ASSIGNMENT 1 Prepare your answers for both Section A and Section B in a spreadsheet file and/or a word-processing file in a format compatible with Microsoft Office. You must upload your answer files for marking, following the instructions on the right-hand side of this page. Section A consists of 20 multiple-choice questions, worth 1 mark each. Section B consists of four problems, worth 75 marks total, and a critical-thinking problem, worth 5 marks. Work must be shown to receive full marks. Section A Multiple-Choice Questions (20 marks) Section A consists of 20 multiple-choice questions, each worth 1 mark. Indicate the best response for each of the following questions. Use the following information to answer Questions 1 and 2: Fine Cutlery Inc. is a manufacturer of quality carving knives. The company has always used a plant-wide allocation rate for allocating manufacturing overhead to its products. The plant manager believes it is time to change to a better method of cost allocation. The accounting department has established the following relationships between production activities and manufacturing overhead costs: Activity Cost Driver Allocation Rate Materials handling Number of parts $4 per part Assembly Labour-hours $40 per hour Inspection Time spent by item at inspection station $6 per minute The previous plant-wide allocation rate method was based on direct manufacturing labour-hours, and if that method is used, the allocation rate is $400 per labour-hour. 1. Assume that a batch of 1000 carving knives requires 2,000 parts, 20 direct manufacturing labour-hours, and 30 minutes of inspection time. What are the indirect manufacturing costs per carving knife to produce a batch of 1000 carving knives, assuming the previous plant-wide allocation rate method is used? a. $8.00 b. $9.80 c. $8000.00 d. $9800.00 2. Assume that a batch of 100 carving knives requires 200 parts, 12 direct manufacturing labour-hours, and 5 minutes of inspection time. What are the indirect manufacturing costs per carving knife to produce a batch of 100 carving knives, assuming the activity-based method of allocation is used? a. $4.80 b. $8.00 c. $13.10 d. $48.00 3. Alta Services Company has 30 full-time employees. Actual time for each employee for the last period was as follows: Billable time for clients 2,000 hours Vacation time 200 hours Professional development 175 hours Unbillable time 0 hours Sick leave 125 hours Demand for the company’s services is at 100% of the time available. Each employee is paid a salary of $75,000 per year. Management believes that clients should be charged for the employee’s benefits. What should be the total actual indirect-cost rate per billable hour? a. $4.17 b. $5.83 c. $7.50 d. $9.17 4. The total traceable fixed and variable costs of the account billing activity centre are $245,000. Cost behaviour analysis indicates that fixed costs are $75,000. Activity analysis indicates that the cost driver for account-billing activity is the number of lines printed. The total lines printed is 2,500,000. What would be the total flexible budget if the total lines printed increased to 2,600,000? a. $176,800 b. $240,000 c. $245,000 d. $251,800 Use the following information to answer Questions 5 and 6: Pots Unlimited manufactures flowerpots. It expects to sell 40,000 flowerpots in 2008. At the start of 2008, the company had a beginning inventory of raw materials sufficient to produce 48,000 units. Beginning inventory of finished units totalled 4,000 with a target ending inventory of 5,000 units. The flowerpots sell for $6.00 and the company keeps no work-in-process inventory. Direct materials costs for each flowerpot total $2.00 and direct labour cost is $1.00. Factory overhead is $0.40 per unit. 5. What will be the amount of cost of goods sold for 2008? a. $122,400 b. $136,000 c. $139,000 d. $149,600 6. What will be the total costs incurred for direct materials, direct manufacturing labour, and manufacturing overhead, respectively, for 2008? a. $0; $40,000; $16,000 b. $0; $41,000; $16,000 c. $80,000; $40,000; $16,000 d. $82,000; $41,000; $16,400 Use the following information to answer Questions 7 and 8: Moldit Inc.’s costing system uses two cost categories: direct materials and conversion costs. Each product must pass through the Assembly department and the Testing department. Direct materials are added at the beginning of production. Conversion costs are allocated evenly throughout production. Data for the Assembly department for March 2008 are as follows: Beginning work-in-process inventory, 40% complete as to conversion 400 units Units started during March 1,200 units