Instructions:

·         Each student will submit their own individual solutions.

·         Solutions must be legible: can be handwritten or typed

·         Please show full workings - just writing down an answer is not sufficient to earn maximum points.

·         There are 8 questions worth a total of 160 points. The number of points for each question is shown in the question header.

 

 

Question No.1 - (20 Points)

Mac Company manufactures and sells adjustable canopies that attach to motor homes and trailers. The market for canopies includes both new unit purchases as well as replacement canopies. Mac developed its fiscal year 2011 business plan based on the assumption that canopies would sell at a price of $400 each. The variable costs for each canopy were projected at $200, and the annual fixed costs were budgeted at $100,000. Mac's after-tax profit objective for the entire year was $240,000; the company's effective tax rate is 40 percent.

While Mac's sales usually rise during the second quarter, the May 2011 financial statements reported that sales were not meeting expectations. For the first five months of the year, only 350 units had been sold at the established price, with variable costs as planned, and it was clear that the 2011 after-tax profit projection would not be reached unless some actions were taken. Mac's president assigned a management committee to analyze the situation and develop several alternative courses of action. The following three mutually exclusive alternatives were presented to the president:

 

Alternative 1:

Reduce the sales price by $40. The sales organization forecasts that with the significantly reduced sales price, 2,700 units can be sold during the remainder of the year. Total fixed costs and variable unit costs will stay as budgeted.

 

Alternative 2:

Lower variable costs per unit by $25 through the use of less expensive raw materials and slightly modified manufacturing techniques. The sales price will also be reduced by $30, and sales of 2,200 units for the remainder of the year are forecast.

Alternative 3:

Cut fixed costs by $10,000 and lower the sales price by 5 percent. Variable costs per unit will be unchanged. Sales of 2,000 units are expected for the remainder of the year.

 

 

Required:

A)    Using the business plan numbers, determine the number of units that Mac Company must sell in 2011 :

                               i.            In order to break even.

                             ii.            To achieve its after-tax profit objective.

B)     Determine which one of the alternatives Mac Company should select to achieve its annual after-tax profit objective. Be sure to support your selection with appropriate calculations.

 

 

 

 

 

 

 

 

 

 

 

 

Question No.2 - (15 Points)

Rum Company has developed a new product that will be marketed for the first time during the next fiscal year. Although Rum's Marketing Department estimates that 35,000 units could be sold at $36 per unit, Rum's management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed costs associated with the new product are budgeted at $475,000 for the year. The variable costs of the new product are $16 per unit.

 

Required:

1)      How many units of the new product must Rum sell during the next fiscal year in order to breakeven on the product?

2)      What is the profit Rum would earn on the new product if all the manufacturing capacity allocated by management is used and the product is sold for $36 per unit?

3)      The Marketing Department would like more manufacturing capacity to be devoted to the new product. What would be the percentage increase in net income for the new product if its unit sales could be expanded by 10% without any increase in fixed expenses and without any change in the unit selling price and unit variable cost?

4)      Rum's management has stipulated that the new product must earn a profit of at least $125,000 in the next fiscal year. What unit selling price would achieve this target profit if all of the manufacturing capacity allocated by management is used and all of the output can be sold at that selling price?

 

 

 

 

 

 

 

 

 

Question No.3 - (15 Points)

Melnick Enterprises manufactures two products, boat wax and car wax, in two departments, the Mixing Department and the Packaging Department. The Mixing Department has 800 production hours per month available, and the Packaging Department has 1,200 hours per month available. Production of the two products cannot exceed 36,000 pounds. Data on the two products follow:

 

 

Required:

Use Excel to calculate the optimal monthly production mix (per 100 pounds) of Boat Wax and Car Wax that Melnick should produce?  Clearly show the objective function and the mixing constraints for the linear program that Melnick would use to determine the optimal monthly production of each wax.

