively. The liquid mouthwash has a contribution margin of $10 per unit; the spray’s CM is $5 per unit. Annual fixed costs for the
(Formula; graph; income statement) Lou & Art Inc. had the following income statement for 2007.a. Compute the break-even point using the equation approach.b. Prepare a CVP graph to reflect the relationships among costs, revenues, profit, and volume.c. Prepare a profit-volume graph.d. Prepare a
(CVP; multiproduct) Howe Wholesalers sells baseball products. Its Little League Division handles both bats and gloves. Historically, the firm’s sales have averaged six bats for every two gloves. Each bat has a $4 contribution margin, and each glove has a $5 contribution margin. The fixed cost of
(Multiproduct) Whee-Go makes three types of scooters. The company’s total fixed costs are $1,080,000,000. Selling prices, variable costs, and sales per¬ centages for each type of scooter follow.a. What is Whee-Go’s break-even point in units and sales dollars?b. If the company has an after-tax
CVP; margin of safety) Harry Potted grows corn in Nebraska. He currently sells his corn at $2.25 per bushel. Variable costs associated with growing and selling a bushel of corn is $1.80. Annual fixed costs are $74,250.a. What is the break-even point in sales dollars and bushels of corn? If
(CVP; operating leverage) Brenda’s Nail Salon provides sculptured nail mani¬ cures for $40. Variable cost per set is $10 and monthly fixed cost is $1,050.a. What is the break-even point in units and sales dollars?b. If Brenda Boudreaux, the owner, wants the business to earn a pre-tax profit of
(Operating leverage; margin of safety) Tampa Packing makes a protein drink, Bottled Energy. The selling price per half-gallon is $3.60, and variable cost of production is $2.16. Total fixed costs per year are $316,600. The company is currently selling 250,000 half-gallons per year.a. What is the
(Leverage factors; essay) A group of prospective investors has asked for your help in understanding the comparative advantages and disadvantages of building a company that is either labor intensive or, in contrast, one that uses significant cutting-edge technology and is therefore capital
(Product cost; essay) A friend of yours, attending another university, states that she learned that CVP is a short-run-oriented model and is, therefore, of limited usefulness. Your professor, however, has often discussed CVP in pre¬ sentations about long-run planning to your cost accounting class.
(Ethics; essay) Valdez Chemical Company’s new president has learned that, for the past four years, the company has been dumping its industrial waste into the local river and falsifying reports to authorities about the levels of suspected cancer-causing materials in that waste. The plant manager
(Essay; Internet) A significant trend in business today is the increasing use of outsourcing. Go to the Internet and search Web sites with the objective of gaining an understanding for the vast array of outsourcing services that are available. Prepare a presentation in which you discuss the
CAT decision alternatives Dusty Baker owns a sports brokerage agency and sells tickets to major league baseball, football, and basketball games. He also sells sports travel packages that include game tickets, airline tickets, and ho¬ tel accommodations. Revenues are commissions based as follows:a.
