Activity-Based Costing for a Service Company

Bounce Back Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report:

Management is concerned that the administrative expenses may make some of the insurance lines unprofitable. However, the administrative expenses have not been allocated to the insurance lines. The controller has suggested that the administrative expenses could be assigned to the insurance lines using activity-based costing. The administrative expenses are comprised of five activities. The activities and their rates are as follows:

Activity-base usage data for each line of insurance were retrieved from the corporate records as follows:

a. Complete the product profitability report through the administrative activities. Determine the operating income as a percent of premium revenue. Rounded to the nearest whole percent.

What can we say about winning percentage and coach's salary as contributors to "Revenue"? Select one: a. Surprisingly, coach's salary has a positive impact on revenue, while winning percentage has a negative impact. b. As would be expected, winning percentage has a positive effect, and coach's salary impact is negative. c. Both winning percentage and coach's salary have a positive impact on revenue. d. More data is needed to conduct a meaningful analysis. e. Answer pending

What is the error of estimation for Alabama’s revenue?

Select one:

a. 4.1 Million

b. 10.6 Million

c. 8.3 Million

d. 0

e. Cannot be determined.

Suppose that you won an exclusive bid to sell Christmas trees from National Park Service (NPS). However, NPS requires that you plant one and a half multiple of any number of trees you cut. For example, if you cut 4 trees, you have to plant 8 trees. If you cut 9, you have to plant 27 trees. The NPS may argue that the number of trees that survive is proportional to the number of tree that you grow. Or, they might just do so to prevent you from cutting all trees. Assume further that the cost of cutting and transporting a tree is $2. The cost of growing a tree is $1.  
Questions:
A.) Write an equation that describes total cost of cutting any number of trees.
B.) Graph total cost function
C.) Derive and graph the average cost equation
D.) Derive and graph the marginal cost equation

Now, assume that as a monopolist, you can sell Christmas trees directly to customers and charge them a higher retail price. Or, on the other hand, you can sell Christmas tree to retail stores and charge them lower wholesale price. It is logical to assume that ordinary customer demand tends to be less elastic than the demand of retail stores. Assume that you estimate the demand of retail stores and customers and find:

P= 3000 – 0.5Q  (Wholesale demand)
P= 2000-2Q   (Retail Demand)

Questions
E) Write the equations that describe total revenue for each market
F.) Graph your total revenue equations
G.) Derive the marginal revenue equations for each market
H.) Graph your answer
E
I.) Find the profit maximizing price and quantity for each market
J.) Write the equation that describe total revenue for the two market combined
K.) Derive the marginal revenue equations for the two markets combined
L.) Graph your answer
M.) Find the profit maximizing price and quantity for both markets combined.
N.) What is better, to combine both market and charge a single price or segregate the two markets and charge different prices? Explain your answer

Below are nineteen concepts, 1-19, and nineteen definitions, A-S. Match each definition to its concept by writing the correct letter the following way: 1A, 2B etc.

____    1.         Long run

____    2.         Short run

____    3.         Sunk cost

____    4.         Fixed cost

____    5.         Explicit cost

____    6.         Implicit cost

____    7.         Accounting profit

____    8.         Economic profit

____    9.         Total revenue

____    10.       Total costs

____    11.       Variable costs

____    12.       Marginal revenue, MR

____    13.       Marginal cost, MC

____    14.       Average cost

____    15.       Zero (normal) profits

____    16.       Increasing cost industry

____    17.       Constant cost industry

____    18.       Decreasing cost industry

____    19.       Elimination principle

____    20.       Risk

____    21.       Uncertainty

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A         An industry in which industry costs do not change with greater output

B          A cost that does not require an outlay of money

C          An industry in which industry costs increase with greater output

D         Total revenue minus explicit costs

E          Price times quantity sold

F          Costs that do vary with output

G          The change in total revenue from selling an additional unit

H         A cost that does not vary with the quantity produced

I           The time after all exit or entry has occurred

J           An industry in which industry costs decrease with an increase in output

K         These occur when P = AC

L          The change in total cost from producing an additional unit

M         The cost per unit, i.e., the total cost of producing Q units divided by Q

N         According to Frank H. Knight, this was insurable

O         Total revenue minus total costs, including implicit opportunity costs

P          The period before exit or entry can occur

Q         The costs of producing a given quantity of output

R          Above normal-profits are eliminated by entry and below-normal profits are eliminated by exit

S          A cost that requires a money outlay

T         A cost that cannot be recovered

U         According to Frank H. Knight, this was uninsurable

Question 22

Which of the following is NOT an example of a legal barrier to entry?

patents

government granted franchise

copyrights

information

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Question 23

To be able to price discriminate, a firm must

have a public franchise.

be a natural monopoly.

prevent resales.

have a patent.

