Mello Manufacturing Company is a diversified manufacturer that manufactures three products (Alpha, Beta, and Omega) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows:

The activity bases identified for each activity are as follows:

The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:

Each product requires 40 minutes per unit of machine time.

Bowie Sporting Goods manufactures sleeping bags. The manufacturing standards per sleeping bag, based on 5,000 sleeping bags per month, are as follows:

Direct material of 6.00 yards at $5.75 per yard

Direct labor of 3.00 hours at $17.00 per hour

Overhead applied per sleeping bag at $15.00

In the month of April, the company actually produced 5,200 sleeping bags using 27,300 yards of material at a cost of $5.10 per yard. The labor used was 11,700 hours at an average rate of $18.50 per hour. The actual overhead spending was $96,200.

Determine the total materials variance and round to the nearest whole dollar. Enter a favorable variance as a negative number. Enter an unfavorable variance as a positive number.

Wolsey Industries Inc. expects to maintain the same inventories at the end of 20Y3 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during the year. A summary report of these estimates is as follows:

It is expected that 21,300 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 25,825 units.

2. What is the expected contribution margin ratio?

3. Determine the break-even sales in units and dollars. Round your answers to the nearest whole number.

4. Construct a cost-volume-profit chart on your own paper. What is the break-even sales?

$

5. What is the expected margin of safety in dollars and as a percentage of sales? If applicable, use amounts previously computed and then round your answers to the nearest whole number.

6. Determine the operating leverage. Round to one decimal place.

Morning Sky, Inc. (MSI), manufactures and sells computer games. The company has several product lines based on the age range of the target market. MSI sells both individual games as well as packaged sets. All games are in CD format, and some utilize accessories such as steering wheels, electronic tablets, and hand controls. To date, MSI has developed and manufactured all the CDs itself as well as the accessories and packaging for all of its products.

The gaming market has traditionally been targeted at teenagers and young adults; however, the increasing affordability of computers and the incorporation of computer activities into junior high and elementary school curriculums has led to a significant increase in sales to younger children. MSI has always included games for younger children but now wants to expand its business to capitalize on changes in the industry. The company currently has excess capacity and is investigating several possible ways to improve profitability.

MSI is considering eliminating a product from its ToddleTown Tours collection. This collection is aimed at children one to three years of age and includes “tours” of a hypothetical town. Two products, The Pet Store Parade and The Grocery Getaway, have impressive sales. However, sales for the third CD in the collection, The Post Office Polka, have lagged the others. Several other CDs are planned for this collection, but none is ready for production.

MSI’s information related to the ToddleTown Tours collection follows:

      
*Allocated based on total sales dollars.

MSI has determined that elimination of the Post Office Polka (POP) program would not impact sales of the other two items. The remaining fixed overhead currently allocated to the POP product would be redistributed to the remaining two products.

Required:
1. Calculate the incremental effect on profit if the POP product is eliminated.

2. Should MSI drop the POP product?

3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $1,200 of the common fixed costs could be avoided if the POP product line were eliminated.

3-b. Should MSI drop the POP product?

Morning Sky, Inc. (MSI), manufactures and sells computer games. The company has several product lines based on the age range of the target market. MSI sells both individual games as well as packaged sets. All games are in CD format, and some utilize accessories such as steering wheels, electronic tablets, and hand controls. To date, MSI has developed and manufactured all the CDs itself as well as the accessories and packaging for all of its products.

The gaming market has traditionally been targeted at teenagers and young adults; however, the increasing affordability of computers and the incorporation of computer activities into junior high and elementary school curriculums has led to a significant increase in sales to younger children. MSI has always included games for younger children but now wants to expand its business to capitalize on changes in the industry. The company currently has excess capacity and is investigating several possible ways to improve profitability.

MSI’s educational products are currently sold without any supplemental materials. The company is considering the inclusion of instructional materials such as an overhead slide presentation, potential test questions, and classroom bulletin board materials for teachers. A summary of the expected costs and revenues for MSI’s two options follows:

  
Required:
1. Based on the given data, Compute the increase or decrease in profit that would result if instructional materials were added to the CDs.