 

 

 

 

 

 

 

 

Question No.4 - (20 Points)

Brewer Corp. is considering dropping its talking dog product line due to continuing losses. Revenue and cost data for the talking dog line for the past year is:

If the talking dog is discontinued, then Brewer could avoid $110,000 per year in fixed costs.

Required:

1)     What is the change in annual operating income from discontinuing the talking dog product line?

2)     Assuming all other conditions stay the same, at what level of annual sales of the talking dog (in units) should Brewer be indifferent to discontinuing or continuing the product line?

3)     Suppose that if the talking dog is dropped, the production and sale of other products would increase so as to generate a $15,000 increase in the contribution margin received from the other products. If all other conditions are the same, what is the change in annual operating income from dropping the talking dog?

 

 

 

 

 

 

 

 

Question No.5 - (20 Points)

Glunn Company makes three products in a single facility. These products have the following unit product costs:

Additional data concerning these products are listed below.

The mixing machines are potentially the constraint in the production facility. A total of 24,200 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

Required:

a)     How many minutes of mixing machine time would be required to satisfy demand for all three products?

b)    How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.)

c)     Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.)

 

 

 

 

Question No.6  - (20 Points)

Humes Corporation makes a range of products. The company's predetermined overhead rate is $16 per direct labor-hour, which was calculated using the following budgeted data:

Management is considering a special order for 700 units of product J45K at $64 each. The normal selling price of product J45K is $75 and the unit product cost is determined as follows:

  

If the special order were accepted, normal sales of this and other products would not be affected. The company has ample excess capacity to produce the additional units. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by the special order.

Required:

If the special order were accepted, what would be the impact on the company's overall profit?

 

 

 

 

 

Question No.7 - (25 Points)

Babb Company is a manufacturing firm that uses job-order costing. The company's inventory balances were as follows at the beginning and end of the year:

 

The company applies overhead to jobs using a predetermined overhead rate based on machine-hours. At the beginning of the year, the company estimated that it would work 17,000 machine-hours and incur $272,000 in manufacturing overhead cost. The following transactions were recorded for the year:

·         Raw materials were purchased, $416,000.

·         Raw materials were requisitioned for use in production, $412,000 $(376,000 direct and $36,000 indirect).

·         The following employee costs were incurred: direct labor, $330,000; indirect labor, $69,000; and administrative salaries, $157,000.

·         Selling costs, $113,000.

·         Factory utility costs, $29,000.

·         Depreciation for the year was $121,000 of which $114,000 is related to factory operations and $7,000 is related to selling, general, and administrative activities.

·         Manufacturing overhead was applied to jobs. The actual level of activity for the year was 15,000 machine-hours.

•         Sales for the year totaled $1,282,000.

 

 

 

 

Required:

 

a)     Prepare a schedule of cost of goods manufactured in good form.

b)    Was the overhead underapplied or overapplied? By how much?

c)     Prepare an income statement for the year in good form. The company closes any underapplied or overapplied manufacturing overhead to Cost of Goods Sold.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Question No.8 - (25 Points)

Cosgrove Company manufactures two products, Product K-7 and Product L-15. Product L-15 is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product K-7. Product L-15 is the more complex of the two products, requiring 2.0 hours of direct labor time per unit to manufacture compared to 1.0 hour of direct labor time for Product K-7. Product L-15 is produced on an automated production line.

Overhead currently is applied to the products on the basis of direct labor-hours. The company estimated it would incur $510,000 in manufacturing overhead costs and produce 10,000 units of Product L-15 and 40,000 units of Product K- 7 during the current year.

Unit costs for materials and labor are:

 

Required:

 

a.     Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year.

b.     The company is considering the use of activity-based costing as an alternative to its traditional costing method for manufacturing overhead. Data relating to the company's activity cost pools for the current year are given below:

 

Using the data above, determine the unit product cost of each product for the current year.

c.      What items of overhead cost make Product L-15 so costly to produce according to the activity-based costing system? What influence might the activity-based costing data have on management's opinions regarding the profitability of Product L-15?

 

 

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