Ending work-in-process inventory 200 units Beginning work-in-process inventory: Direct materials $ 200,000 Conversion costs 200,000 Direct materials added during March 2,000,000 Conversion costs added during March 2,500,000 7. What unit cost can be inferred from the information provided regarding beginning work-in-process inventory? a. $1,000 b. $1,750 c. $3,500 d. $3,750 8. How many units were completed and transferred out of the Assembly department during March 2008? a. 200 units b. 1,200 units c. 1,400 units d. 1,600 units 9. The following information relates to the TCW country furniture shop: Beginning finished-goods inventory, January 1, 2008 $ 15,000 Ending finished-goods inventory, December 31, 2008 9,500 Cost of goods sold 56,000 Sales 112,500 Operating expenses 25,000 What is TCW’s cost of goods manufactured for 2008? a. $31,500 b. $50,500 c. $56,500 d. $61,500 10. Cardan Inc. had the following activities and costs during 2008: Direct materials: Beginning inventory $ 50,000 Purchases 154,000 Ending inventory 26,000 Direct manufacturing labour 40,000 Manufacturing overhead 30,000 Beginning work-in-process inventory 2,000 Ending work-in-process inventory 10,000 Beginning finished-goods inventory 60,000 Ending finished-goods inventory 40,000 What is Cardan’s cost of direct materials used in 2008? a. $24,000 b. $128,000 c. $178,000 d. $204,000 11. The determination of a cost as being either direct or indirect depends upon which of the following? a. the cost tracing system b. the accounting system c. the choice of the cost object and the materiality of the cost in question d. only the cost object chosen to determine individual costs e. the allocation system 12. Which of the following costs should be included as part of manufacturing overhead in the production of a wooden table? a. the amount paid to the individual who stains the table b. the commission paid to the salesperson who sells the table c. the cost of glue used in the table d. the cost of wood used in the table 13. Alpha Co. has the following estimated costs for next year: Direct materials $ 6,000 Direct labour 20,000 Rent on factory building 15,000 Sales salaries 25,000 Amortization on factory equipment 8,000 Indirect labour 12,000 Production supervisor’s salary 15,000 Alpha estimates that 20,000 direct labour-hours will be worked during the year. If manufacturing overhead is applied on the basis of direct labour-hours, what will be the overhead rate per hour? a. $2.50 b. $3.50 c. $3.75 d. $5.05 14. Beta Co.’s beginning work-in-process inventory consisted of 11,000 units, 100% complete as to materials costs and 30% complete as to conversion costs. The total cost in the beginning inventory was $22,400. During the month, 45,000 units were transferred out. The equivalent unit cost for production during the month was computed to be $1.20 for materials and $3.40 for conversion costs under the weighted-average method. What was the total cost of the units completed and transferred out? a. $182,500 b. $184,600 c. $204,980 d. $207,000 15. Activity in Epsilon Co.’s assembly department for the month of March was as follows: Percentage Complete Number of Units Materials Conversion Costs Work-in-process inventory, March 1 6,000 60% 45% Started into production during March 65,000 Work-in-process inventory, March 31 4,000 35% 20% What are the equivalent units of production for conversion costs for March, using the weighted-average method? a. 67,800 units b. 69,000 units c. 69,600 units d. 71,000 units 16. Omega Co. had the following data for the first 5 months of 2008: Machine Hours (X) Lubrication Costs (Y) January 120 $750 February 160 800 March 200 870 April 150 790 May 170 840 Omega Co. expects to work 180 machine-hours in June. What would be the variable rate per machine-hour expected in June, using the high-low method? a. $0.67 b. $1.25 c. $1.40 d. $1.50 17. Activity-based costing (ABC) is a costing technique that uses a 2-stage allocation process. Which of the following statements best describes these 2 stages? a. All costs are assigned to activities and then to the products, based on the products’ use of the activities. b. All costs are assigned to departments and then to the products, based upon the products’ use of the activities. c. Service department costs are allocated to the production departments and then to the products, based upon the products’ use of the activities. d. Indirect costs are assigned to activities and then to the products, based upon the products’ use of the activities. 