Accounting Study Set 8

Business

Quiz 21 :

Cost Behavior Andcost-Vo Ume-Profit Analysis

Quiz 21 :

Cost Behavior Andcost-Vo Ume-Profit Analysis

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Classify costs Following is a list of various costs incurred in producing toy robotic helicopters. With respect to the production and sale of these toy helicopters, classify each cost as either variable, fixed, or mixed. 1. Property taxes, $210,000 per year on factory building and equipment 2. Janitorial costs, $5,000 per month 3. Metal 4. Packaging 5. Salary of plant manager 6. Oil used in manufacturing equipment 7. Cost of labor for hourly workers 8. Plastic 9. Straight-line depreciation on the production equipment 10. Computer chip (purchased from a vendor) 11. Electricity costs, $0.10 per kilowatt-hour 12. Rent on warehouse, $12,000 per month plus $20 per square foot of storage used 13. Pension cost, $0.75 per employee hour on the job 14. Hourly wages of machine operators 15. Property insurance premiums, $2,000 per month plus $0,008 for each dollar of property over $1,000,000
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Fixed costs are the cost which remain same even when the activity base changes. Straight line depreciation is one of the example of fixed cost.
Mixed Costs are costs which are also known as semi variable costs. They have features of both fixed cost and variable cost.
Variable costs are the cost which increase/ decrease proportionately with change in activity level.
Classification of Cost
1. Fixed cost as the taxes won't change due to change in activity.
2. Fixed cost as they won't change due to change in activity.
3. Variable cost as the requirement shall change as quantity produced changes.
4. Variable cost as the requirement shall change as quantity produced changes.
5. Fixed cost as they won't change due to change in activity.
6. Variable cost as the requirement shall change due to change in activity level.
7. Variable cost as the requirement shall change due to change in activity level.
8. Variable cost as the requirement shall change due to change in activity level.
9. Fixed cost as they won't change due to change in activity.
10. Fixed cost as they won't change due to change in activity.
11. Fixed cost as they won't change due to change in activity.
12. Mixed Cost as it is fixed and variable.
13. Fixed cost as they won't change due to change in activity.
14. Variable cost as the requirement shall change due to change in activity level.
15. Mixed Cost as it is fixed and variable.

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Break-even sales under present and proposed conditions Boleyn Company, operating at full capacity, sold 120,000 units at a price of $140 per unit during 2014. Its income statement for 2014 is as follows: The division of costs between variable and fixed is as follows: img Management is considering a plant expansion program that will permit an increase of $2,800,000 in yearly sales. The expansion will increase fixed costs by $1,250,000, but will not affect the relationship between sales and variable costs. Instructions 1. Determine the total fixed costs and the total variable costs for 2014. 2. Determine for 2014 (a) the unit variable cost and (b) the unit contribution margin. 3. Compute the break-even sales (units) for 2014. 4. Compute the break-even sales (units) under the proposed program. 5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $5,650,000 of income from operations that was earned in 2014. 6. Determine the maximum income from operations possible with the expanded plant. 7. If the proposal is accepted and sales remain at the 2014 level, what will the income or loss from operations be for 2015 8. Based on the data given, would you recommend accepting the proposal Explain.
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1. Total Fixed costs and Variable cost
img 2. Unit cost
img img * Contribution margin = Sales - Variable cost
3. Break-even sales (units) for 2014
img 4. Break-even sales (units) - proposed program
img Break-even sales
img 5. Desired sales (units)
Contribution Margin = Fixed Costs + Desired Income
img img =10,850,000
img img 6. Maximum income from operations
Maximum income shall be realized when Company operates at full capacity and sells 120,000 units
img 7. Income from operations in 2015
It shall be $4,400,000 as production and sales have been at full capacity of plant.
8. Accept or reject the proposal
No, if the proposal is accepted and sales remain same there would be decrease in income from operations by S1,250,000.

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Contribution margin Elon Company sells 6,000 units at $80 per unit. Variable costs are $50 per unit, and fixed costs are $50,000. Determine (a) the contribution margin ratio, (b) the unit contribution margin, and (c) income from operations. Weidner Company sells 22,000 units at $30 per unit. Variable costs are $24 per unit, and fixed costs are $40,000. Determine (a) the contribution margin ratio, (b) the unit contribution margin, and (c) income from operations.
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21.2A Contribution Margin
img a. Contribution Margin Ratio
img b. Unit Contribution Margin
As calculated above = $30
c. Income from Operations
img 21. 2B Contribution Margin
img a. Contribution Margin Ratio
img b. Unit Contribution Margin
As calculated above = $6
c. Income from Operations
img