Question 24

For a single-price monopolist, price is

equal to marginal revenue.

greater than marginal revenue.

less than marginal revenue.

equal to zero because the firm is not a price taker.

Question 25

To maximize its profit, a single-price monopolist will produce an output level where its marginal revenue

equals zero.

equals its marginal cost.

exceeds its marginal cost.

is less than its marginal cost.

Question 26

If we compare perfect competition to a single-price monopolist, we see that the monopolist sells

the same quantity at higher prices.

a smaller quantity at higher prices.

a larger quantity at lower prices.

a larger quantity at higher prices.

Question 27

One way a monopoly can convert additional consumer surplus into economic profit is to

lower prices.

raise prices.

price discriminate.

become more competitive.

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Question 28

Compared to a single-price monopoly, when a monopoly can perfectly price discriminate, the deadweight loss

increases.

decreases.

remains the same.

might change, but more information is needed to determine if it increases, decreases, or remains constant.

Question 29

Compared to a single-price monopoly, when a monopoly can perfectly price discriminate, the Consumer Surplus

increases.

decreases.

remains the same.

might change, but more information is needed to determine if it increases, decreases, or remains constant.

Question 30

The total revenue test using the price elasticity of demand

explains why monopolies will only operate on the elastic portion of their demand curve.

explains why monopolies will only operate on the inelastic portion of their demand curves.

helps regulators decide whether to use a marginal cost pricing rule or an average cost pricing rule.

determines whether a monopoly can perfectly price discriminate or not.

A CPA has performed $500 of CPA services for a client but has not billed the client as of the end of the accounting period. If the CPA does not make the proper adjusting entry for this transaction at the end of the accounting period, which of the following is correct?

A. Net income will be correct because no cash has been received.

B. Net income will understated.

C. Net income will be overstated.

D. Accounts Receivable will be overstated.

Entity I collected $800 on account from its credit customers. The entry to record this transaction will include:

A. a debit to Accounts Receivable credit to Service Revenue

B. a debit to Cash and a credit to Service Revenue

C. a debit to Accounts Receivable and a credit Cash.

D. a debit to Cash and a credit to Accounts Receivable

Entity L purchased equipment for $12,000 on January 1, 2022. The company expects to use the equipment for 5 years and uses straight-line depreciation. The equipment has no salvage value. The entry to record depreciation expense on December 31, 2022 will include:

All of the following would be classified as internal users of financial statements except:

All of the following accounts must be closed at the end of the accounting period except:

Entity G received cash of $1,400 for services rendered. The entry to record this transaction will include

Which of the following is an advantage of corporations relative to partnerships and sole proprietorships?

Adjusting entries to recognize unearned revenue that has now been earned (hint: think of the journal entry):

At 31 December 20X5, the post-closing trial balance reflects the following:

The following transactions occurred during 20X6 in the order given (use the letter at the left in place of date):

1. Sales revenue of $91,000, of which $40,000 was on credit; cost of goods sold, provided by perpetual inventory record, $59,500. (Note: When the perpetual system is used, make two entries to record a sale: first, debit cash or accounts receivable and credit sales revenue; second, debit cost of goods sold and credit inventory.)
2. Collected $52,000 on accounts receivable.
3. Paid income taxes payable (20X5), $13,000.
4. Purchased merchandise, $130,000, of which $26,000 was on credit.
5. Paid accounts payable, $20,000.
6. Sales revenue of $240,000 (in cash); cost of goods sold, $156,400.
7. Paid operating expenses, $63,000.
8. Issued 1,000 common shares for $4,000 cash.
9. Purchased merchandise, $400,000, of which $108,000 was on credit.
10. Sales revenue of $392,000, of which $120,000 was on credit; cost of goods sold, $255,100.
11. Collected cash on accounts receivable, $104,000.
12. Paid accounts payable, $112,000.
13. Paid various operating expenses in cash, $72,000.

Required:

1. Journalize each of the transactions listed above for 20X6. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)