2. Should MSI add the instructional materials or sell the CDs without them?

  
3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 20,000 units. Complete the table given below based on Requirement 1 and 2 data.

  

3-b. Should MSI add the instructional materials or sell the CDs without them?

Morning Sky, Inc. (MSI), manufactures and sells computer games. The company has several product lines based on the age range of the target market. MSI sells both individual games as well as packaged sets. All games are in CD format, and some utilize accessories such as steering wheels, electronic tablets, and hand controls. To date, MSI has developed and manufactured all the CDs itself as well as the accessories and packaging for all of its products.

The gaming market has traditionally been targeted at teenagers and young adults; however, the increasing affordability of computers and the incorporation of computer activities into junior high and elementary school curriculums has led to a significant increase in sales to younger children. MSI has always included games for younger children but now wants to expand its business to capitalize on changes in the industry. The company currently has excess capacity and is investigating several possible ways to improve profitability.

MSI is considering outsourcing the production of the handheld control module used with some of its products. The company has received a bid from Monte Legend Co. (MLC) to produce 25,000 units of the module per year for $22.00 each. The following information pertains to MSI’s production of the control modules:        

MSI has determined that it could eliminate all variable costs if the control modules were produced externally, but none of the fixed overhead is avoidable. At this time, MSI has no specific use in mind for the space that is currently dedicated to the control module production.

Required:
1. Compute the difference in cost between making and buying the control module.

Difference in Cost:

2. Should MSI buy the modules from MLC or continue to make them?

3-a. Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $41,000 in annual profit. Recompute the difference in cost between making and buying under this scenario.

Difference in Cost:

3-b. Does this change your recommendation to MSI?

“I’m not sure we should lay out $360,000 for that automated welding machine,” said Jim Alder, president of the Superior Equipment Company. “That’s a lot of money, and it would cost us $96,000 for software and installation, and another $62,400 per year just to maintain the thing. In addition, the manufacturer admits it would cost $59,000 more at the end of three years to replace worn-out parts.”

“I admit it’s a lot of money,” said Franci Rogers, the controller. “But you know the turnover problem we’ve had with the welding crew. This machine would replace six welders at a cost savings of $126,000 per year. And we would save another $8,700 per year in reduced material waste. When you figure that the automated welder would last for six years, I’m sure the return would be greater than our 17% required rate of return.”

“I’m still not convinced,” countered Mr. Alder. “We can only get $23,000 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $42,000 for parts. But have your people work up the figures and we’ll talk about them at the executive committee meeting tomorrow.”

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Compute the annual net cost savings promised by the automated welding machine.

2a. Using the data from (1) above and other data from the problem, compute the automated welding machine’s net present value.

2b. Would you recommend purchasing the automated welding machine?

3. Assume that management can identify several intangible benefits associated with the automated welding machine, including greater flexibility in shifting from one type of product to another, improved quality of output, and faster delivery as a result of reduced throughput time. What minimum dollar value per year would management have to attach to these intangible benefits in order to make the new welding machine an acceptable investment?

Jeremy and Alyssa Johnson have been married for five years and do not have any children. Jeremy was married previously and has one child from the prior marriage. He is self-employed and operates his own computer repair store. For the first two months of this year, Alyssa worked for Office Depot as an employee. In March, Alyssa accepted a new job with Super Toys, Inc. (ST) where she worked for the remainder of the year. This year the Johnsons received $274,000 of gross income.

a. Expenses associated with Jeremy’s store include $44,750 in salary (and employment taxes) to employees, $50,700 of supplies, and $19,900 in rent and other administrative expenses.

b. As a salesperson, Alyssa incurred $2,190 in travel expenses related to her employment that were not reimbursed by her employer.

c. The Johnsons own a piece of raw land held as an investment. They paid $690 of real property taxes on the property and they incurred $295 of expenses in travel costs to see the property and to evaluate other similar potential investment properties.

d. The Johnsons own a rental home. They incurred $8,690 of expenses associated with the property.

e. Jeremy paid $4,690 for health insurance coverage for himself (not through an exchange). Alyssa was covered by health plans provided by her employer, but Jeremy is not eligible for the plan until next year.

f. Jeremy paid $2,690 in self-employment taxes ($1,345 represents the employer portion of the self-employment taxes).

g. Jeremy paid $5,380 in alimony and $3,285 in child support from his prior marriage (divorced 2010).

h. The Johnsons donated $2,190 to their favorite charity.

