ACC 3123 / EXAM 2 / FALL 2010

(VERSION A/B/C)

Q ANSWER Q ANSWER
1 PRODUCT
(+$60,000)
B
9 $23.50/UNIT

2 $98,823.5294 10 BUY (+$10,000)

3 $67,741.9355 11 320,000 BRUSHES
+ 0 COMBS)
4 $20,800 12 DECREASE
($227,000)
5 $3/UNIT 13 $52.00
6 $40,000 14 $96,429
$240,000 $62,768
7 15
DECREASE
8 ($155,000)
Q 1. Ritz Company makes three products from a joint input that have the following information:

Units Sales Value per Total Additional Sales value per unit after
Produced unit at split off processing costs additional processing
Product A 50,000 $10 $400,000 $15
Product B 30,000 $8 $300,000 $20
Product C 45,000 $7 $180,000 $10.50

The joint cost incurred to produce the three products to the split off point is $600,000. Which
products should be processed further?

SOLUTION:

Units Sales Total Sales value per PROCESS

Produced Value per Additional unit after FURTHER
unit at processing additional
split off costs processing
Product A 50,000 $10 $400,000 $15 ($150,000)
Product B 30,000 $8 $300,000 $20  $60,000
Product C 45,000 $7 $180,000 $10.50 ($22,500)

Q 2-3: IOWA INDUSTRIES

Iowa Industries makes corn oil and corn meal from corn in a joint process. The corn oil can be
further processed into margarine, and the corn meal can be further processed into corn muffin mix.
The joint cost incurred to process the corn to the split off point was $140,000. Information on the
quantities, value, and further processing costs for the joint product appears below:

Quantity Sales value at Estimated further Final Sales

split off processing cost. Value after
processing
Corn Oil 800,000 lbs. $0.30/lb. $0.15/lb. $0.60/lb.
Corn Meal 1,500,000 lbs. $0.15/lb. $0.45/lb. $0.55/lb.

Q2. Assume that the joint cost is allocated to the products based on the approximate net
realizable value of each product. How much joint cost should be assigned to the corn oil?

Quantity ADDL FINAL

COSTS VALUE APPX NRV RATIO ALLOCATION
Corn 800,000 $0.15 $0.60
Oil $360,000.00 0.70588235 $98,823.5294
Corn 1,500,000 $0.45 $0.55
Meal $150,000.00 0.29411765 $41,176.4706
$510,000.00
 Q 3. Assume that the joint cost is allocated to the products based on the relative sales value at
split-off of each product. How much joint cost should be assigned to the corn meal?

Quantity AT VALUE
SPLIT OFF AT SPLIT
OFF RATIO ALLOCATION
Corn
Oil 800,000 $0.30 $240,000.00
0.516129032 $72,258.0645
Corn
Meal 1,500,000 $0.15 $225,000.00
0.483870968 $67,741.9355
$465,000.00

Q 4: Value Pro produces and sells a single product. Information on its costs follow:

Variable costs:
SG&A $2 per unit
Production $4 per unit
Fixed costs:
SG&A $12,000 per year
Production $15,000 per year
In the upcoming year, Value Pro estimates that it will produce and sell 4,000 units. The variable
costs per unit and the total fixed costs are expected to be the same as in the current year.
However, it anticipates a sales price of $16 per unit. What is Value Pro's projected margin of
safety (in dollars) for the coming year?

Profit at 4,000 units

Gross Sales = $16 * 4,000 units = $64,000
Contribution Margin = $(16 - 6) = $10/unit

Breakeven
10*x - $27,000 = $0  x=2,700 units
Break Even Sales = 2,700*16=$43,200

$(64,000 - 43,200) = $20,800

Q 5. Meixner Manufacturing incurs annual fixed costs of $250,000 in producing and selling a single
product. Estimated unit sales are 125,000. An after-tax income of $75,000 is desired by
management. The company projects its income tax rate at 40 percent. What is the maximum
amount that Meixner can expend for variable costs per unit and still meet its profit objective if
the sales price per unit is estimated at $6?

Before Tax Income: $75,000 / 0.60 = $125,000

Fixed Costs: 250,000
Contribution Margin: $375,000

Projected Sales $750,000

less: Contribution Margin 375,000
Variable Costs $375,000

$375,000 / 125,000 units $3/unit

Q 6. Adams Company uses 10,000 units of a part in its production process. The costs to make a part
are: direct material, $12; direct labor, $25; variable overhead, $13; and applied fixed overhead,
$30. Adams has received a quote of $55 from a potential supplier for this part. If Adams buys the
part, 70 percent of the applied fixed overhead would continue. Adams Company would be better
off by $______?

Cost to buy: $55/unit * 10,000 units = $550,000

Cost to manufacture: $(12+25+13+9)= $59/unit
Incremental difference in favor of buying: $4/unit * 10,000 units = $40,000

Q 7. Gamble Company has only 25,000 hours of machine time each month to manufacture its two
products. Product X has a contribution margin of $50, and Product Y has a contribution margin
of $64. Product X requires 5 hours of machine time, and Product Y requires 8 hours of machine
time. If Gamble Company wants to dedicate 80 percent of its machine time to the product that
will provide the most income, the company will have a total contribution margin of

Assume 80% of capacity applied to Product X

X: 20,000 hrs/5 hrs per unit 4,000 units * $50 CM/unit $200,000
Y: 5,000 hrs/8 hrs per unit 625 units * $64 CM/unit 40,000
Total $240,000
======

Q 8. Perry Company has 3 divisions: R, S, and T. Division R's income statement shows the following
for the year ended December 31:

Sales $1,000,000
Cost of goods sold (800,000)
Gross profit $ 200,000
Selling expenses $100,000
Administrative expenses 250,000 (350,000)
Net loss $ (150,000)

Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are
avoidable if the division is closed. All of the selling expenses relate to the division and would be
eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied
from corporate costs (unavoidable). If Division R were eliminated, how would Perry’s income
change?

