Question

Player’s Sports has a machine that can be used to sharpen skill-saws and/or sharpen skates. The machine is available 8 hours per day for 25 days per month.

They charge $22.00 to sharpen a skill-saw. This process consumes $2.00 worth of supplies. The machine can sharpen 2 skill-saws per hour.

They charge $5.25 to sharpen a pair of skates. The process consumes $0.25 worth of supplies.

Each skate uses 3 minutes of machine time (6 minutes per pair).

The total demand for skill-saw sharpening is 800 per month.  

The total demand for skate sharpening is 1,200 pairs per month.  

Fixed costs related to the machine (insurance, repair contract, labour, amortization, etc.) total $3,200 per month. The marginal tax rate is 40%.

Required:

1. Compute the optimal use of machine hours per month. In other words, how many hours for saws? For skates?

2. Compute the number of skill-saw sharpenings and skate sharpenings and the contribution margin at this level of usage.

3. Compute the operating income at this level of usage.

4. Compute the net income (after-tax) at this level of usage.

Question 2 – Activity Costing Exercise

“We just can’t seem to make any money”, exclaimed the President. “Profits are falling every month. This month we lost money. What is going on?”

A quick look at the books revealed that the company had $250,000 in manufacturing overhead costs. The $250,000 had traditionally been applied based on Direct Labour hours. The company used 10,000 Direct Labour hours, so a pre-determined rate of $25 per Direct Labour Hour was used.

		Product Y		Product Z
Direct Materials	$10		$18
Direct Labour
(1 hour)	$20
(2 hours)			$40
Manufacturing Overhead	$25		$50
Total Cost	$55		$108

The company has been selling 5 of the cheaper product Y for each unit of Product Z. The company used a 40% markup to cover non-manufacturing operating costs.

		Product Y		Product Z
Selling Price	$77.00		$151.20

An in-plant study recently revealed that the $250,000 could be traced to the following activities:

Activity	Cost	Total Number for Year
Material moves	$30,000	15,000 moves
Inspections	$20,000	20,000 inspections
Machinery hours	$90,000	9,000 machine hours
Testing	$10,000	5,000 tests
Setups	$60,000	60,000 setups
Receiving	$40,000	10,000 orders processed
	$250,000

Further inspection revealed the following activities related to Products Y and Z.

	Product Y	Product Z
Material moves	3	4
Inspections	2	3
Machinery hours	2	1
Testing	3	3
Setups	4	6
Receiving	2	1

Required: Advise the President on the cause and solution for the current dilemma.

Determine what the new selling prices should be for Products Y and Z.

Question 3 – Job Costing

On March 1, Pixma Company had the following balances in its inventory accounts:

Raw Materials            $42,000

Work in Process         $ 9,905

Finished Goods           $        0

Work in Process of $9,905 on March 1 was made up of three jobs with the following costs:

	Job 817	Job 818	Job 819
Raw materials	$2,100	$1,410	$1,915
Direct labour	900	850	1,050
Applied overhead	540	510	630

Hint:

Add these to get your beginning WIP amounts for March.

During March, the following transactions occurred:

1. Materials purchased on account: $15,000
2. Materials requisitions: Job 817: $8,500; Job 818: $7,200; Job 819: $12,300
3. Job time tickets collected and summarized: Job 817: 185 hours at $10 per hour; Job 818: 175 hours at $11 per hour; Job 819: 235 hours at $10 per hour
4. Overhead is applied on the basis of direct labour cost.

[Hint: Look at the overhead applied to Jobs 817-819 to determine the overhead rate.]

5. Actual overhead: $3,500 (assume cash)
6. Jobs 817 and 818 were completed and transferred to the finished goods warehouse.
7. Job 818 was shipped and the customer was billed for 160 percent of the cost.
8. Close overhead to Cost of Goods Sold (no pro-rating).

Required:

1. Prepare the journal entries for transactions (a) through (h).

Use the reverse side of this page.

2. Prepare job-order cost sheets for Jobs 817, 818, and 819. Post the beginning inventory data, and then update the cost sheets for the March activity.

3. Calculate the March 31 balances for the three inventory accounts.

Answer 1

Q1)

Company's Limiting Factor is Machine Hours. In total company has (25 Day * 8 hours a Day) 200 Hours a Month.

Now we have to find out the contribution margin & contribution margin per limiting factor for each product.

Contribution Margin & Contribution Margin Per Limiting Factor for Skill Saw:-

Contribution Margin = Selling Price - Variable Cost

= 22 - 2

= 20

Contribution Margin Per Limiting Factor =

Contribution Margin/Limiting Factor

= 20/2 hours

= 10 per hour

Contribution Margin & Contribution Margin Per Limiting Factor for Skates

Contribution Margin = 5.25 - .25

= 5

Contribution Margin Per Limiting Factor = 5/.1

= 50

(It takes 6 minutes to do the work of one pair of Skates. So 6 Minutes/60 Minutes = .1Hours to complete one Pair)

So here Skates Has the Highest Contribution Margin Per Limiting Factor. So Company should produce it first & maximum.

Demand for Skates are 1,200

So it would require (1,200*6) 7,200 Minutes. Which means (7,200/60) 120 Hours.

Remaining Time is (200-120) 80 Hours. Each Skill Saw Require 2 Hours. So we can sell (80/2) 40 Skill Saw Sharpening.

Computation of Operating Income & Net Income

Revenue:-

Skill Saw 40*22 880

Skates 1,200*5.25 6,300

7,180

- Variable:-

Skill Saw 40*2 80

Skates 1,200*.25 300

380

Total Contribution Margin 6,800

- Total Fixed Cost 3,200

Operating Income 3,600

- Tax @ 40% 1,440

Net Income 2,160