Question 1: Cost-Volume-Profit Analysis
Marbles Corporation has a maximum capacity of 200,000 units per year. Variable manufacturing costs (with respect to units manufactured) are $11.50 per unit. Fixed manufacturing overhead is $875,000 per year. Variable marketing, distribution, customer service and administrative costs (with respect to units sold) are $1.90 per unit, and fixed marketing, distribution, customer service and administrative costs are $115,000 per year. The current selling price is $21 per unit. Marbles has no beginning or ending inventory. The company’s tax rate is 32%.
How many units must be sold to earn a target operating income of $360,000 per year?
6 points for this part of the question Many ways to present this information – I’ll stick with the formula we ultimately ended up with in the slides: FC + Target operating income = 875m + 115m + 360m
CM per unit 21 – 11.5 – 1.90
= 177,631.58 units
Also, it was kind of tricky to throw in non-manufacturing costs. However, if you stepped back and thought about the concept of the break-even point, and if we did not cover all of our costs (i.e., exclude them from our analysis), then you would not truly be breaking even. The same could be said about reaching a particular level of profit.
Finally, the target information is “operating income” – this number is reported before taxes (i.e., is not “net income”). Therefore, no adjustment for taxes is necessary.
What is the breakeven point in (a) units sold and (b) sales dollars?
6 points for this part of the question.In class, we talked about the propensity for students to mess this one up a bit (i.e., it is acommon mistake to watch out for). Specifically, given that the question is asking for a
“breakeven” point (in units and sales $), that implies that profit is zero. If profit is zero, then taxexpense must be zero. So, taxes do not play a role in this problem.We’ve considered them . . . and, they do not apply here.So, same formula as above, with “0” replacing the target operating income:
( 875m + 115m ) / (21 – 11.5 – 1.90) = 130,263.16 units130,263.16 units x $21 per unit = $2,735,526.32 in total revenue dollars
Question 3: Overhead and Related Issues
Assume a standard costing system in the following.
The following total costs are budgeted for a pure manufacturing firm:
Direct materials $100,000Direct labor $120,000Indirect labor – paid hourly $106,000Rent $129,000
The company has deemed machine hours to be a good estimator of overhead.
In a perfect world, the company would use 1.6 machine hours for every output-unit produced.
Other information: Budgeted output for the year is 8,900 units Actual output for the year is 9,000 units Actual number of machine hours used is 8,750 hours Other information: As of June 30th, the company actually used 6,950 machine hours to produce 4,750 units.
Required:
What is the predetermined overhead rate? _________________
Compute the applied overhead as of June 30th . _________________
Required:
What is the predetermined overhead rate? _________________
Budgeted overhead / (SI x SQ) = P/D OH Rate(106,000 + 129,000) / (1.6 x 8,900) = $16.5028 per MH5 points
Compute the applied overhead as of June 30th . _________________
Applied OH = P/D OH Rate x SI x AQ = $16.5028 per MH x 1.6 MH/unit x 4,750 units = $125,421.28
5 points
Question 4: Relevant Costs
McDermott and Petra are currently manufacturing their own brand of playing cards. Given their connections at the major casinos, McDermott and Petra expect to have ample demand for the product in the years to come.
The manufacturing process consists of the printing of the design on specialized paper (rank and suit), the cutting of the specialized paper into individual cards, the specialized gloss applied to the cards, and the sorting of the cards into their respective order.
The cards are then packaged in cardboard boxes (also manufactured by McDermott and Petra and wrapped in purchased plastic.
Recently, they received an offer from Worm Incorporated. Worm offered to sell the cardboard boxes used in the packaging directly to McDermott and Petra for $1.69 per box. Boxes would be received, and the only remaining step required of McDermott and Petra would be to place the manufactured cards in the box and wrap the boxes in plastic.
The following represent costs of the complete process of manufacturing and packaging a deck
| of cards: | |
| Specialized paper for cards | $ 1.04 |
| Gloss used as coating | 1.00 |
| Cost of electricity used to | |
| power machines used in sorting and cutting | .46 |
| Plastic used in wrapping the deck | .12 |
| Cardboard | 1.32 |
| Rent allocated to space used for box mftg | .24 |
Rent allocated to space used for plastic wrapping .22 Cost of electricity used to power machines
used in cutting and folding cardboard .19
Based on the information given above, should McDermott and Petra accept Worm’s offer regarding the boxes? Support your answer with calculations and a brief reasoning statement.