Sales foregone $(1,000,000)

COGS avoided
Variable $600,000
Fixed 120,000 720,000
Selling Expense Avoided 100,000
Administrative Expense Avoided 25,000
Decrease in income $(155,000)
=========
Q 9. Pratt Company is currently operating at a loss of $15,000. The sales manager has received a
special order for 5,000 units of product, which normally sells for $35 per unit. Costs associated
with the product are: direct material, $6; direct labor, $10; variable overhead, $3; applied fixed
overhead, $4; and variable selling expenses, $2. The special order would allow the use of a
slightly lower grade of direct material, thereby lowering the price per unit by $1.50 and selling
expenses would be decreased by $1. If Pratt wants this special order to increase the total net
income for the firm to $10,000, what sales price must be quoted for each of the 5,000 units?

In order to increase income to $10,000, there must be an increase of $25,000 or $5 per unit.

Direct materials $ 4.50

Direct Labor 10.00
Variable Overhead 3.00
Variable Selling Exp 1.00
Production Costs $18.50
Additional profit per unit
5.00
Sales price/unit $23.50
=====

Q 10. West Company produces a part that has the following costs per unit:

Direct material $8
Direct labor 3
Variable overhead 1
Fixed overhead 5
Total $17

Zest Corporation can provide the part to West for $19 per unit. West Company has determined
that 60 percent of its fixed overhead would continue if it purchased the part. However, if West no
longer produces the part, it can rent that portion of the plant facilities for $60,000 per year. West
Company currently produces 10,000 parts per year. Which alternative is preferable and by what
margin?

Purchase price from Zest $(190,000)

Rent Revenue Received 60,000
Variable Costs Avoided 120,000
Fixed Overhead Avoided 20,000
Difference in Favor of Buying $ 10,000

Q 11. Glamorous Grooming Corporation makes and sells brushes and combs. It can sell all of either
product it can make. The following data are pertinent to each respective product:

Brushes Combs
Units of output per machine hour 8 20
Selling price per unit $12.00 $4.00
Product cost per unit
Direct material $1.00 $1.20
Direct labor 2.00 0.10
Variable overhead 0.50 0.05
Allocated Fixed Costs $8.00 $1.00
 The company has 40,000 machine hours available for production. What sales mix will maximize
profits?

Brushes have a contribution margin of $8.50 per unit and 8*8.50=$68/hour; combs
have a contribution margin of $2.65 per unit and 20*2.65=$53/hour. Brushes have
bigger CM per hour (constrained resource).

The combination of 320,000 brushes (=8*40,000) and 0 combs provides the highest
profit.

Q 12. Green Industries has two sales territories-East and West. Financial information for the two
territories is presented below:

East West
Sales $980,000 $750,000
Direct costs:
Variable (343,000) (225,000)
Fixed (450,000) (325,000)
Allocated common costs (275,000) (175,000)
Net income (loss) $(88,000) $ 25,000

Because the company is in a start-up stage, corporate management feels that the East sales
territory is creating too much of a cash-drain on the company and it should be eliminated. If the
East territory is discontinued, one sales manager (whose salary is $40,000 per year) will be
relocated to the West territory. By how much would Green's income change if the East territory
is eliminated?

Sales foregone in East $(980,000)

Variable costs avoided 343,000
Fixed costs avoided 410,000
Decrease in income from $(227,000)
eliminating East territory ========

Q13: Jones Corp. has a capacity to produce 40,000 units. Its product sells for $50 per unit and the
variable costs incurred in manufacturing and selling the product are as follows on a per unit
basis: Direct materials = $10; Direct labor = $20; Variable manufacturing OH = $5; Sales
commission = $3. Annual fixed manufacturing OH is $500,000 and annual fixed S G & A costs
are $200,000. A customer has proposed a special order to purchase 10,000 units. If Jones
accepts the order, the company would not have to pay its sales people their normal commission
of $3 per unit, but the company would incur extra shipping cost of $5 per unit. Assume that
Jones is operating at full capacity and will have to divert sales from regular customers, if the
offer is accepted. What is the minimum price per unit below which Jones should reject the
order?

Ans: 50-3+5=$52
Q14-15: The following information relates to Two-4-One Corp.

Service Departments Costs

Service A $70,000
Service B $90,000
Production Departments
Production C $16,000
Production D $21,000

Number of employees is the cost driver for service department A and square-feet is the cost driver
for service department B. The cost drivers are distributed as followed:

Department Square-feet Number of employees

A 1,000 5
B 1,500 15
C 4,000 45
D 3,000 25

Q14: How much of the total Service Department Costs will be allocated to Production Department
C (using the direct method).
Q15: How much of the total Service Department Costs will be allocated to Production Department
D (using the step-down method).