Business Learning Center, AIS 211

Fall 2017
Exam 1 Review Problems

Note: These questions are provided ONLY to give students extra practice on chapters already covered.
The topics covered here are not comprehensive and are not indicative of the breadth of coverage on the
examinations for the course.

Question 1: Jim sells steel clocks and steel stools. Fixed costs for his factory are 21,450. Jim has
decided on a target mix of 25% clocks and 75% stools. Below is the cost information for the two
products (assume Direct Labor is a variable cost):

Product Clock Stool

Selling Price $30 $50

Direct Materials 8 15

Direct Labor 4 6

a) Using, the target sales mix, determine the number of units that Jim just sell of each item to
breakeven for the month. (Round only your final answer for each item to the nearest whole number)

b) Using the target sales mix, determine the number of units of clocks and stools that Jim must sell to
make a (pretax) target profit of 15% of sales revenue.

c) Using the target sales mix, determine the sales revenue required to earn (pretax) income equal to
15% of sales revenue.

Question 2: Gidgets Glassware Company makes and sells sets of glassware. Gidgets sells each glass for
$15. There is no discount for buying a case. The following information reflects a breakdown of costs at
current production (Assume Direct Labor is a variable cost and round only your final answer for each
part):

Costs: Total Costs

Direct Materials $40,000
Direct Labor 25,000
Variable Manufacturing Overhead 10,000
Variable Selling Costs 6,000
Fixed Overhead 15,000
The glasses are sold in cases of 20. Each case requires 5 machine hours to manufacture. The plant has a
practical capacity of 2,500 machine hours per month, but current monthly production consumes only
about 80% of the capacity.
A glass collectors catalog arranged a meeting with Gidgets sales team to place an order for 1600
glasses next month. It has requested a special stem that will cost Gidgets an additional $0.50 a glass.
However, no variable selling costs will be incurred for fulfilling this special order.

a) Determine the minimum (floor) price that Gidgets Glassware should charge for the order of 1,600
glasses.

b) Determine the minimum (floor) price, for the total order of glasses, if the order was for 2,600 glasses.

Question 3: Zinger Industries manufactures two products: YX56 and YZ83. The monthly practical
capacity is 5,000 machine hours. The following data applies for the current month (all amounts are per
unit):

YX56 YZ83

Maximum sales units 4,000 4,500

Machine hours 1.1 .8

Selling price $50 $40

Direct materials 10 8

Variable Manufacturing overhead 9 7

Variable selling overhead 5 3

Fixed overhead 10 10

a) How many units of each product should Zinger produce to maximize profits this month?

Question 4: McKinnon Companys plant manager is considering buying a new machine to replace an old
grinding machine or overhauling the old one to ensure compliance with the plants high-quality
standards. The following data are available:

Old Grinding Machine

Original cost $50,000
Accumulated Depreciation 40,000
Annual operating costs 18,000
Current salvage value 4,000
Salvage value at end of 5 years 0

New Grinding Machine

Cost $70,000
Annual operating costs 13,000
Salvage value at end of 5 years 500

Overhaul of Old Grinding Machine

Cost of overhaul $25,000
Annual operating costs after
Overhaul 14,000
Salvage value at end of 5 years 200

a) What costs should the decision maker consider as sunk costs?

b) List all relevant costs and when they are incurred.
c) What should the plant manager do? Why?

Question 5: Kane Company is considering outsourcing a key component. A reliable supplier has quoted
a price of $64.50 per unit. The following costs of the component when manufactured in-house are
expressed on a per unit basis (assume Direct Labor is a variable cost):

Direct Materials $23.40

Direct Labor 16.10
Variable Overhead 26.70
Fixed Overhead 6.90
Total costs $73.10

a) What assumptions need to be made about the behavior of overhead costs for Kane in order to
analyze the outsourcing decision?
b) Should Kane Company outsource the component?
c) What other factors are relevant to this decision?