There were a variety of ways to solve this problem. I gave full credit as long as you treated the cost information appropriately. The only costs that are associated with making the cardboard boxes were the cardboard itself ($1.32), the rent allocated to the space used for manufacturing boxes ($.24), and the electricity for machines used to cut and fold the cardboard.
Given that the cost of the rent was described as “allocated,” the appropriate approach was to treat this information as “irrelevant” (i.e., regardless of choice to make or buy, company will incur the rent cost). If you did not treat the cost as “allocated” (as described), I took off 2 points.
So, the only thing to compare is the cost to buy ($1.69) and the (relevant) cost to make ($1.32 + $.19 = $1.51), which suggests that the McDermott and Petra should continue to make the cardboard boxes.
12 total possible points on this problem.
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Performance Evaluation of Investment Centers
When the Coronet Company formed three divisions a year ago, the president told the division managers that an annual bonus would be paid to the most profitable division. However, absolute division operating income as conventionally computed would not be used. Instead, the ranking would be affected by the relative investments in the three divisions. Options available include ROI and residual income, and variations of each. Investment can be measured using gross book value or net (of straight-line depreciation) book value. Each manager has now written a memorandum claiming entitlement to the bonus. The following data are available:
| Gross Book | Division | |
| Value of | Operating | |
| Division | Division Assets | Income |
| Mastex | 400,000 | 47,500 |
| Banjo | 380,000 | 46,000 |
| Randal | 250,000 | 30,800 |
All the assets are fixed assets that were purchased 10 years ago and have 10 years of useful life remaining. A zero terminal disposal price is predicted. Coronet’s cost of capital for computing residual income is 10% of investment.
Required: Which method for computing profitability did each manager choose? Make your description specific and brief. Calculations must be used to support your answer.
The issue here is that each of the division managers perceives they are the top-ranked division
based on their measure.This problem is designed to allow you to demonstrate your understanding of the ambiguity associated even with “objective,” financial performance measures.
ROI ordering (based on gross or book value of investment) – Randal, Banjo, Mastex RI ordering (based on gross value of investment) – Banjo, Mastex, Randal RI ordering (based on net book value of investment) – Mastex, Banjo, Randal So, Randal used ROI, Banjo used RI based on gross value of investment, and Mastex used RI
based on net book value of investment
Materials and Manufacturing Labor Variances
Consider the following selected data regarding the manufacture of a line of upholstered chairs:
Standards Per Chair
Direct materials 2 square yards of input at $10 per square yard
Direct manufacturing labor 0.5 hour of input at $20 per hour
The following data were compiled regarding actual performance: actual output units (chairs) produced, 20,000; square yards of input purchased and used, 37,000; price per square yard, $10.20; direct manufacturing labor costs, $176,400; actual hours of input, 9,000; labor price per hour, $19.60.
Required:
- Show your computations of spending and efficiency variances for direct materials. Give a plausible explanation of why the variances occurred.
Materials spending variance: $7,400 U
Materials efficiency variance: $30,000 F
- Show your computations of price and efficiency variances for direct materials. Give a plausible explanation of why the variances occurred.
Direct labor spending variance: $3,600 F
Direct labor efficiency variance: $20,000 F
Production Cost Variance Calculations
The following standard costs per unit have been established by Baldwin Company:
Material (6 pounds @ $.50 per pound) $ 3.00
Direct labor (1 hour @ $8 per hour) 8.00
Factory overhead (1 hour @ $5.50 per hour) 5.50
Total Standard Cost per Unit $16.50
The $5.50 per direct labor hour overhead rate is based on normal capacity of 95 percent of practical capacity. The following flexible budget information is provided:
Operating Levels
| 85% | 95% | 100% | |
| Units of production | 4,250 | 4,750 | 5,000 |
| Standard direct labor hours | 4,250 | 4,750 | 5,000 |
| Variable factor overhead | 8,500 | 9,500 | 10,000 |
| Fixed factory overhead | 16,625 | 16,625 | 16,625 |
During March the company operated at 85% capacity, producing 4,250 units of product which were charged with the following standard costs:
Material (25,500 pounds @ $.50 per pound) $12,750 Direct labor (4,250 hours @ $8 per hour) 34,000 Factory overhead (4,250 hours @ $5.50 per hour) 23,375
Total Standard Cost $70,125
Actual costs incurred during March were:
Material (26,100 pounds) $11,745 Direct labor (4,150 hours) 34,445 Fixed factory overhead costs 16,625 Variable factory overhead costs 7,650
Total Actual Costs $70,465
Assume all the direct material purchased was used during the period.
