Download ACC 212, Practice Test on Chapter 20 solutions

ACC 212, Practice Test on Chapter 20 solutions
Problem No. 1
Crosby Co. Electronics Division produces a radio/cassette player, among other products..
The following income statement shows the past year’s results from producing 40,000
products of different kinds (the relevant range of activity is between 30,000 and 50,000
and averages are shown). Several different divisions are located in the one building, and
several different products within the electronics department are manufactured using the
same production equipment. Consider the following requirements independently.
Budgeted Income Statement for the Electronics Division
Revenue
(40,000 x $40)
$1,600,000
Unit-level Variable costs
Materials Cost (40,000 x $20)
(800,000)
Labor Cost (40,000 x $10)
(400,000)
Manufacturing Overhead (40,000 x $3) (120,000)
Shipping & Handling to customers
(40,000 x $1)
(40,000)
Sales Commissions (40,000 x $5)
(200,000)
Contribution margin
40,000
Fixed Expenses
Depreciation on the building (prorated) (5,000)
Advertising of the radio/cassettes
(20,000)
Utilities (allocated)
(8,000)
Salary of production Supervisor(radio/c) (30,000)
Depreciation on Production Equipment (50,000)
Prorated share of CEO’s salary
(10,000)
Net Loss
(83,000)
Requirements:
a. Because the electronics division is operating at a loss, should Crosby Co.
eliminate this division? Support your answer with appropriate computations.
By what amount would the division’s elimination increase or decrease
profitability of the company as a whole?
Revenue
$1,600,000
Materials
( 800,000)
Labor
( 400,000)
Man OH
( 120,000)
Shipp & H
( 40,000)
Sales Com
( 200,000)
Advertising ( 20,000)
Salary PS
( 30,000)
Contrib
To Loss
($10,000) if eliminated
Note: All of the variable costs in this example will decrease if the division is
eliminated, and fixed costs of product advertising and the production supervisor’s
salary will also be eliminated. The building and product equipment are used by other
divisions and these costs continue, along with the CEO.
b. An international company has offered to buy 12,000 radio/cassette players for $38
each. It would sell the product in a foreign country so that Crosby’s existing
customers are not affected. There would be no sales commission, but shipping
and handling costs would increase to $2 per unit. Based on quantitative factors
only, should Crosby Co. accept the special order?
1. Is there sufficient idle capacity to take on the order, assuming that 40,000
players is the planned production and sale without the order?
No -- the relevant range is between 30,000 and 50,000. They could only make 10,000
of the 12,000 requested, without hurting regular sales.
2. Assume that there is sufficient capacity to do the order. Should Crosby
Co. accept this order? Support with numbers.
Differential revenue and costs if take on the special order:
Revenues
12,000 u * $38
Unit materials 12,000 * $20
Unit labor 12,000 * $10
Unit OH
12,000 * $3
Ship&Handl 12,000 * $2
Contribution to profit
=
=
=
=
$456,000
=
(240,000)
(120,000)
(36,000)
(24,000)
36,000
Note: Sales commissions depreciations, advertising, utilities, salary of production
supervisor, and prorated share of CEO salary are not increased or decreased by taking
on the special order, and therefore, are not used.
c. Crosby Co. has the opportunity to buy the 40,000 radio/cassette players it
currently makes from a foreign manufacturer for $42 per player. If the quality
would be as good as Crosby’s, should Crosby Co. make or buy its players?
Specifically, how much would it cost to buy the radio/cassette players than to
make them?
Buy: 40,000 radio/cassette players * $42 =
Make: Materials
Labor
$1,680,000 cost to buy
$800,000
$400,000
Manufacturing overhead
Supervisor’s Salary
$120,000
$ 30,000
$1,350,000 Cost to make
It is $330,000 cheaper to make the product than to buy it. Note in this decision, the
advertising of the product, shipping and handling and sales commissions are not
relevant, because the product will still be advertised for sale, shipped and commissions
paid whether it is purchased or manufactured by the company.
d. If Crosby Co. could rent out the space presently occupied by the manufacturer of
radio/cassette players, and the rent for the year would be $350,000, would Crosby
Co be better or worse off to buy the radio/cassettes and rent out the space?
Rent out the space
$350,000 contribution to profit
Keep the space and manufacture the radio/cassettes $330,000 contribution to profit
$ 20,000 better off to rent it out
Problem No. 2
Holly Berry Co. is considering building product A or product B for a customer. They
have already spent $1,000 to develop the cost analysis for product A and $1,500 for
product B. If product A is produced, it will cost $10 per unit for materials, $4 per unit for
labor, and $8 per unit for overhead. They will need to hire a supervisor and pay $30,000
a year for this person, if they produce A or B. They will also pay $20,000 a year for
depreciation, etc. on their sales and office building. Product A would bring in $100,000
of revenue, and Product B, $80,000.
Required:
For each of the items listed below, find one item from Problem No. 5 that is an example
1. Sunk cost – Cost analyses are already done, and thus not relevant for the
decisions
2. Differential revenue- the difference between the revenue from product a and
b.
3. Differential cost- the difference between such costs as unit level labor and
materials between a and b.
4. Opportunity cost- What they are giving up (i.e., interest earned on the money
invested) to manufacture either product a or b.
5. Unit-level cost -- Materials, labor or overhead costs.
6. Facility-level cost – Depreciation on the sales and office building.
Problem No. 3
Acme Manufacturing Company manufactures an electric jeep for toddlers. The
company expects production of 5,000 units this year. Currently, Acme produces the
gearing harness used in the vehicle. Acme has received an offer from Carter, Inc. an
outside vendor, to supply the harnesses. If production of the harness is discontinued
the company will be able to eliminate its product-level costs since no other products
along the same line are produced by the company. However, due to its concern for
quality, the company will have to inspect each harness. Various costs and items are
described below. For each item in the table, place a check mark in the column that
best describes the item in the context of the described outsourcing decision.
Item
Purchase cost of harnesses from
Carter
Rental income from the idled
facilities
Material costs
Direct labor costs
Variable overhead costs
Cost of equipment used to make
harnesses
Assembly setup costs
Materials handling costs
Inspection costs if harness is
purchased
Engineering design costs for
harnesses
Harness manager salary
Depreciation on machinery used to
produce harnesses
Allocated corporate costs
Other facility-level costs
Impact on employee morale if
production is discontinued
relevant
not relevant
varies/
opportunity does not sunk cost
future
cost
vary
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X