Exercise 5-13 Changes in Selling Price, Sales Volume, Variable Cost per Unit, and Total Fixed Costs [LO5-1, LO5-4]

Miller Company’s contribution format income statement for the most recent month is shown below:

Required:

(Consider each case independently):

1. What is the revised net operating income if unit sales increase by 15%?

2. What is the revised net operating income if the selling price decreases by $1.30 per unit and the number of units sold increases by 20%?

3. What is the revised net operating income if the selling price increases by $1.30 per unit, fixed expenses increase by $9,000, and the number of units sold decreases by 8%?

4. What is the revised net operating income if the selling price per unit increases by 20%, variable expenses increase by 30 cents per unit, and the number of units sold decreases by 12%?

Suppose you own Hot Air Balloon Rides during a local sports event in Vancouver, Canada, which is a singleprice monopoly (see Figure 1). Columns 1 and 2 of the following table set out the market demand schedule and columns 2 and 3 set out the total cost schedule. Price (dollars per ride) (1) Quantity demanded (rides per month) (2) Total cost (dollars per month) (3) 220 0 80 200 1 160 180 2 260 160 3 380 140 4 520 120 5 680 Please apply relevant micrconomic theory and models to analyze and answer the following questions ( (please draw economic model charts as many as possible for your answers):

a) Construct Hot Air’s total revenue and marginal revenue schedules (mark: 15%).

b) Draw a graph of the market demand curve and Hot Air’s marginal revenue curve (mark: 15%). Price (dollars per ride) (1) Quantity demanded (rides per month) (2) Total cost (dollars per month) (3) 220 0 80 200 1 160 180 2 260 160 3 380 140 4 520 120 5 680 UCW Course Syllabus: CODE nnn MBAF 504 Spring Term VAN10 A2.docx 2

c) Find Hot Air’s profit-maximizing output quantaty and price and calculate the firm’s economic profit, and indicate Price (P), Quantity (Q), and Profit (P) in your graph. (mark: 15%). d) Calculate the firm’s Consumer Surplus (CS), Producer Surplus (PS), and total Deadweigh Loss (DWL) under this single-price monopoly by comparing the Perfect Competition: P, Q, Pi, CS, PS, and DWL, what can you conclude? (mark:15%)

e) If the government imposes a tax as 14% on Hot Air’s profit, how do its output and price change? ( mark:10%)

f) If instead of taxing Hot Air’s profit, the government imposes a sales tax on balloon rides of $30 a ride, what are the new profit-maximizing quantity, price, and economic profit? (mark:10%);

g) If your brother finds out that you profit from this Hot Air Balloon Rides, he wants to buy 2nd Balloon with similar cost structure and runs his Hot Ballon Riding business independtly (see Figure 2). What is your estimated market structure change in terms of P, Q, Pi, CS, PS, and DWL and why? (mark:10%);

h) If more and more vendors join in this market from the other provinces of Canada and the USA (see Figure 3), what can you predict the market structure change in terms of P, Q, Pi, CS, PS, and DWL. Please apply your key learnings from Microeconomic portion of this class to analyze and conclude here.(mark:10%). You may receive a Bonus mark (<=10) for your excellent economic analysis here.

1. A profit-maximizing, monopolistically competitive car wash washes 40 cars per day, and its total cost $200 and currently makes an economic profit of $280. In the long run, everything else equal, the
   a.   car wash will wash less than 40 cars per day.
   b.   car wash will charge more than $12 per wash.
   c.   car wash will need to hire new workers to wash more cars.
   d.   car wash will wash more than 50 cars per day.

2. For a competitive firm, if at least some portion of its short-run average cost curve lies below the price of the product, we can conclude that the firm
   a.  is earning zero economic profits.
   b.  is incurring short-run losses.
   c.  is going to shut down.
   d.  is earning a profit at the profit maximizing output level.

3. If stock exchanges did not exist,
   a.   the economy’s resources could be more efficiently allocated among firms.
   b.   the risk to the investor of buying stocks would be much greater.
   c.   investment banks would no longer play a role in handling stocks.
   d.   there would be no organized way for firms to issue stock.

4. A “specialist” is a
   a.   stockbroker who specializes in the “third market.”
   b.   person who works on the floor of the New York Stock Exchange and specializes in certain stocks.
   c.   stockholder who finds buyers and sellers for specific stocks, but also operates outside of specific stock markets.
   d.   stockbroker who operates only in a particular regional stock market.