Use the table on the following page to support your answers if you find it useful, or show your work in another clearly labeled format.
- Determine the following variances:
| Price | Efficiency | Activity | |
| direct material | $1305 F | $300 U | $1500 F |
| direct labor | $1245 U | $800 F | $4000 F |
| variable overhead | $650 F | $200 F | $1000 F |
| fixed overhead | $0 | X | X |
Make sure you record a number in each blank space. Indicate “favorable” or “unfavorable” for each variance.
Standard Costing
Swan is a specialty chemical produced in batches. Normal denominator volume is 100 batches per week. The weekly flexible budget for indirect costs (i.e., overhead) is $1600 plus $5 per standard hour of direct labor. The company considers direct labor hours to be a reasonable cost driver in this scenario.
Data for the week just ended are:
| (1) | Production amounted to 103 batches |
| (2) | There were 315 hours of direct labor used, costing $2,472. |
| (3) | The standards allow 3 hours of direct labor per batch |
| (4) | Actual variable overhead for the week was $1,550 |
| (5) | Actual fixed overhead for the week was $3,700 |
Computations are shown first using tables, then formulas on the following page.
Actual Standard Flexible Master Overhead
Activity Input Budget Budget Applied
| Variable Overhead | $1550 315x$5 = $1575 103x3x$5 = $1545 100x3x$5 = $1500 $25 F activity efficiencyspending $30 U $45 U | Same as flex budget under standard costing system |
| $50 U |
Overall variable overhead variance
Actual Standard Flexible Master Overhead
Activity Input Budget Budget Applied
Fixed NA NA $1600 103x Overhead $3700 ($1600/100) = $1648 $2100 U
$48 F
Fixed overhead budget variance Production
volume variance (PVV)
- Calculate the following variances:
Variance Variable Overhead Fixed Overhead
Price/Spending $25 F $2100 U Efficiency $30 U X Activity $45 U X
Production Volume X $48 F
Note that this problem shows a production volume variance – which we didn’t cover in class, so you are not responsible for that information.
Variable overhead spending variance: $1550 – (315x $5) = $25 F
Variable overhead efficiency variance: (315 – 3 x 103)x$5 = $30 U
Variable overhead activity variance: (103 – 100) x (3 x$5) – $45 U
Fixed overhead budget variance:
$3700 – $1600 = $2100 U (just actual minus budgeted)
Fixed overhead production volume variance: (103 – 100) x ($1600/100) = $48 F (just budgeted minus applied)
Illawarra Office Equipment
The production report of Illawaarra Office Equipment for April 1999 included the following information pertaining to the manufacture of a line of tables:
Direct Direct Manufacturing Materials Labor
| Budgeted spending | $540,000 | $360,000 |
| Actual spending | 672,000 | 396,000 |
| Variance | $132,000 U | $ 36,000 F |
| Actual price per unit of input (bd. ft., hr.) | $14 | $18 |
| Standard price per unit of input | $12 | $20 |
| Standard inputs allow per unit of output | 5 | 2 |
| Actual units of input | 48,000 | 22,000 |
| Budgeted units of output (product) | 9,000 | 9,000 |
| Actual units of output (product) | 10,000 | 10,000 |
- How much of the Direct Material and Direct Labor Variances are due to (a) price changes,
(b) usage efficiencies or inefficiencies, (c) activity level changes.
Materials Price: $96,000 U
Labor Price: $44,000 F
Materials Efficiency: $24,000 F
Labor Efficiency: $40,000 U
Materials Activity: $60,000 U
Labor Activity: $40,000 U
- Give a plausible explanation for the performance.
As we discussed in class, there exist a number of plausible explanations for each of the above variances.