CVP) Abraham Inc., in business since 1995, makes swimwear for profes¬ sional athletes. Analysis of the firm’s financial records for the current year reveals the following:The company’s tax rate is 40 percent. Louise Abraham, company president, has asked you to help her answer the following
(CVP) CSP Inc. makes a child’s jumper chair that sells for $60. Variable man¬ ufacturing and variable selling costs are, respectively, $35 and $10 per unit.Annual fixed costs are $975,000.a. What is the contribution margin per unit and the contribution margin ratio?b. What is the break-even
(CVP single product; comprehensive) Speedy Gonzalez Inc. makes baseballs that sell for $12.50. Annual production and sales are 240,000 balls. Costs for each ball are as follows:a. Calculate the unit contribution margin in dollars and the contribution margin ratio for the company.b. Determine the
(Graph) Thunderbird Club has the following monthly cost and fee informa¬ tion: monthly membership fee per member, $25; monthly variable cost per member, $12; and monthly fixed cost, $1,800. Costs are extremely low be¬ cause volunteers provide almost all services and supplies.a. Prepare a
(Multiproduct firm) Techno Sounds, Inc., makes portable refrigerators, ice trays, and batteries that sell in a normal sales mix of 1:3:6. The following fi¬ nancial information is available:The firm is in a 40 percent tax bracket.a. What is the annual break-even point in revenues?b. How many
(Multiproduct firm) Decoy Inc. makes small pressed resin roosters and hens.For every rooster sold, the company sells two hens. The following informa¬ tion is available about the company’s selling prices and costs:a. What is the average contribution margin ratio?b. Calculate the monthly
(Multiproduct firm) Anaheim Company produces and sells V8 car engines and lawn mower engines in a sales mix of three V8s to five lawn mower engines. Selling prices for the V8 and lawn mower engines are $1,200 and $240, respectively; respective variable costs are $480 and $160. The com¬ pany’s
(Comprehensive; multiproduct) Greenbacks Flooring makes three types of artificial turf: astro, golf, and lawn. The company’s tax rate is 40 percent.The following costs are expected for 2006:a. Calculate the break-even point for 2006.b. How many square yards of each product are expected to be sold
(CVP analysis) Jim Tracy owns Sportsday Hotel, a luxury hotel with 60-two bedroom suites for coaches and their players. Capacity is 10 coaches and 50 players. Each suite is equipped with extra long king-sized beds, supertail and extended shower heads, extra tall bath room vanities, a laptop, and a
(CVP analysis; advanced) Piratrac Railways is a luxury passenger carrier in South Africa. All seats are first class, and the following data are available.a. What is the break-even point in passengers and revenues?b. What is the break-even point in number of passenger train cars?c. If Piratrac
(Incremental analysis) Fair Winds Co. makes portable hair dryers. You have been asked to predict the potential effects of some proposed company changes. The following information is available:The selling price is $23.50 per unit, and expected sales volume for the cur¬ rent year is 150,000 units.
(MS; DOL; PV graph) You are considering buying one of two local firms (VPI and TECH). VPI uses a substantial amount of direct labor in its manu¬ facturing operations and its salespeople work on commission. TECH uses the latest automated technology in manufacturing; its salespeople are salaried.
CVP; DOL; MS—two quarters; comprehensive) Following is information per¬ taining to Tigers Company’s operations of the first and second quarter of 2007:Additional Information • There were no beginning/ending finished goods at January 1, 2007.• Tigers writes off any quarterly underapplied or
WHAT FACTORS ARE RELEVANT IN MAKING DECISIONS AND WHY? LO.1
WHAT ARE SUNK COSTS, AND WHY ARE THEY NOT RELEVANT IN MAKING DECISIONS?LO.1
WHAT ARE THE RELEVANT CONSIDERATIONS IN OUTSOURCING?LO.1
HOW CAN MANAGEMENT MAKE THE BEST USE OF A SCARCE RESOURCE?LO.1
HOW DOES SALES MIX PERTAIN TO RELEVANT COSTING PROBLEMS?LO.1
HOW ARE SPECIAL PRICES SET, AND WHEN ARE THEY USED?LO.1
HOW IS SEGMENT MARGIN USED TO DETERMINE WHETHER A PRODUCT LINE SHOULD BE RETAINED OR ELIMINATED?LO.1
(APPENDIX) HOW IS A LINEAR PROGRAMMING PROBLEM FORMULATED?LO.1
Because of their association with the decision, im¬ portance to the decision maker, and bearing on the future, the following items are relevant in decision making:• incremental or differential costs that vary between decision choices.• opportunity costs, which represent the benefits sacrificed
Sunk costs are costs incurred in the past to acquire assets or resources. are not relevant to making decisions because they cannot be changed regardless of which future course of action is taken. are not recoverable regardless of current cir- cumstances.LO.1
Relevant considerations in outsourcing (or offshoring) decisions include quantitative factors such as incremental/differential production costs. opportunity costs. external purchase costs. cash flow. qualitative factors such as capacity availability. quality control. technology availability.