18. Upsilon Co., a manufacturer of widgets, had the following data for 2008: Sales 2,400 units Sales price $40 per unit Variable costs $14 per unit Fixed costs $19,500 If the company wishes to increase its total dollar contribution margin by 40% in 2009, all other factors remaining constant, by how much will it need to increase its sales? a. $17,160 b. $24,960 c. $26,400 d. $38,400 Usethe following information to answer Questions 19 and 20: Zeta Co. makes and sells T-shirts. It takes three metres of Material A to make one T-shirt. Budgeted production for the next three months is as follows: August 14,000 units September 15,500 units October 11,900 units The company wants to maintain monthly ending inventories of Material A equal to 20% of the following month’s production needs. On July 31, 2,000 metres of Material A were on hand. The cost of Material A is $0.80 per metre. The company wishes to prepare a direct materials budget for the last quarter. 19. What is the total cost of Material A that should be purchased in August? a. $34,320 b. $39,440 c. $42,900 d. $49,300 20. What is the desired ending inventory of Material A for the month of September? a. 3,100 metres b. 7,140 metres c. 8,400 metres d. 9,300 metres Section C Problems and Critical-Thinking Problem (80 marks). Section C consists of four problems, worth 75 marks total, and a critical-thinking problem, worth 5 marks. Work must be shown to receive full marks. Question 21 (18 marks) Galvanco Ltd. manufactures custom home-office furniture. The controller has given you the task of preparing a contribution-format income statement for the fiscal year just ended (December 31, 2008). You are troubled because the data produced by the accounting system of Galvanco do not distinguish between variable and fixed costs. After some analysis, you have identified various cost behaviour patterns. You have determined that the breakeven point is $550,000 in sales; your analysis was made easier by the fact that it is Galvanco’s policy not to carry any inventories. Instead, the company finishes pending orders sometime in December and gives employees vacations that end in early January of the following year. You have also collected the following information for the 2008 fiscal year: 2008 Gross profit $ 70,000 Sales 500,000 Direct labour 140,000 Direct materials 210,000 Contribution margin 100,000 Variable manufacturing overhead 30,000 Required: a. Calculate fixed manufacturing overhead for 2008. (6 marks) b. Calculate variable selling and administrative expenses for 2008. (6 marks) c. Calculate fixed selling and administrative expenses for 2008. (6 marks) Question 22 (22 marks) General Fabricators assembles its products in two departments. During October, the beginning work-in-process in the cutting department was half completed as to conversion and complete as to direct materials. The beginning inventory included $12,000 for materials and $3,000 for conversion costs. Ending work-in-process inventory in the cutting department was 40% complete. Direct materials are added at the beginning of the process. Conversion costs are added evenly throughout the process. During October, beginning work-in-process in the finishing department was 75 percent complete as to conversion. Direct materials are added at the end of the process in the finishing department and conversion costs are added evenly throughout the process. Beginning inventories included $16,000 for transferred-in costs and $20,000 for conversion costs. Ending inventory was 25 percent complete. Additional information about the two departments follows: Cutting Finishing ________________________________________ Beginning work-in-process units 20,000 20,000 Units started this period 40,000 Units transferred out this period 50,000 50,000 Ending work-in-process units 20,000 Material costs added 48,000 28,000 Direct manufacturing labour 16,000 40,000 Other conversion costs 8,000 24,000 Required: Prepare a production cost worksheet (similar to 17-12 and 17-14), using the weighted average for the cutting department (10 marks) and FIFO for the finishing department (12 marks). Question 23 (17 marks) Come-on-In Manufacturing produces two types of entry doors: deluxe and standard. The assignment basis for support costs has been direct labour dollars. For 2008, Come-On-In compiled the following data for the two products: Deluxe Standard ________________________________________ Sales units 50,000 400,000 Sales price per unit $650 $475 Direct materials and labour costs per unit $180 $130 Manufacturing support costs per unit $80 $113.75 Last year, Come-on-In Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information for 2008: Activity Cost Driver Cost Total Deluxe Standard ________________________________________ Set-ups # of setups $500,000 500 400 100 Machine-related* # of machine-hours $44,000,000 600,000 300,000 300,000 Packing # of shipments $5,000,000 250,000 50,000 200,000 *These costs relate mainly to amortization of equipment. Required: a. Using the current system, state each of the following: 1. estimated total cost of manufacturing one unit for each type of door (1 mark) 2. estimated profit per unit for each type of door (1 mark) b. Using the current system, estimated manufacturing overhead costs per unit are less for the deluxe door than for the standard door. What is a likely explanation for this? (2 marks) c. Review the machine-related costs above. What is a likely explanation for machine-related costs being so high? What might explain why machine-hours for the deluxe doors are the same as for the standard doors? (2 marks) d. Using the activity-based costing data presented above, 1. compute the cost driver for each overhead activity. (2 marks) 2. compute the revised manufacturing overhead cost per unit for each type of entry door. (2 marks) 3. compute the revised total cost to manufacture one unit of each type of entry door. (2 marks) 4. compute the profit per unit and in total for each type of entry door. (2 marks) e. Is the deluxe door as profitable as the original data estimated? Why or why not? (3 marks) Question 24 (18 marks) Because of the opportunities created for competition by the merger between Air Canada and Canadian Airlines, East-West Air is about to introduce a daily round-trip flight on the Toronto-to-Vancouver route. East-West Air offers only one class of seats, Comfort Class, which provides more leg room, on all its flights. No other airline offers this kind of seat. East-West is in the process of determining how it should price its round-trip tickets. The following information is available: Seating capacity per plane 360 Maximum expected demand for seats on any flight 300 Food and beverage service cost for a round trip (no additional charge to passenger) $40/passenger Commission to travel agents paid by East-West on each ticket (assume all tickets are booked by travel agents) 8% of fare Fuel costs for a round-trip flight $24,000 Fixed annual lease costs allocated to a round-trip flight $100,000 Fixed ground-services costs (maintenance, check-in, baggage handling) allocated to a round-trip flight $10,000 Fixed flight crew salaries allocated to a round-trip flight $8,000 For simplicity, assume that fuel costs are not affected by the actual number of passengers on a flight. The market research group at East-West segments the market into business travellers and pleasure travellers and provides the following information on the effect of different price levels on the estimated demand for seats on any given flight: Price Charged Number of Seats Expected to be Sold Business travellers $500 200 $2,000 190 Pleasure travellers $500 100 $2,000 20 Assume these prices are the only choices available to East-West. The market research team offers one additional piece of information: Pleasure travellers usually begin their travels in one week, spend at least a weekend at their destination, and return in a following week. Business travellers usually begin and complete their travels within the same week and do not stay over a weekend. Required: a. Prepare an analysis of the contribution margin that would be obtained from each of the two types of travellers at each of the two fares. (6 marks) b. What is the breakeven volume for each type of passenger on a given return flight, if you assume that the fare is $2000 and that the sales mix of 190 business passengers to 20 pleasure travellers is maintained? (7 marks) c. Explain the key factor or factors that should be considered in determining which fare or fares to charge. (3 marks) d. If East-West wishes to charge different prices for the two types of travellers, explain how it might achieve such a policy. (2 marks) Question 25 (5 marks) Read the following scenario and answer the question below it. The new manager of the insurance division does not understand how the company can have so many overhead rates for assigning costs to the activities of the company’s life insurance underwriters. One rate schedule is used to calculate average assignable costs when agents write standard policies. Another rate schedule is applied when the agents write special policies, and these policies are costed out differently from those categorized as standard policies. Why might the company use different costing systems, with different overhead rates, for standard and specialized policies? Section C Multiple-Choice Questions (20 marks) Section C consists of 20 multiple-choice questions, each worth 1 mark. Indicate the best response for each of the following questions. 