Determine the Johnson"s AGI given the above information

Flow of Costs and Income Statement

Ginocera Inc. is a designer, manufacturer, and distributor of custom gourment kitchen knives. A new kitchen knife series called the Kitchen Ninja was released for production in early 20Y8. In January, the company spent $600,000 to develop a late-night advertising infomercial for the new product. During 20Y8, the company spent an additional $1,400,000 promoting the product through these infomercials, and $800,000 in legal costs. The knives were ready for manufacture on January 1, 20Y8.

Ginocera uses a job order cost system to accumulate costs associated with the Kitchen Ninja Knife. The unit direct materials cost for the knife is:

The production process is straightforward. First, the hardened steel blanks, which are purchased directly from a raw material supplier, are stamped into a single piece of metal that includes both the blade and the shaft. The stamping machine requires one hour per 250 knives.

After the knife shafts are stamped, they are brought to an assembly area where an employee attaches the handle to the shaft and packs the knife into a decorative box. The direct labor cost is $0.50 per unit.

The knives are sold to stores. Each store is given promotional materials, such as posters and aisle displays. Promotional materials cost $60 per store. In addition, shipping costs average $0.20 per knife.

Total completed production was 1,200,000 units during the year. Other information is as follows:

Factory overhead cost is applied to jobs at the rate of $800 per stamping machine hour after the knife blanks are stamped. There were an additional 25,000 stamped knives, handles, and cases in process and waiting to be assembled on December 31, 20Y8.

In your computations, if required, round interim per unit costs to two decimal places.

Required:

1. Prepare an annual income statement for the Kitchen Ninja knife series.

2. Determine the balances in the work in process and finished goods inventories for the Kitchen Ninja knife series on December 31, 20Y8.

Activity-Based Budget

Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushette, and the Ultima. Forecast sales for next year are 15,300 for the Sleepeze, 12,510 for the Plushette, and 5,080 for the Ultima. Gene Dixon, vice president of sales, has provided the following information:

1. Salaries for his office (including himself at $64,900, a marketing research assistant at $41,350, and an administrative assistant at $24,450) are budgeted for $130,700 next year.
2. Depreciation on the offices and equipment is $17,100 per year.
3. Office supplies and other expenses total $23,450 per year.
4. Advertising has been steady at $17,750 per year. However, the Ultima is a new product and will require extensive advertising to educate consumers on the unique features of this high-end mattress. Gene believes the company should spend 10 percent of first-year Ultima sales for a print and television campaign.
5. Commissions on the Sleepeze and Plushette lines are 5 percent of sales. These commissions are paid to independent jobbers who sell the mattresses to retail stores.
6. Last year, shipping for the Sleepeze and Plushette lines averaged $45 per unit sold. Gene expects the Ultima line to ship for $70 per unit sold since this model features a larger mattress.

Suppose that Gene is considering three sales scenarios as follows:

Suppose Gene determines that next year's Sales Division activities include the following:

Research—researching current and future conditions in the industry

Shipping—arranging for shipping of mattresses and handling calls from purchasing agents at retail stores to trace shipments and correct errors

Jobbers—coordinating the efforts of the independent jobbers who sell the mattresses

Basic ads—placing print and television ads for the Sleepeze and Plushette lines

Ultima ads—choosing and working with the advertising agency on the Ultima account

Office management—operating the Sales Division office

The percentage of time spent by each employee of the Sales Division on each of the above activities is given in the following table:

Additional information is as follows:

1. Depreciation on the office equipment belongs to the office management activity.
2. Of the $23,450 for office supplies and other expenses, $5,200 can be assigned to telephone costs which can be split evenly between the shipping and jobbers' activities. An additional $2,200 per year is attributable to Internet connections and fees, and the bulk of these costs (80 percent) are assignable to research. The remainder is a cost of office management. All other office supplies and costs are assigned to the office management activity.