5. Suppose that we learn that hotels in Los Angeles generally operate with an average vacancy rate of 15 percent (in other words, 85 percent of the hotel rooms are filled with guests). Given this information about excess capacity, we would judge this market to be
   a.  a perfectly competitive market.
   b.  a monopoly.
   c.  a monopolistically competitive market.
   d.  an oligopoly.

6. A monopolistically competitive firm
   a.   is always a retail establishment.
   b.   has more monopoly power in the long run than does a perfectly competitive firm.
   c.   tries to differentiate its product from competitors’ products.
   d.   faces a perfectly elastic demand curve for its product.

Summary Problem—Four-Variance Breakdown of the Total Overhead Variance; Journal Entries ACME manufacturing is a low-cost producer of a single, commodity product: RGL-01. Standard overhead cost information for one unit of this product is presented below:

Standard number of machine hours per unit produced 0.5

Standard variable overhead rate per machine hour $30.00

Budgeted fixed overhead (for the year) $300,000

Practical capacity, in units (annual basis) 10,000

Budgeted output for the coming year, in units 8,000

Normal capacity, in units (per year) 9,000

Actual production for the year (in units) 9,200

Actual overhead costs incurred during the year:

Fixed overhead $288,000

Variable overhead $142,600

Actual number of machine hours per unit for work done this period 0.49

Required

Calculate the fixed overhead application rate per machine hour (rounded to 2 decimal places) using (a) budgeted output, (b) normal capacity, and (c) practical capacity.

What is the total overhead application rate per machine hour (rounded to 2 decimal places) for each of the three choices identified in requirement 1?

What is the total overhead variance for the year when the overhead application rate per machine hour is determined under each of the following options: (a) budgeted output, (b) normal capacity, and (c) practical capacity? [Round answers to nearest whole number, and indicate whether each variance is favorable (F) or unfavorable (U).]

What is causing the results you observe in requirement 3?

What is the Overhead Efficiency Variance (= Variable Overhead Efficiency Variance) for the year when the overhead application rate per machine hour is determined under each of the following options: (a) budgeted output, (b) normal capacity, and (c) practical capacity? [Round answers to nearest whole number, and indicate whether each variance is favorable (F) or unfavorable (U).]

Provide an interpretation of the results reported in requirement 5.

What is the total Overhead Spending Variance for the year under each of the following assumptions regarding the denominator activity level used to set the overhead application rate for the year: (a) budgeted output, (b) normal capacity, and (c) practical capacity? Round answers to nearest whole dollar, and state whether each variance is favorable (F) or unfavorable (U).

Break down the Total Overhead Spending Variance (as determined in requirement 7) into: (a) a Fixed Overhead Spending Variance, and (b) a Variable Overhead Spending Variance. Round answers to nearest whole dollar, and state whether each variance is favorable (F) or unfavorable (U).

Provide an interpretation of the results reported in requirements 7 and 8. Calculate the Production Volume Variance when the overhead application rate per machine hour is determined under each of the following options: (a) budgeted output, (b) normal capacity, and (c) practical capacity. Round answers to nearest whole dollar, and state whether each variance is favorable (F) or unfavorable (U).

Provide an interpretation of the results reported in requirement 10.

Summary analysis: Prepare a four-variance analysis of the total overhead variance for the period under each of the following options for determining the fixed overhead application rate: (a) budgeted output, (b) normal capacity, and (c) practical capacity.

Provide summary journal entries at the end of the year to (a) record all four overhead cost variances (calculated above, in requirement 12) and (b) to close the variances to Cost of Goods Sold (CGS). Assume that variances were determined using “practical capacity” as the denominator volume level for establishing the fixed overhead application rate and the total overhead application rate. Also assume that the company uses a single account, Factory Overhead, to record overhead costs.

In December 2016, Learer Company’s manager estimated next year’s total direct labor cost assuming 40 persons working an average of 2,000 hours each at an average wage rate of $30 per hour. The manager also estimated the following manufacturing overhead costs for 2017.