1. Honda Heaven produces and sells an auto part for $20.00 per unit. Direct materials are $8.00 per unit, while direct manufacturing labour averages $1.50 per unit. Variable overhead is $0.50 per unit and fixed overhead is $250,000.00 per year. Administrative expenses, all fixed, run $90,000.00 per year, with sales commissions of $2.00 per part. Production is 100,000 parts per year. This year, 75,000 parts were sold. What is the inventory cost per part using variable costing? $10.00 $12.00 $14.50 $16.50 $9.50 Use the information below to answer Questions 2 and 3: Jones Cleaners manufactures dish soap. The following information has been provided about the inventories, production, and sales volumes for dish soap for January and February. Jones Cleaners uses standard costing for manufacturing, marketing, and administrative costs. January February ________________________________________ Beginning inventory 0 ? Production 2,000 3,000 Sales 1,750 3,250 Other information: Selling price $ 5.00 Standard variable manufacturing cost/unit $ 1.00 Standard variable market/admin. cost/unit $ 0.50 Standard fixed manufacturing overhead cost/month $4,000 Standard fixed market/admin. cost/month $2,000 There were no beginning or ending inventories of materials or work-in-process. 2. What is the value of February’s beginning inventory under absorption costing? $750 $700 $250 $500 none of the above 3. What would Jones Cleaners’ operating income (loss) be for January and February, respectively, using the variable costing approach? $(125) and $5,125 $125 and $5,375 $(125) and $(5,375) $125 and $5,125 none of the above 4. Cady Machine Shop used 15,000 machine-hours during January. It takes 0.90 machine-hours to produce one unit; 15,000 units were produced during the month. Budgeted production included 12,000 units, using 10,800 machine-hours. Budgeted variable manufacturing overhead costs per output unit is $22.50. What is the variable overhead efficiency variance for Cady? $16,875 favourable $16,875 unfavourable $37,000 favourable $37,500 unfavourable $37,500 favourable 5. Which of the following is incorrect concerning variable versus absorption costing? The difference in operating income between the two approaches is captured by the difference between fixed manufacturing costs in ending inventory and fixed manufacturing costs in opening inventory. The absorption costing income statement does not need to differentiate between variable and fixed costs. The variable costing income statement classifies costs by cost behaviour. The absorption costing income statement classifies costs primarily by business function. The difference in operating income between the two approaches is captured by the difference between fixed manufacturing costs in ending inventory and variable manufacturing costs in ending inventory. 6. Comics Plus has a current production level of 200,000 comics per month. Unit costs at this level are as follows: Direct materials $0.125 Direct labour 0.200 Variable overhead 0.075 Fixed overhead 0.100 Marketing – Fixed 0.100 Marketing/distribution – Variable 0.200 Current monthly sales are 180,000 units. Printers Ltd. has contacted Comics Plus about purchasing 15,000 units at $1.00 each. Current sales would not be affected by the special order, and variable marketing/ distributing costs would not be incurred on the special order. What is Comics Plus’ change in profits using the contribution margin format if the order is accepted? $9,000 increase $2,000 increase $2,000 decrease $11,000 increase $9,000 decrease 7. First Image has a plant capacity of 80,000 units per month. Unit costs at capacity are as follows: Direct materials $2.00 Direct labour 3.00 Variable overhead 1.50 Fixed overhead 1.50 Marketing – Fixed 3.50 Marketing/distribution – Variable 1.80 Current monthly sales are 78,000 units at $12.60 each. Computer Output Management has contacted First Image about purchasing 2,000 units at $12.00 each. Current sales would not be affected by the special order. What is First Image’s change in profits if the order is accepted? a. $8,600 increase b. $7,400 increase c. $16,600 increase d. $11,000 decrease e. $19,600 increase 8. For Consumer Lumber, what would be the total difference between operating incomes under absorption costing and variable costing? Beginning fixed manufacturing overhead in inventory $47,500 Fixed manufacturing overhead in production $37,500 Ending fixed manufacturing overhead in inventory $12,500 Beginning