A scarce resource is essential to production activity but is available only in limited quantity.• includes machine hours, skilled labor hours, raw materials, and production capacity.• requires management to make decisions using the contribution margin per unit of scarce re¬ source;
Sales mix is important in relevant costing problems because it will be affected by changes in sales prices. sales compensation methods. advertising budgets.LO.1
Special prices . are generally set based on relevant variable pro- duction and selling costs and, if any, incremen- tal fixed costs. may or may not include a profit amount. are used when companies bid on special order jobs, such as those that > require a bid. are accepted during slack periods. are
Segment margin . represents the excess of revenues over direct vari- able expenses and avoidable fixed expenses of a specific product/service line. measures the segment's contribution to the cov- erage of indirect and unavoidable expenses. is used to decide whether a product line should be
What does the term relevance mean in the context of cost analysis for mak¬ ing management decisions?LO.1
How does the passage of time affect the set of costs that is relevant to a de¬ cision?LO.1
What are opportunity costs and why are they arguably the most difficult set of costs to analyze in making a decision?LO.1
Describe sunk costs. Are there circumstances in which sunk costs are rele¬ vant to decisions? Discuss.LO.1
What is outsourcing? Why is it heatedly debated?LO.1
What is a scarce resource? Why is the most scarce resource in an organiza¬ tion likely to change from time to time?LO.1
What is the objective of managing the sales mix of products? What are the major factors that influence sales mix?LO.1
What is a special order decision? Under what circumstances would a com¬ pany refuse to accept a special order?LO.1
What is segment margin? How is segment margin used in the quantitative analysis of a decision to drop or keep a product line?LO.1
(Appendix) Under what circumstances is linear programming needed to ana¬ lyze a scarce resource decision?LO.1
(Relevant costs) Assume that you are about to graduate from your university. You are trying to decide whether to apply for graduate school or enter the job market. To help make the decision, you have gathered the following data:a. Which of these factors are relevant to your decision?b. What is the
(Relevant costs) Because of a monumental error committed by its purchasing department, JC’s Grocery ordered 50,000 heads of lettuce rather than the 500 that should have been ordered. The company paid $0.60 per head for the lettuce. Although management is confident that it can sell 5,000 units
(Relevant vs. sunk costs) Your roommate, Sara Canfield, purchased a new cordless telephone just before this school term for $70. Shortly after the se¬ mester began, Sara’s phone was crushed by an errant “flying plant” during a party at her apartment. Returning the equipment to her retailer,
Asset replacement) Certain production equipment used by Westside Manu¬ facturing has become obsolete relative to current technology. The company is considering whether it should keep or replace its existing equipment. To aid in this decision, the company’s controller gathered the following
Asset replacement) On April 1, 2006, Panther Hydraulics purchased new computer-based production scheduling software for $120,000. On May 15, 2006, a representative of a computerized manufacturing technology company demonstrated new software that was clearly superior to that purchased by the firm in
(Outsourcing) Highland Technologies manufactures fiberglass housings for portable generators. One part of a housing is a metal latch. Currently, the company produces the 120,000 metal latch units required annually. Com¬ pany management is considering purchasing the part from an external ven¬ dor.
