Belmain Co. expects to maintain the same inventories at the end of 20Y7 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 10,640 units will be sold at a price of $240 a unit. Maximum sales within the relevant range are 13,000 units.

Required:

1. Prepare an estimated income statement for 20Y7.

2. What is the expected contribution margin ratio? Round to the nearest whole percent.
%

3. Determine the break-even sales in units and dollars.

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?

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

Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $688,000. The company has a 40% cost of goods sold and will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:

All $688,000 of the sales will be collectible. However, collection costs will be 4 percent of sales, and production and selling costs will be 79 percent of sales. The cost to carry inventory will be 10 percent of inventory. Amortization expense on plant and equipment will be 5 percent of plant and equipment. The tax rate is 30 percent. Inventory is calculated using cost of goods sold and not sales.

a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. What is the total value of the investment made?

b. Compute the accounts receivable collection costs and production and selling costs and add the two figures together.

c. Compute the costs of carrying inventory.

Cost of carrying inventory           $

d. Compute the amortization expense on new plant and equipment.

Amortization expense           $

e. Add together all the costs in parts b, c, and d.

Total cost           $

f. Compute income after taxes.

Income after taxes           $

Problem 7-26

In the previous problem, if inventory had only been 2 times:

a. What would be the new value for inventory investment?

Inventory investment           $

b.1 What would be the return on investment? You need to recompute the total investment and the total costs of the campaign to work toward computing income after taxes. (Round the final answer to 1 decimal place.)

Rate of return             %

39-42

Hickory Company manufactures two products—13,000 units of Product Y and 5,000 units of Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all $829,500 of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Y and Z:

9. Using the ABC system, how much total manufacturing overhead cost would be assigned to Product Y? (Round all intermediate calculations to 2 decimal places.)

10. Using the ABC system, how much total manufacturing overhead cost would be assigned to Product Z?

Which of the following statements is true?

Multiple Choice

• Contribution margin + fixed expenses = net operating income

• Contribution margin + net operating income = sales

• Sales ‒ contribution margin = net operating income

• Sales ‒ variable expenses = contribution margin

A cost-volume-profit (CVP) graph contains three lines. Which of the following is not explicitly depicted by one of those three lines?

Multiple Choice

• Total contribution margin

• Total sales

• Total expenses

• Total fixed expenses

Income statements under absorption costing and variable costing

Fresno Industries Inc. manufactures and sells high-quality camping tents. The company began operations on January 1 and operated at 100% of capacity (181,000 units) during the first month, creating an ending inventory of 17,000 units. During February, the company produced 164,000 units during the month but sold 181,000 units at $600 per unit. The February manufacturing costs and selling and administrative expenses were as follows:

a. Prepare an income statement according to the absorption costing concept for February. Enter all amounts as positive numbers.

b. Prepare an income statement according to the variable costing concept for February. Enter all amounts as positive numbers.

PROBLEM 1

AAA Company produces two products in a single factory. The following production and cost information has been determined.

The controller has determined total overhead to be P480,000. P140,000 relates to material moves; P150,000 relates to testing; the remainder is related to labor time. DDD uses direct labor hours to allocate overhead to each model.

Compute:

1. Using traditional costing, compute for the total cost and cost per unit of:
   1. Model 1 (2 pts)
   2. Model 2 (2 pts)
2. Using activity-based costing, compute for total cost and per-unit cost of:
   1. Model 1 (2 pts)
   2. Model 2 (2 pts)

PROBLEM 2

BBB Company plans to use activity-based costing to assign hospital indirect costs to the care of patients. The hospital has identified the following activities and activity rates for the hospital’s indirect costs:

The records of two representatives were analyzed, using the activity rates. The activity information associated with the two patients is as follows:

Determine the total activity cost associated with:

1. Patient X (2 pts)
2. Patient Y (2 pts)

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 21,875 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 27,000 units.

Required:

1. Prepare an estimated income statement for 20Y3.

2. What is the expected contribution margin ratio?

%

3. Determine the break-even sales in units and dollars.

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?

6. Determine the operating leverage. If required, round your answer to one decimal place, e.g. 15.4.

Sunrise Coffee Company roasts and packs coffee beans. The process begins in the Roasting Department. From the Roasting Department, the coffee beans are transferred to the Packing Department. The following is a partial work in process account of the Roasting Department at December 31:

Required:

Prepare a cost of production report, using the average cost method, and identify the missing amounts for Work in Process—Roasting Department. If required, round your cost per equivalent unit answer to two decimal places.

Calculate and graph the profit maximizing price and quantity in output markets (monopoly)

ACME Electricity provides electricity service in a rural community as a monopolist with no competitors.

The following Table 1 shows price per unit and total costs associated with various amounts of electricity (in 100 kilowatts blocks) in the short-run:

Table 1:

Step 1

Using the information in Table 1, create a separate table that includes calculations of the following for each quantity of electricity (in 100 kilowatt blocks): Total Revenue, Marginal Revenue, Total Cost, Marginal Cost, Average Total Cost, and Profit.

The table can be computer-generated or created by hand. Be sure to appropriately label the table so the various costs, revenues, and profit can be identified. Round off to two decimal places for the dollar values.

Step 2

Using Table 1 and the table you created in Step 1 for this section, create one graph that contains the following curves: Marginal Revenue, Demand, Average Revenue, Marginal Cost, and Average Total Cost.

Label the vertical axis “Price, Revenue, and Cost (in dollars)” and the horizontal axis “Quantity of Electricity (in 100 kilowatt blocks)”. Label each of the five curves on the graph. The graph can be computer-generated or created by hand. Indicate the profit maximizing quantity and price in this graph. Indicate the amount of profit earned by the company at the profit maximizing quantity by shading the relevant area on the graph.

Income Statements under Absorption Costing and Variable Costing

Joplin Industries Inc. manufactures and sells high-quality sporting goods equipment under its highly recognizable J-Sports logo. The company began operations on May 1 and operated at 100% of capacity (61,600 units) during the first month, creating an ending inventory of 5,600 units. During June, the company produced 56,000 garments during the month but sold 61,600 units at $90 per unit. The June manufacturing costs and selling and administrative expenses were as follows:

a. Prepare an income statement according to the absorption costing concept for June.

b. Prepare an income statement according to the variable costing concept for June.