variable manufacturing overhead in inventory $ 5,000 Variable manufacturing overhead in production $25,000 Ending variable manufacturing overhead in inventory $ 7,500 a. $2,500 b. $35,000 c. $25,000 d. $20,000 e. $1,500 9. Day Star collected the following information: Cost to buy one unit $48 Production costs per unit: Direct materials $22 Direct labour $16 Variable overhead $2 Total fixed overhead $360,000 Day Star can sell 25,000 units per year at $80 each. The company also has an offer from a subsidiary to rent its plant facilities for $2,000,000. The fixed overhead will be incurred in each alternative, but there will be a savings of $150,000 in the fixed costs under the renting alternative. Based on the above information only, should Day Star make or buy the product or rent its facilities out? buy make rent the facilities to the subsidiary either make or rent either make or buy 10. When considering a project that will require production using otherwise idle resources, which of the following is true? Only the variable costs of the project are relevant. In the short run, even if revenue is less than the total costs of production, the project could help the company’s overall operating income. The project should not be undertaken if total revenue from the project is less than the total costs of production. Only financial factors should be considered. Avoidable fixed costs are irrelevant. 11. Two finished products, A and B, are sold for $16 a unit and $24 a unit, respectively. Each product can also be sold at the splitoff point. Product A can be sold for $10 and Product B, for $8. Joint costs for the two products totalled $8,000 for January for 600 units of A and 500 units of B. What are the respective joint costs assigned to each unit of Products A and B if the sales value at splitoff method is used? $8.00 and $9.10 $5.92 and $8.88 $6.40 and $14.40 $6.40 and $9.10 $8.00 and $6.40 12. The distinction between absorption costing and variable costing is most important for which type of industry? manufacturing educational retail marketing service Use the information below to answer Questions 13 and 14: Action Mopeds manufactures mopeds. The following information pertains to the company’s normal operations per month: Output units 15,000 mopeds Machine-hours 4,000 hours Direct manufacturing labour-hours 5,000 hours Direct manufacturing labour per hour $24 Direct materials per unit $200 Variable manufacturing overhead costs $322,500 Fixed manufacturing overhead costs $1,200,000 Marketing and distribution costs $1,125,000 Research and development costs $900,000 13. What is the unit cost when establishing a long-run price for mopeds? $444.50 $470.00 $325.48 $309.50 $460.50 14. What is the unit cost for establishing a minimum bid on a one-time-only special order of 1,000 units from an overseas city, if all cost relationships remain the same except for a one-time set-up charge of $40,000? $260.50 $209.50 $269.50 $309.50 $444.50 15. Taylor Stadium is evaluating ticket prices for its baseball games. Studies have shown that Monday and Tuesday ballgames average fewer than half the fans of games on other days. The following information pertains to the stadium’s normal operations per season: Average fans per game 5,000 fans Average fans per Monday/Tuesday game 2,000 fans Stadium operating hours per season 300 hours Stadium capacity 7,000 seats Variable operating costs per hour $2,000 Fixed overhead costs per year for all events $450,000 Marketing costs per season for baseball $212,500 Customer service costs per season for baseball $25,000 The stadium is open for 5 hours on each day a game is played. The stadium is available for some type of use 300 days a year. All employees work by the hour except for the administrators. In addition, only one game is played per day and each fan would have only one ticket per game. What is the unit cost when establishing a long-run price for ballgames, assuming all tickets are priced the same? $2.20 $85.73 $4.30 $91.00 $3.09 16. Office Supply House purchases 4,160 reams of paper per year, ordered in lots of 80 reams per week at $150 per ream. The vendor covers all shipping costs. Office Supply House is not required to inspect the shipment upon entry. Office Supply House earns 20% on its cash investments. The purchase order lead time is two weeks. The following cost data are available: Relevant ordering costs per purchase order $53.75 Relevant insurance, materials handling, breakage, and so on, per year $4.25 What is the economic-order quantity? 