Ex. 141

Hewitt Co. has 4,000 machine hours
available to produce either Product 22 or Product 44. The cost accounting
department developed the following unit information for each product:

Product
22 Product 44

Sales price $25 $50

Direct materials 6 8

Direct labor 3 2

Variable manufacturing overhead 4 5

Fixed manufacturing overhead 3 5

Machine time required 15 minutes 60 minutes

Instructions

Management wants to know which product to produce
in order to maximize the company’s income. Taking into consideration the
constraints under which the company operates, prepare a report to show which
product should be produced and sold.

Ex. 142

Reynolds, Inc. manufactures and sells two
products. Relevant per unit data concerning each product are given below:

Product

Standard Deluxe

Selling
price $50 $75

Variable
costs $26 $33

Machine
hours 2 3

Instructions

(a) Compute the contribution margin per unit of
limited resource for each product.

(b) If 1,000 additional machine hours are
available, which product should be manufactured?

Ex. 143

Oscar Corporation produces and sells
three products. Unit data concerning each product is shown below.

Product

X Y Z

Selling price $200 $300 $250

Direct labor costs 45 75 60

Other variable costs 110 130 106

Ex 143 (cont.)

The company has 2,000 hours of labor
available to build inventory in anticipation of the company’s peak season.
Management is trying to decide which product should be produced. The direct
labor hourly rate is $15.

Instructions

(a) Determine the number of direct labor hours
per unit.

(b) Determine the contribution margin per direct
labor hour.

(c) Determine which product should be produced
and the total contribution margin for that product.

Ex. 144

Shanahan Co. of Dublin, Ireland is contemplating
a major change in its cost structure. Currently, all of its drafting work is
performed by skilled draftsmen. Mike Shanahan the owner, is considering
replacing the draftsmen with a computerized drafting system.

However, before making the change, Mike
would like to know the consequences of the change, since the volume of business
varies significantly from year to year. Shown below are CVP income statements
for each alternative.

Manual
System Computerized System

Sales $1,500,000 $1,500,000

Variable costs 1,200,000 900,000

Contribution margin 300,000 600,000

Fixed costs
150,000 450,000

Net income $150,000 $150,000

Ex. 144 (cont.)

Instructions

(a) Determine the degree of operating leverage
for each alternative.

(b) Which alternative would produce the higher net
income if sales increased by $300,000?

\

Ex. 145

The following CVP income statements are available
for Chantal Corp. and Mantle, Inc.

Chantal
Corp. Mantle,
Inc.

Sales revenue $700,000 $700,000

Variable costs
350,000 210,000

Contribution margin 350,000 490,000

Fixed costs
175,000 315,000

Net income $175,000 $175,000

Instructions

(a) Compute the degree of operating leverage for
each company.

(b) Assume that sales revenue decreases by 20%.
Prepare a CVP income statement for each company.

Ex. 146

An investment banker is analyzing two companies
that specialize in the production and sale of gourmet cappuccino and chai
mixes. Roasted Beans Co. uses a labor-intensive approach and Monat Industries
uses a mechanized system. Variable costing income statements for the two
companies are shown below:

Roasted Beans Monat Industries

Sales $1,000,000 $1,000,000

Variable costs 650,000 300,000

Contribution margin 350,000 700,000

Fixed costs
175,000 525,000

Net Income $ 175,000 $ 175,000

The investment banker is interested in acquiring
one of these companies. However, she is concerned about the impact that each
company’s cost structure might have on its profitability.

Instructions

(a) Calculate
each company’s degree of operating leverage.

(b) Determine
the effect on each company’s net income if sales decrease by 10% and if sales
increase by 15%. Do not prepare income statements.

^aEx. 147

Indicate with a check mark whether each of the
following would be a product cost or a period cost under an absorption or a
variable system for Sour Industries.