(Outsourcing) Lincoln Steel Co. produces pickup truck bumpers that it sells on a wholesale basis to new car retailers. The average bumper sales price is $120. Normal annual sales volume is 150,000 units, which is maximum pro¬ duction capacity. At this capacity, the company’s per-unit costs are
(Outsourcing) Pneumatic Shoe Company manufactures various types of shoes for sports and recreational use. Several types require a built-in air pump. Presently, the company makes all air pumps it requires. However, management is evaluating an offer from Cloud Supply Co. to provide air pumps at a
(Allocation of scarce resources) Because the employees of one of the com¬ pany’s plants are on strike, the Elkhorn Digital plant is operating at peak ca¬ pacity. It makes two electronic products, MP3 players and PDAs. Presently, the company can sell as many of each product as can be made, but
(Allocation of scarce resources) Latoya Jones received her accounting degree in 1976. Since graduating, she has obtained significant experience in a vari¬ ety of job settings. Her skills include auditing, income and estate taxation, and business consulting. Jones currently has her own practice,
(Special order) Farmer’s Wire Co. produces 15-gauge barbed wire that is re¬ tailed through farm supply companies. Presently, the company has the ca¬ pacity to produce 50,000 tons of wire per year. It is operating at 85 percent of annual capacity, and at this level of operations, the cost per
(Special order) Classic Wood Products produces solid-oak umbrella stands. Each stand is handmade and hand finished using the finest materials avail¬ able. The firm has been operating at capacity for the past three years (2,000 stands per year). Based on the capacity level operations, the firm’s
(Sales mix) Canine Challet provides two types of services to dog owners, grooming and training. All company personnel can perform each service equally well. To expand sales and market share, Canine Challet’s manager, Brenda Bulldog, relies heavily on radio and billboard advertising, but the 2006
(Sales mix) One product produced and sold by Ohio Outdoors is an ATV gun rack for which 2006 projections follow:a. Compute the projected pre-tax profit to be earned on the ATV gun rack during 2006,b. Corporate management estimates that unit volume could be increased by 20 percent if sales price
Product line) Operations of Tanner Oil Drilling Services are separated into two geographical divisions: United States and Mexico. The operating results of each division for 2006 follow.Corporate fixed costs are allocated to the divisions based on relative sales. Assume that all of a division’s
(Product line) Support Services provides outsourcing services for three areas: payroll, general ledger (GL), and tax compliance. The company is currently contemplating the elimination of the GL area because it is showing a pre-tax loss. An annual income statement follows:a. Should corporate
(Appendix) The contribution margins for three different products are $9.50, $5.00, and $1.50. State the objective function in equation form to maximize the contribution margin.LO.1
(Appendix) The variable costs for four different products are $0.65, $0.93, $1.39, and $0.72. State the objective function in equation form to minimize the variable costs.LO.1
(Appendix) California Fashions makes three items: pants, shorts, and shirts. The contribution margins are $3.25, $2.05, and $2.60 per unit, respectively. The manager must decide what mix of clothes to make. The company has 800 labor hours and 4,000 yards of material available. Additional
(Appendix) Josie Galvez is a college student with a food budget of $120 per month. She wants to get a certain level of nutritional benefits from the food she buys. The following table lists the foods she can buy with the nutri¬ tional information per serving.LO.1 Carbohydrates Protein Potassium
(Asset replacement) Clarion Tools recently created a new product, a com¬ puter-controlled, laser-precise lathe, and Midwest Ornamental Metals is con¬ sidering purchasing one. Midwest’s CFO received the following information from the accounting department regarding the company’s existing lathe
Asset replacement) Northern Plains Energy Company provides electrical ser¬vices to several rural counties in Nebraska and South Dakota. Its efficiency has been greatly affected by changes in technology. The company is cur¬ rently considering the replacement of its main steam turbine, which was
(Outsourcing) Handy Grab Inc. manufactures handles for suitcases and other luggage. Attaching each handle to the luggage requires two to six standard fasteners, which the company has historically produced. The costs to pro¬ duce one fastener (based on capacity operation of 4,000,000 units per
(Outsourcing) Modern Building Systems manufactures steel buildings for agricultural and commercial applications. Currently, it is trying to decide be¬ tween two alternatives regarding a major overhead door assembly for the company’s buildings. The alternatives are as follows:# 1: Purchase new