324 reams 100 reams 114 reams 235 reams 110 reams 17. Boone Hobbies, a wholesaler, has a sales budget for next month of $600,000. Cost of units sold is expected to be 40 percent of sales. All units are paid for in the month following purchase. The beginning inventory of units is $20,000, and an ending amount of $24,000 is desired. Beginning accounts payable are $152,000. The cost of goods sold for next month is expected to be $240,000. $360,000. $225,000. $264,000. $244,000. 18. A Canadian company has subsidiaries in France, England, Canada, and the US. The company is somewhat vertically integrated, in that the Canadian subsidiary sells some of its output to the US subsidiary, which further processes the material. If the market is fully competitive, which transfer price would maximize the corporation’s overall income? distress price market-based price either market-based or full-cost price full cost no markup negotiated price 19. Which of the following is false concerning profit centres and cost centres? A profit centre can exist within a centralized organization. If a profit centre exists within a centralized organization, there cannot be any cost centres in the organization. A cost centre can exist within a decentralized organization. A profit centre can exist within a decentralized organization. A cost centre can exist within a centralized organization. 20. Boyd Tool Company is a tool manufacturer. Production capacity is 3,000 units per month; however, the firm is considering alternative ways to increase capacity to 3,500 units per month. One of the alternatives involves purchasing new equipment. In this alternative, there are two choices: Machine A will provide increased capacity of 4,000 units per month, with a unit cost of $14 at capacity; Machine B will increase capacity to 3,600 units per month with a unit cost of $15 at capacity. Both machines are adequate since Boyd does not intend to go beyond the 3,500 units per month level for the foreseeable future. Relevant information for this decision includes which of the following? whether other costs will change solely due to a capacity increase the difference in unit cost of production between the two machines at their capacity levels Boyd’s planned capacity utilization excess capacity of either machine the difference in unit cost of production between the two machines at Boyd’s planned capacity levels Section D Problems and Critical-Thinking Problem Section D consists of five problems, worth 75 marks total, and a critical-thinking problem, worth 5 marks. Work must be shown to receive full marks. Question 21 (18 marks) Ewing Company planned to be in operation for three years. During the first year, it made 60,000 units but had no sales. The following expenses were incurred: Variable Manufacturing Expenses $120,000 or $2 per unit Fixed Manufacturing Overhead $90,000 Fixed Selling and Administrative Expenses $0 In the second year, it produced an additional 50,000 units, sold 80,000 units for $400,000, and incurred the following expenses: Variable Manufacturing Expenses $100,000 or $2 per unit Fixed Manufacturing Overhead $75,000 Variable Selling and Administrative Expenses $20,000 Fixed Selling and Administrative Expenses $30,000 In the third year, it sold the remainder of the inventory for $160,000, had no manufacturing expenses and went out of business. The expenses for year three were as follows: Variable Manufacturing Expenses $0 Fixed Manufacturing Overhead $0 Variable Selling and Administrative Expenses $10,000 Fixed Selling and Administrative Expenses $25,000 Required: Prepare an income statement for each of the three years using absorption costing. (9 marks) Prepare an income statement for each of the three years using variable costing. (9 marks) Question 22 (23 marks) Under a contract with the provincial government, ChemLabs Inc. analyzes the chemical and bacterial composition of well water in various municipalities in the interior of British Columbia. The contract price is $25.20 per test performed. The normal volume is 10,000 tests per month. Each test requires two testing kits, which are $3.80 each at standard price. Direct labour to perform the test is 10 minutes at $22.80 per hour. At normal volume, the overhead costs are as follows: Variable overhead costs: Indirect labour $18,000 Utilities 4,000 Labour-related costs 15,000 Laboratory maintenance 11,000 $48,000 Fixed overhead costs: Supervisor 30,000 Amortization 28,000 Base utilities 9,000 Insurance 2,000 69,000 Total overhead $117,000 Overhead is allocated on the basis of direct labour-hours. During May 2008, 9,000 tests were performed. The records show the following actual costs and production data: Activity Actual Cost Number of test kits