Absorption Variable

Product Period Product Period

a. Direct
materials _________ _________ _________ ________

b. Direct
labor _________ _________ _________ ________

c. Factory
utilities _________ _________ _________ ________

d. Factory
rent _________ _________ _________ ________

e. Indirect
labor _________ _________ _________ ________

f. Factory
supervisor salaries _________ _________ _________ ________

g. Factory
maintenance (variable) _________ _________ _________ ________

h. Factory
depreciation _________ _________ _________ ________

i. Sales
salaries _________ _________ _________ ________

j. Sales
commissions _________ _________ _________ ________

^aEx. 148

Nimble Corp. manufactures and sells a variety of
camping products. Recently the company opened a new plant to manufacture a
deluxe portable cooking unit. Cost and sales data for the first month of
operations are shown below:

Manufacturing
Costs

Fixed Overhead $140,000

Variable overhead $3 per unit

Direct labor $12 per
unit

Direct material $30 per unit

Beginning
inventory 0
units

Units
produced 10,000

Units
sold 9,000

Selling
and Administrative Costs

Fixed $200,000

Variable $4
per unit sold

The portable cooking unit sells for
$110. Management is interested in the opening month’s results and has asked for
an income statement.

Instructions

Assume the company uses absorption costing.
Calculate the production cost per unit and prepare an income statement for the
month of June, 2013.

^aEx. 149

On-Road Wheels, Inc. manufactures a basic road
bicycle. Production and sales data for the most recent year are as follows (no
beginning inventory):

Variable production costs $90 per bike

Fixed production costs $400,000

Variable selling and administrative
costs $22 per bike

Fixed selling and administrative costs $550,000

Selling price $200
per bike

Production 20,000
bikes

Sales 18,000
bikes

Instructions

(a) Prepare a brief income statement using
absorption costing.

(b) Compute the amount to be reported for
inventory in the year-end absorption costing balance sheet.

^aEx. 150

On-Road
Wheels, Inc. manufactures a basic road bicycle. Production and sales data for
the most recent year are as follows (no beginning inventory):

Variable production costs $95 per bike

Fixed production costs $400,000

Variable selling and administrative
costs $22 per bike

Fixed selling and administrative costs $550,000

Selling price $200
per bike

Production 20,000
bikes

Sales 16,000
bikes

Instructions

(a) Prepare a brief income statement using
variable costing.

(b) Compute the amount to be reported for
inventory in the year-end variable costing balance sheet.

^aEx. 151

Cutting Edge Corp. produces sporting equipment.
In 2012, the first year of operations, Cutting Edge produced 25,000 units and
sold 20,000 units. In 2013, the production and sales results were exactly
reversed. In each year, selling price was $100, variable manufacturing costs
were $40 per unit, variable selling expenses were $8 per unit, fixed
manufacturing costs were $540,000, and fixed administrative expenses were
$200,000.

Instructions

(a) Compute the net income under variable costing
for each year.

(b) Compute the net income under absorption
costing for each year.

(c) Reconcile the differences each year in income
from operations under the two costing approaches.

^aEx. 152

Graham is a division of Flynn, Inc. The division
manufactures and sells a pump that is used in a wide variety of applications.
During the coming year, it expects to sell 30,000 units for $25 per unit. Steve
Moss, division manager, is considering producing either 30,000 or 35,000 units
during the period. Other information is presented in the schedule below:

Division Information – 2013

Beginning inventory 0

Expected sales in units 30,000

Selling price per unit $25

Variable manufacturing cost per unit $7

Fixed manufacturing overhead costs
(total) $420,000

Fixed manufacturing overhead costs per
unit

Based on 30,000 units ($420,000÷ 30,000) $14

Based on 35,000 units ($420,000÷ 35,000) $12

Manufacturing
cost per unit

Based on 30,000 units ($7 variable + $14 fixed) $21

Based on 35,000 units ($7 variable + $12 fixed) $19

Selling
and administrative expenses (all fixed) $25,000