Question

1.Teruba Melons purchased a truckload of watermelons weighing 3,000 pounds for $900. The company separated the melons into two grades: superior and economy. The superior grade melons have a total weight of 2,400 pounds and the economy grade melons total 600 pounds. The company sells the superior grade at $0.60 per pound and the economy grade at $0.30 per pound. How much of the $900 cost of the truckload will be allocated to the superior grade melons using the relative sales value method? Use five significant digits in calculations.

Select one: a. $800 b. $720 c. $600 d. $1,440

2.The following information is available for Diva Footwear’s segments:
Platform Shoes Athletic Shoes Boots
Sales $120,000 $420,000 $360,000
Variable costs 64,000 220,000 140,000
Contribution margin 56,000 200,000 220,000
Direct fixed costs 45,000 70,000 90,000
Allocated fixed costs 20,000 70,000 60,000
Net income ($ 9,000) $ 60,000 $ 70,000


Diva Footwear normally sells boots for $90 per pair. An exporter has approached Diva about buying 1,000 pairs of boots for a one-time export deal for $81 per pair. Diva can avoid $3.00 per pair of the normal varia-ble cost on this sale, but Diva must pay a fixed cost of $4,000 to have the boots shipped. Diva has the capacity to produce this order, and no regular sales will be affected. What affect will occur on Diva’s profits if the order is accepted?

Select one:

a. Profits will increase by $42,000.

b. Profits will increase by $49,000.

c. Profits will increase by $45,000.

d. More information is needed to answer.

Answer 1

Question - 1

Calculate the relative sales value ratio

	Superior	Economy
Weight	2400	600
Price	0.6	0.3
Sales value	1440	180
Ratio	8	1

Cost of truckload allocated to Superior = 900 * 8/9 = $ 800 .......... Option - A

Question - 2

Sales revenue = 1000 * 81	81000
(-) Variable cost = ( 35 - 3) * 1000	32000
Contribution	49000
(-) Additional fixed costs (given)	4000
Profit will Increase by	45000

So ...... Select - Option - C

Explanation ..........  

(1) Current Sales level for Boots = 360,000 / $ 90 = 4000 Boots

(2)Current variable cost per unit = 140000/ 4000 Units of Boots = 35

(3) As given in the question ........ varaiable cost shall decrease by $ 3 per pair of Boots. Hence relevant variable cost to be taken = 35 - 3 = 32. And for 1000 Boots = 32*1000 = 32000

(4) Current fixed cost are irrelevant. Only the additional fixed cost, that have to incurred in offer is accepted shall be taken in calculations.

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