Download Demonstration Problem 4-1 Work Paper

Demonstration Problems for Class 3
Demonstration Problem 4-1 Special Order
Davis Driveways, Inc. (DDI) pours concrete driveways for single family homes. DDI uses a
cost plus pricing approach. The company’s accountant prepared the following report
showing how DDI established the price per driveway at $350.
Davis Driveways, Inc.
Cost Plus Pricing Policy
Materials
Labor
Overhead*
Total
Desired Profit
Price
$100
120
80
$300
50
$350
*Annual overhead cost for rent on the corporate office and supervisory
salaries is $80,000. Normal volume is 1,000 driveways per year.
Overhead cost per unit is determined as $80,000 / 1,000 units = $80 per
unit. The relevant range is from 800 to 1,500 units.
A new builder in town, Rachel Rodgers, has acquired a large tract of land upon which she
intends to build 200 single family homes. Ms. Rodgers offers to purchase all 200 driveways
from DDI. However, she is willing to pay only $250 per driveway.
Required
Assume your group is a management team responsible for deciding whether to accept or reject
Ms. Rodgers’ offer. Develop a response, support your decision with appropriate computations,
and choose a spokesperson to explain your answer.
Demonstration Problem 4-2 Contrast Relevance, Cost Behavior, and
Cost Type
Pass Fast, Inc. is considering two alternative locations in which to conduct its CPA review
course. One alternative is an exclusive hotel; the other is a moderately priced training facility.
The hotel is in a central location easily accessible to potential students. The training facility is in
a less desirable location. Pass Fast has gathered the following cost data regarding the two
locations.
Cost Items
Rental Fee for Classroom
Twenty Advertising Brochures Distributed to
each Student for Referrals
Cost of Instruction
Books (per student)
Refreshments (per student)
Depreciation on Instructional Equipment
Allocated Portion of Accounts Receivable
Collection Costs
Training
Cost
Product
Hotel Facility Relevant? Behavior or GS&A
$2,000 $1,500
250
5,000
100
5
400
250
5,000
100
4
400
450
500
Required
a. In the column titled “Relevant?” indicate whether each cost is relevant (Yes) or not relevant
(No) to deciding which facility to rent for the course.
b. In the column titled “Cost Behavior” indicate whether each cost is fixed, variable, or mixed
relative to the number of students attending the course.
c. In the column titled “Product or GS&A” indicate whether each cost would be classified as a
product cost or a general, selling, and administrative (GS&A) cost.
Demonstration Problem 4-1 Work Paper
Demonstration Problem 4-2 Work Paper
Cost Items
Hotel
Rental Fee for Classroom $2,000
Twenty Advertising
Brochures Distributed to
250
each Student for
Referrals
Cost of Instruction
5,000
Books (per student)
100
Refreshments
5
(per student)
Depreciation on
Instructional
400
Equipment
Allocated Portion of
Accounts Receivable
450
Collection Costs
Product
Training
Cost
or
Facility Relevant? Behavior GS&A
$1,500
250
5,000
100
4
400
500