Indirect labor $ 340,200 Factory supervision 110,000 Rent on factory building 101,000 Factory utilities 107,000 Factory insurance expired 87,000 Depreciation—Factory equipment 473,000 Repairs expense—Factory equipment 79,000 Factory supplies used 87,800 Miscellaneous production costs 55,000 Total estimated overhead costs $ 1,440,000 At the end of 2017, records show the company incurred $1,599,000 of actual overhead costs. It completed and sold five jobs with the following direct labor costs: Job 201, $623,000; Job 202, $582,000; Job 203, $317,000; Job 204, $735,000; and Job 205, $333,000. In addition, Job 206 is in process at the end of 2017 and had been charged $36,000 for direct labor. No jobs were in process at the end of 2016. The company’s predetermined overhead rate is based on direct labor cost. Required 1-a. Determine the predetermined overhead rate for 2017. 1-b. Determine the total overhead cost applied to each of the six jobs during 2017. 1-c.

Determine the over- or underapplied overhead at year-end 2017. 2. Assuming that any over- or underapplied overhead is not material, prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold at the end of 2017.

In December 2016, Learer Company’s manager estimated next year’s total direct labor cost assuming 30 persons working an average of 2,500 hours each at an average wage rate of $30 per hour. The manager also estimated the following manufacturing overhead costs for 2017.

At the end of 2017, records show the company incurred $1,566,000 of actual overhead costs. It completed and sold five jobs with the following direct labor costs: Job 201, $608,000; Job 202, $567,000; Job 203, $302,000; Job 204, $720,000; and Job 205, $318,000. In addition, Job 206 is in process at the end of 2017 and had been charged $21,000 for direct labor. No jobs were in process at the end of 2016. The company’s predetermined overhead rate is based on direct labor cost.

Required
1-a. Determine the predetermined overhead rate for 2017.
1-b. Determine the total overhead cost applied to each of the six jobs during 2017.
1-c. Determine the over- or underapplied overhead at year-end 2017.
2. Assuming that any over- or underapplied overhead is not material, prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold at the end of 2017.

1. In perfect competition, the price of the product is determined where the market

2.

At the profit-maximizing level of output for a perfectly competitive firm, price equals marginal cost. Which of the following is also true?

3.

In perfect competition, the marginal revenue of an individual firm

4.

In a perfectly competitive market, if a firm finds it is producing an amount of output such that its marginal cost exceeds its price, it will

Define the following terms and/or write the formula if available:

Fixed input (Give one example)
Fixed cost
Variable input (Give one example)
Variable cost
Total cost
Sunk cost (Give one example)
Average fixed cost
Average variable cost
Average total cost (or average cost)

Consider a market with many firms that have different cost structures.

Unless shutdown or exit is​ optimal, every firm expands production until​ ___________.

A.

marginal product is maximized.

B.

marginal​ revenue, marginal​ cost, and price are all equal

​(MR

​ = MC​ =

P​).

C.

marginal revenue is equal to the minimum of​ short-run average total cost.

D.

marginal cost is minimized.

To construct the supply curve in a market with many firms with different cost​ structures, the​ ___________.

A.

individual supply curves for each firm are added together.

B.

individual average variable cost curves are added together.

C.

minimums of the​ firms' marginal cost curves are linked together.

D.

minimums of the​ firms' long-run average total cost curves are linked together.

The equilibrium price is the​ ___________.

A.

​long-run average total cost of the last entrant into the market.

B.

average marginal cost of the firms.

C.

​long-run average total cost of the first entrant into the market.

D.

minimum of the average variable cost of the smallest firm in the market.

In terms of economic​ profits, early market entrants earn

(negative

zero

positive)

economic profits and the last entrant earns

(negative

zero

positive)

economic profits.

A perfectly competitive firm will choose to shut down when the (price (marginal revenue)/ average total cost) intersects the marginal cost curve below the ( total cost curve average variable cost curve ).

​Therefore, the​ short-run supply curve for a perfectly competitive firm is represented by​ __________.

A. the portion of the average variable cost curve below marginal cost. B. the portion of the average variable cost curve above marginal cost. C. the portion of the marginal cost curve above average total cost. D. the portion of the marginal cost curve above average variable cost.

In the long​ run, the supply curve for a perfectly competitive firm is represented by​ __________.

A. the portion of the marginal cost curve above average total cost. B. the portion of the marginal cost curve above average variable cost. C. the portion of the average variable cost curve below marginal cost. D. the portion of the average variable cost curve above marginal cost.