Required:

1. Prepare an activity-based budget for next year by activity. Use the expected level of sales activity. If required, round answers to the nearest dollar.

2. On the basis of the budget prepared in Requirement 1, advise Gene regarding actions that might be taken to reduce expenses.

Bergamo Bay's computer system generated the following trial balance on December 31, 2017. The company’s manager knows something is wrong with the trial balance because it does not show any balance for Work in Process Inventory but does show a balance for the Factory Overhead account. In addition, the accrued factory payroll (Factory Payroll Payable) has not been recorded.

After examining various files, the manager identifies the following six source documents that need to be processed to bring the accounting records up to date.

Jobs 402 and 404 are the only units in process at year-end. The predetermined overhead rate is 100% of direct labor cost

Prepare an income statement for 2017 and a balance sheet as of December 31, 2017.

Cost allocation is often the centerpiece of conflict that is resolved in court cases. The litigation usually involves the dispute over how costs are allocated to a product or product line that is of interest to the plaintiff. This is particularly an issue when a company produces some products or services for a price-competitive market while other products or services are produced for a governmental unit on a cost-plus or reimbursement basis.

Nursing Care Inc., or NCI, operates both a small nursing home and retirement home. There is a single kitchen used to provide meals to both the nursing home and retirement home, meaning labor costs and utilities costs of the kitchen are shared by the two homes. There is also a centralized cleaning department that provides the cleaning services for both homes as well as the kitchen. The nursing home serves only indigent patients who are on Medicaid. The state Department of Health and Family Services (DHFS) reimburses NCI at Medicaid-approved cost reimbursement rates. The Medicaid reimbursement rates are based on cost information supplied by NCI. The relevant cost and allocation data for the most recent year appear in the following table.

Required:

1. Management of NCI currently allocates the kitchen and cleaning department costs based on the number of residents in each home. Determine the amount of service department costs assigned to each of the homes using this allocation base. (Round percentages to two decimal places in your calculations.)

2. DHFS auditors believe the step method of allocation should be used by first assigning cleaning costs based on square feet and then kitchen costs based on number of residents. Determine the amount of service department costs assigned to each of the homes using this allocation method. (Do not round percentage answers.)

The Decision to Lease or Buy at Warf Computers Warf Computers has decided to proceed with the manufacture and distribution of the virtual keyboard (VK) the company has developed. To undertake this venture, the company needs to obtain equipment for the production of the microphone for the keyboard. Because of the required sensitivity of the microphone and its small size, the company needs specialized equipment for production. Nick Warf, the company president, has found a vendor for the equipment. Clapton Acoustical Equipment has offered to sell Warf Computers the necessary equipment at a price of $7.1 million. Because of the rapid development of new technology, the equipment falls in class 45 with a CCA rate of 45 percent. At the end of four years, the market value of the equipment is expected to be $860,000. Alternatively, the company can lease the equipment from Hendrix Leasing. The lease contract calls for four annual payments of $1.86 million due at the beginning of the year. Additionally, Warf Computers must make a security deposit of $440,000 that will be returned when the lease expires. Warf Computers can issue bonds with a yield of 11 percent, and the company has a marginal tax rate of 35 percent.

Questions

1) Should Warf buy or lease the equipment?

2) Nick mentions to James Hendrix, the president of Hendrix Leasing, that although the company will need the equipment for four years, he would like a lease contract for two years instead. At the end of the two years, the lease could be renewed. Nick would also like to eliminate the security deposit, but he would be willing to increase the lease payments to $3.0 million for each of the two years. When the lease is renewed in two years, Hendrix would consider the increased lease payments in the first two years when calculating the terms of the renewal. The equipment is expected to have a market value of $2.1 million in two years. What is the NAL of the lease contract under these terms? Why might Nick prefer this lease? What are the potential ethical issues concerning the new lease terms?

The following information is available for United Corporation on December 31 for the year just ended.