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Break-even sales and cost-volume-profit chart For the coming year, Cleves Company anticipates a unit selling price of $100, a unit variable cost of $60, and fixed costs of $480,000. Instructions 1. Compute the anticipated break-even sales (units). 2. Compute the sales (units) required to realize a target profit of $240,000. 3. Construct a cost-volume-profit chart, assuming maximum sales of 20,000 units within the relevant range. 4. Determine the probable income (loss) from operations if sales total 16,000 units.
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In applying the high-low method of cost estimation, how is the total fixed cost estimated
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Variable costs and activity bases in decision making The owner of Warwick Printing, a printing company, is planning direct labor needs for the upcoming year. The owner has provided you with the following information for next year's plans: img Each color on the banner must be printed one at a time. Thus, for example, a four-color banner will need to be run through the printing operation four separate times. The total production volume last year was 800 banners, as shown below. img As you can see, the four-color banner is a new product offering for the upcoming year. The owner believes that the expected 1,000-unit increase in volume from last year means that direct labor expenses should increase by 125% (1,000/800). What do you think
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Ethics and professional conduct in business Edward Seymour is a financial consultant to Cornish Inc., a real estate syndicate. Cornish Inc. finances and develops commercial real estate (office buildings). The completed projects are then sold as limited partnership interests to individual investors. The syndicate makes a profit on the sale of these partnership interests. Edward provides financial information for the offering prospectus, which is a document that provides the financial and legal details of the limited partnership offerings. In one of the projects, the bank has financed the construction of a commercial office building at a rate of 10% for the first four years, after which time the rate jumps to 15% for the remaining 20 years of the mortgage. The interest costs are one of the major ongoing costs of a real estate project. Edward has reported prominently in the prospectus that the break-even occupancy for the first four years is 65%. This is the amount of office space that must be leased to cover the interest and general upkeep costs over the first four years. The 65% break-even is very low and thus communicates a low risk to potential investors. Edward uses the 65% break-even rate as a major marketing tool in selling the limited partnership interests. Buried in the fine print of the prospectus is additional information that would allow an astute investor to determine that the break-even occupancy will jump to 95% after the fourth year because of the contracted increase in the mortgage interest rate. Edward believes prospective investors are adequately informed as to the risk of the investment. Comment on the ethical considerations of this situation.
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Describe how total variable costs and unit variable costs behave with changes in the level of activity
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Break-even point Recovery Enterprises sells a product for $90 per unit. The variable cost is $60 per unit, while fixed costs are $45,000. Determine (a) the break-even point in sales units and (b) the break-even point if the selling price were increased to $110 per unit. Elrod Inc. sells a product for $75 per unit. The variable cost is $45 per unit, while fixed costs are $48,000. Determine (a) the break-even point in sales units and (b) the breakeven point if the selling price were increased to $95 per unit.
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Identify cost graphs The following cost graphs illustrate various types of cost behavior: img For each of the following costs, identify the cost graph that best illustrates its cost behavior as the number of units produced increases. a. Total direct materials cost b. Electricity costs of $1,000 per month plus $0.10 per kilowatt-hour c. Per-unit cost of straight-line depreciation on factory equipment d. Salary of quality control supervisor, $20,000 per month e. Per-unit direct labor cost
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Describe how total fixed costs and unit fixed costs behave with changes in the level of activity.
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Which of the following costs would be classified as variable and which would be classified as fixed, if units produced is the activity base
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Break-even sales, contribution margin "For a student, a grade of 65 percent is nothing to write home about. But for the airline … [industry], filling 65 percent of the seats … is the difference between profit and loss. The [economy] might be just strong enough to sustain all the carriers on a cash basis, but not strong enough to bring any significant profitability to the industry.… For the airlines…, the emphasis will be on trying to consolidate routes and raise ticket prices.…" The airline industry is notorious for boom and bust cycles. Why is airline profitability very sensitive to these cycles Do you think that during a down cycle the strategy to consolidate routes and raise ticket prices is reasonable What would make this strategy succeed or fail Why Source: Edwin McDowell, "Empty Seats, Empty Beds, Empty Pockets," The New York Times , January 6, 1992, p. C3.