(Sales mix with scarce resources) EuroCycles makes wholly by hand three unique bicycle models: racing, touring, and basic. All products are made by skilled craftspeople experienced in making all three models. Because it takes about a year to train each craftsperson, labor is a fixed production
(Sales mix) Lassiter Leather produces leather belts and key fobs that sell for$40 and $10, respectively. The company currently sells 100,000 units of each type with the following operating results:Corporate management has expressed its disappointment with the income be¬ ing generated from the
(Product line) Birnberg Food Service sells quality ice cream and steaks via home delivery. Income statements showing revenues and costs of fiscal year 2006 for each product line follow:Management is concerned about profitability of steaks and is considering dropping the line. Management estimates
(Product line) You have been hired to assist the management of Posture Perfect Chair Company in resolving certain issues. Posture Perfect has its home office in Tennessee and leases facilities in Tennessee, Georgia, and Florida, where it produces a high-quality bean bag chair designed for resi¬
(Comprehensive) Jersey Glass Products has processing plants in Ohio and New Jersey. Both plants use recycled glass to produce jars that a variety of food processors use in food canning. The jars sell for $10 per hundred units. Budgeted revenues and costs for the year ending December 31, 2006, in
(Sales and profit improvement) Pink Passion is a retail organization that sells upscale clothing to girls and young women in the Northeast. Each year, store managers in consultation with their supervisors establish financial goals, and then a monthly reporting system captures actual perfor¬
Special order) Clean-N-Brite is a multiproduct company with several manufacturing plants. The Cincinnati plant manufactures and distributes two household cleaning and polishing compounds, regular and heavy duty, under the HouseSafe label. The forecasted operating results for the first six months of
(Special order) Hydraulic Engineering, located in Toronto, manufactures a variety of industrial valves and pipe fittings sold to customers in the United States. Currently, the company is operating at 70 percent of capacity and is earning a satisfactory return on investment.Prince Industries Ltd. of
(Ethics essay) Karlson Computers manufactures computers and all compo¬ nents. Its purchasing agent informed the company owner, Alberta Karlson, that another company had offered to supply keyboards for Karlson’s com¬ puters at prices below the variable costs at which Karlson can make them.
WHY IS VARIABLE COSTING MORE USEFUL THAN ABSORPTION COSTING IN DETERMINING THE BREAK-EVEN POINT AND DOING COST-VOLUME-PROFIT ANALYSIS? LO.1
HOW IS THE BREAK-EVEN POINT DETERMINED USING THE FORMULA APPROACH, GRAPH APPROACH, AND INCOME STATEMENT APPROACH? LO.1
HOW CAN A COMPANY USE COST-VOLUME-PROFIT (CVP) ANALYSIS? LO.1
HOW DO BREAK-EVEN AND CVP ANALYSIS DIFFER FOR SINGLE-PRODUCT AND MULTIPRODUCT FIRMS? LO.1
HOW ARE MARGIN OF SAFETY AND OPERATING LEVERAGE CONCEPTS USED IN BUSINESS? LO.1
WHAT ARE THE UNDERLYING ASSUMPTIONS OF CVP ANALYSIS? LO.1
Variable costing is more useful than absorption cost¬ ing in determining break-even point and doing cost- volume-profit analysis because variable costing• shows costs separated by cost behavior in vari¬ able and fixed categories rather than by func¬ tional classification as in absorption
Break-even point can be determined using the• formula approach by solving the following for¬ mulas for X.>- X — Fixed Cost •= Contribution Margin; where X = BEP in units>- X = Fixed Cost A- Contribution Margin Ra¬ tio; where X = BEP in sales dollars• graph approach>- by reading the y-axis
Cost-volume-profit (CVP) analysis can be used by a company to• determine break-even point by assigning a zero value to the profit figure.• study the interrelationships of >• prices,>■ volumes,>- contribution margins.• calculate the level of sales volume necessary to achieve specific
In a multiproduct environment, break-even and CVP analysis• require that a constant product sales mix or “bag” assumption be used for the various products.• require that a weighted average contribution mar¬ gin or CM ratio be calculated for each “bag” of product sold.• state
Companies use the margin of safety (MS) and degree of operating leverage (DOL) concepts as follows:• the MS indicates how far (in units, in sales dol¬ lars, or as a percentage) a company is operating from its break-even point; the MS percentage is equal to (1 — degree of operation
The break-even and CVP models are based on sev¬ eral assumptions that limit their ability to reflect re¬ ality. Underlying assumptions are that• revenue and variable cost per unit are constant and linear within the relevant range.• contribution margin is linear within the relevant range.•
WHY IS BUDGETING IMPORTANT? LO.1
HOW IS STRATEGIC PLANNING RELATED TO BUDGETING?LO.1
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