Question

22) Assume that a company manufactures numerous component parts, one of which is called Part A. The company makes 50,000 units of Part A per year and its absorption costing system indicates that, at this volume of production, it costs $23.00 per unit to make this part:

Direct materials	$	10.00
Direct labor		6.00
Variable overhead		2.00
Fixed overhead		5.00
Total absorption cost per unit	$	23.00

The company is trying to decide between two alternatives:

Alternative 1: Continue making 50,000 units of Part A annually using its existing equipment at the unit cost shown above. The equipment used to make this part does not wear out through use and it has no resale value.

Alternative 2: Purchase 50,000 units of Part A from a supplier at a cost of $19.01 per unit.

If the company chooses alternative 2, it believes that $180,000 of the fixed manufacturing overhead cost being allocated to Part A will continue to be incurred. What is the financial advantage or (disadvantage) of buying the parts from a supplier?

A) -19500

B) 19500

C) 130000

D) -130000

24) Assume the following information:

		Amount
Selling price	$	30
Variable expense ratio		80	%
Fixed expenses	$	8,000	per month
Unit sales		3,400	per month

How many units need to be sold to achieve a target profit of $17,800?

A) 6373 UNITS

B) 4300 UNITS

C) 1039 UNITS

D) 2967 UNITS

26) Assume the following information appears in the standard cost card for a company that makes only one product:

	Standard Quantity or hours		Standard Price or Rate			Standard Cost
Direct materials	5	pounds	$	11.00	per pound	$	55.00
Direct labor	2	hours	$	18.40	per hour	$	36.80
Variable manufacturing overhead	2	hours	$	3.00	per hour	$	6.00

During the most recent period, the following additional information was available:

• 20,000 pounds of material was purchased at a cost of $10.50 per pound.
• All of the material that was purchased was used to produce 3,900 units.
• 8,000 direct labor-hours were recorded at a total cost of $132,000.

What is the direct labor rate variance?

A) 7600U

B) 15200F

C) 7600 F

D) 15200 U

Answer 1

Answer-22:

Option B is the correct answer i.e. $199,500

Explanation:

Direct material	$                10.00
Direct labour	$                  6.00
Variable manufacturing overhead	$                  2.00
Fixed manufacturing overhead	$                  5.00
Relevant manufacturing cost	$                23.00
Manufacturing cost saving	(50,000 × $23)	$ 1,150,000
Total benefit		1150000
Less: Cost of purchasing the part	(50,000 × $19.01)	$     950,500
Financial advantage		$     199,500

Answer-24:

Option B is the correct answer i.e. 4,300 units

Explanation:

Target net income = $17,800

= Contribution margin - Fixed expense = $17,800

= Unit sold × Selling Price × (100% - 80%) - $8,000 = $17,800

= Unit sold × $30 × 20% = $25,800

= Units sold = $25,800 / 6 = 4,300 units

Answer-26:

Option B is the correct answer i.e. 15,200 F

Explanation:

Direct Labor Rate Variance
Actual hours	× (	Standard rate	-	Actual rate	) =	DL Rate variance
8,000	× (	$                  18.40	-	$132,000/8,000	) =	15,200	F