purchased 19,000 $70,300 Number of test kits used 18,500 Direct labour 1,623 hours $37,646 Total overhead costs: Variable $45,000 Fixed $68,500 Test kits are kept in inventory at standard cost. At the end of May, no tests were in process. Required: Prepare a flexible overhead budget based on 80% of normal volume. (5 marks) Calculate the standard cost for a water test. (5 marks) Calculate the direct materials price and quantity variances and the direct labour rate and efficiency variances for May 2008, indicating whether they are favourable or unfavourable. (7 marks) Calculate the laboratory variable overhead variances for the month, indicating whether they are favourable or unfavourable. (6 marks) Question 23 (16 marks) Berg and Sons Ltd. build custom-made pleasure boats that range in price from $10,000 to $250,000. For the past 30 years, Mr. Berg Sr. has determined the selling price of each boat by estimating the cost of material, labour, and a prorated portion of overhead, and adding 20% to the estimated costs. For example, a recent price quotation was determined as follows: Direct materials $50,000 Direct labour 80,000 Overhead 20,000 $150,000 Plus 20% 30,000 Selling price $180,000 The overhead figure was determined by estimating total overhead for the year and allocating it at 25% of direct labour costs. If a customer rejected the price and business was slow, Mr. Berg Sr. might be willing to reduce his markup to as little as 5% over estimated costs. Thus, average markup for the year was estimated at 15%. Mr. Berg Jr. has just completed a managerial accounting course which dealt with pricing, and he believes that the firm could use some of the techniques discussed in the course. The course emphasized the contribution margin approach to pricing and Mr. Berg Jr. feels that such an approach would be helpful in determining an appropriate price for their boats. Total overhead, which includes selling and administrative expenses for the year, has been estimated at $1,500,000, of which $900,000 is fixed and the remainder is variable in direct proportion to direct labour. Required: Assume the customer rejected the $180,000 quotation and also rejected a $157,500 (5% markup) quotation during a slack period. The customer countered with a $150,000 offer. (12 marks) What is the minimum selling price Mr. Berg Sr. could have quoted without reducing or increasing company net income? What is the difference in company net income for the year between accepting and rejecting the customer’s offer? Identify and briefly explain one advantage and one disadvantage of the contribution approach to pricing compared to the approach previously used by I. Berg and Sons, Ltd. (4 marks) Question 24 (10 marks) The Doran Company prepared the following Revenue Budget: Month Budgeted Sales ________________________________________ March $250,000 April 265,000 May 225,000 June 272,500 July 262,500 In addition, the gross profit rate is 40 percent and the desired inventory level is 30 percent of next month’s cost of goods sold. Required: Using purchases in a merchandising company in place of Cost of Goods Manufactured, prepare a Purchases Budget for April through June. Question 25 (8 marks) John Hatelak is a sales representative for a manufacturing equipment company. He is trying to decide for which clients he should spend his time working. John has 172 hours available each month to spend with his clients. The following information is the potential sales data related to each type of customer:: Large Customers Medium Customers Small Customers ________________________________________ Number of customers 20 100 160 Average sale per customer $6,000 $2,000 $1,200 Commission (% of sales $) 10% 7% 5% Average time per customer 6 4 3 Required: What should be his client mix in order to maximize his sales commissions? Question 26 (5 marks) Read the following scenario and answer the question below it. The Assembly division of Canadian Car Company has offered to purchase 90,000 batteries from the Electrical division for $104 per unit. At a normal volume of 250,000 batteries per year, production costs per battery are as follows: Direct materials $40 Direct manufacturing labour 20 Variable factory overhead 12 Fixed manufacturing overhead 40 Total $112 The Electrical division has been selling 250,000 batteries per year to outside buyers at $136 each. Capacity is 350,000 batteries per year. The Assembly division has been buying batteries from outside sources for $130 each. Should the Electrical division manager accept the offer? Explain. From the company’s perspective, will the internal sales be of any benefit? Explain.