1. A review of the $12,000 unadjusted balance in the prepaid rent account shows a remaining balance of $8,750 at the end of the year.
2. $2,200 of the television advertising paid for in advance has been used.
3. The yearly depreciation on the building is $150.
4. The yearly depreciation on the equipment is $800.
5. $1,200 of the advertising paid for in advance has been published by the newspaper.
6. Furniture purchased in a previous year for $17,750 will be sold after ten years for $750.
7. Accrued salaries of $29,000 were not recorded at year-end.
8. Of the $7,500 consulting fees United Corporation received in advance, $6,600 has not yet been earned.
9. Interest of $1,690 has accrued on a bank loan and is unrecorded.
10. $11,500 of advertising United Corporation placed in the local newspaper is unrecorded and unpaid.

Prepare the required adjusting entries at December 31, 2014.
Enter the transaction letter as the description when entering the transactions in the journal. Dates must be entered in the format dd/mmm (i.e., January 15 would be 15/Jan). For each journal entry, indicate how each account affects the balance sheet (Assets, Liabilities, Equity). Use + for increase and - for decrease. For example, if an account decreases equity, choose '-Equity'.

On April 1, 2018 Hippocrates Consulting began operations with the following beginning balances entered on April 1^st as seen in the T-accounts below. First show each of the transactions described below as a journal entry including the date and then post each of the entries to the T-accounts below. After you have completed all of the entries as well as the adjusting entries prepare an Income Statement, Statement of Retained Earnings, and Balance Sheet for the month of April, 2018. Make sure that your statements presented in good form (points will be deducted if they are not in good form).

April 1: Paid three months’ rent on a lease rental contract, $4,800

           2: Paid a six-month insurance premium for $1,800

           4: Received cash from clients as an advance payment for services to be          

                 provided and recorded as unearned fees, $5,000

           5: Purchased additional office equipment on account from Office Station Co.,

                 $2,000.

           6: Received cash from clients on account, $1,800.

          10: Paid cash for a newspaper advertisement, $120

          12: Paid Office Station Co. for part of the debt incurred on April 5, $1200.

          12: Recorded services provided on account for the period April 1-12, $4,200.

          14. Paid part-time receptionist for two weeks’ salary, $750.

          17: Recorded cash from cash clients for fees earned during the period April

                  1-16, $6,250.

           18: Paid cash for supplies, $800.

           20: Recorded services provided on account for the period April 13-20, $2,100.

           24: Recorded cash from cash clients for fees earned the period April

                    17-24, $3,850.

           26: Received cash from clients on account, $5,600.

           27: Paid part-time receptionist for two weeks’ salary, $750.

           29: Paid telephone bill for April, $130.

           30: Paid electricity bill for April, $200.

           30: Recorded cash from cash clients for fees earned for the period April 25-30,                

                   $3,050.

           30: Recorded services provided on account for the remainder of April, $1,500.

           30. A dividend of $6,000 was declared and paid.

The following are adjusting entries to be recorded on April 30th:

1. Insurance expired during April is $300.
2. Supplies on hand on April 30 are $1,350.
3. Depreciation of office equipment for April is $700.
4. Accrued receptionist salary on April 30 is $120.
5. Rent expired during April is $1,600.
6. Unearned fees on April 30 are $2,500.

                                              Accounts

        Cash                                 Receivable                   Supplies                      Prepaid Rent

---------------------                 -------------------              --------------                         ---------------

$13,100                             $3,000                          $1,400                                                                   

                                                                                    Office                          Accumulated

                                    Prepaid Insurance              Equipment                       Depreciation

                                    --------------------------         -------------------                  -------------------

                                                                           $12,500

                                                                                     Unearned

Accounts Payable      Salaries Payable                      Fees                          Common Stock

-----------------------        ---------------------                   ----------------               --------------------

                                                                                                                                   $30,000

Retained Earnings             Fees Earned                    Salary Expense          Rent Expense

------------------------           -----------------                      ----------------------        ------------------

                                          Depreciation                                                          Miscellaneous

Supplies Expense               Expense                          Insurance Expense        Expense

-----------------------            ---------------------                -------------------------     -----------------