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Break-even analysis Somerset Inc. has finished a new video game, Snowboard Challenge. Management is now considering its marketing strategies. The following information is available: img *The cost of the video game, packaging, and copying costs. Two managers, James Hamilton and Thomas Seymour, had the following discussion of ways to increase the profitability of this new offering: James: I think we need to think of some way to increase our profitability. Do you have any ideas Thomas: Well, I think the best strategy would be to become aggressive on price. James: How aggressive Thomas: If we drop the price to $60 per unit and maintain our advertising budget at $15,000,000, I think we will generate total sales of 2,000,000 units. James: I think that's the wrong way to go. You're giving too much up on price. Instead, I think we need to follow an aggressive advertising strategy. Thomas: How aggressive James: If we increase our advertising to a total of $25,000,000, we should be able to increase sales volume to 1,400,000 units without any change in price. Thomas: I don't think that's reasonable. We'll never cover the increased advertising costs. Which strategy is best: Do nothing Follow the advice of Thomas Seymour Or follow James Hamilton's strategy
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Break-even sales under present and proposed conditions Howard Industries Inc., operating at full capacity, sold 64,000 units at a price of $45 per unit during 2014. Its income statement for 2014 is as follows: img The division of costs between variable and fixed is as follows: img Management is considering a plant expansion program that will permit an increase of $900,000 in yearly sales. The expansion will increase fixed costs by $212,500, but will not affect the relationship between sales and variable costs. Instructions 1. Determine the total fixed costs and the total variable costs for 2014. 2. Determine for 2014 (a) the unit variable cost and (b) the unit contribution margin. 3. Compute the break-even sales (units) for 2014. 4. Compute the break-even sales (units) under the proposed program. 5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $692,500 of income from operations that was earned in 2014. 6. Determine the maximum income from operations possible with the expanded plant. 7. If the proposal is accepted and sales remain at the 2014 level, what will the income or loss from operations be for 2015 8. Based on the data given, would you recommend accepting the proposal Explain.
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Classify costs Cromwell Furniture Company manufactures sofas for distribution to several major retail chains. The following costs are incurred in the production and sale of sofas: a. Fabric for sofa coverings b. Wood for framing the sofas c. Legal fees paid to attorneys in defense of the company in a patent infringement suit, 002425,000 plus $160 per hour d. Salary of production supervisor e. Cartons used to ship sofas Rent on experimental equipment, $50 for every sofa produced g. Straight-line depreciation on factory equipment h. Rental costs of warehouse, $30,000 per month i. Property taxes on property, plant, and equipment j. Insurance premiums on property, plant, and equipment, $25,000 per year plus $25 per $25,000 of insured value over $16,000,000 k. Springs l. Consulting fee of $120,000 paid to efficiency specialists m. Electricity costs of $0.13 per kilowatt-hour n. Salesperson's salary, $80,000 plus 4% of the selling price of each sofa sold o. Foam rubber for cushion fillings p. Janitorial supplies, $2,500 per month q. Employer's FICA taxes on controller's salary of $180,000 r. Salary of designers s. Wages of sewing machine operators t. Sewing supplies Instructions Classify the preceding costs as either fixed, variable, or mixed. Use the following tabular headings and place an X in the appropriate column. Identify each cost by letter in the cost column. img
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Break-even sales and cost-volume-profit chart For the coming year, Culpeper Products Inc. anticipates a unit selling price of $150, a unit variable cost of $110, and fixed costs of $800,000. Instructions 1. Compute the anticipated break-even sales (units). 2. Compute the sales (units) required to realize income from operations of $300,000. 3. Construct a cost-volume-profit chart, assuming maximum sales of 40,000 units within the relevant range. 4. Determine the probable income (loss) from operations if sales total 32,000 units.
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Identify activity bases For a major university, match each cost in the following table with the activity base most appropriate to it. An activity base may be used more than once, or not used at all. img
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High-low method The manufacturing costs of Buckley Industries for three months of the year are provided below. img Using the high-low method, determine (a) the variable cost per unit and (b) the total fixed cost. The manufacturing costs of Carrefour Enterprises for the first three months of the year are provided below. img Using the high-low method, determine (a) the variable cost per unit and (b) the total fixed cost.
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Classify costs Seymour Clothing Co. manufactures a variety of clothing types for distribution to several major retail chains. The following costs are incurred in the production and sale of blue jeans: a. Shipping boxes used to ship orders b. Consulting fee of $200,000 paid to industry specialist for marketing advice c. Straight-line depreciation on sewing machines d. Salesperson's salary, $10,000 plus 2% of the total sales e. Fabric f. Dye g. Thread h. Salary of designers i. Brass buttons j. Legal fees paid to attorneys in defense of the company in a patent infringement suit, $50,000 plus $87 per hour k. Insurance premiums on property, plant, and equipment, $70,000 per year plus $5 per $30,000 of insured value over $8,000,000 l. Rental costs of warehouse, $5,000 per month plus $4 per square foot of storage used m. Supplies n. Leather for patches identifying the brand on individual pieces of apparel o. Rent on plant equipment, $50,000 per year p. Salary of production vice president q. Janitorial services, $2,200 per month r. Wages of machine operators s. Electricity costs of $0.10 per kilowatt-hour t. Property taxes on property, plant, and equipment Instructions Classify the preceding costs as either fixed, variable, or mixed. Use the following tabular headings and place an X in the appropriate column. Identify each cost by letter in the cost column. img
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