Exercise 4-10 Contrasting ABC and Conventional Product Costs [LO4-2, LO4-3, LO4-4]

Rocky Mountain Corporation makes two types of hiking boots—Xactive and Pathbreaker. Data concerning these two product lines appear below:

The company has a conventional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

Required:

1-a. Compute the predetermined overhead rate based on direct labor-hours.

1-b. Using the predetermined overhead rate and other data from the problem, determine the unit product cost of each product.

2. The company is considering replacing its conventional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools:

Determine the activity rate for each of the four activity cost pools.

3. Using the activity rates and other data from the problem, determine the unit product cost of each product.

Exercise 4-10 Contrasting ABC and Conventional Product Costs [LO4-2, LO4-3, LO4-4]

Rocky Mountain Corporation makes two types of hiking boots—Xactive and Pathbreaker. Data concerning these two product lines appear below:

The company has a conventional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

Required:

1-a. Compute the predetermined overhead rate based on direct labor-hours.

1-b. Using the predetermined overhead rate and other data from the problem, determine the unit product cost of each product.

2. The company is considering replacing its conventional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools:

Determine the activity rate for each of the four activity cost pools.

3. Using the activity rates and other data from the problem, determine the unit product cost of each product.

You are going to make a substantial purchase. You have enough money to pay cash, but don’t know if that’s the way to make best use of your assets. Maybe you should take out an installment loan to make the purchase and invest the cash you would otherwise have used to pay for it.

Use the information provided to complete the following worksheet and analyze how the numbers work out most favorably for you. For simplicity, compounding is ignored in calculating both the cost of interest and interest earnings. [Note: Enter your dollar answers rounded to the nearest two cents and precede numbers that are less than zero (0) with a minus sign (–).]

Based on the numbers alone, you should      because:

If you invest the principal, you’ll earn more interest than you’ll pay on the loan.

The interest on a loan will cost you more than the interest you would earn if you invested the principal.

Suppose a profit-maximizing monopoly firm has short-run total cost function TC(Q)=5Q+300. It faces market demand Q=400-4P.

What price will it charge and what quantity will it sell if it acts as a one-price monopolist?

If the firm wishes to sell output in two different blocks at different prices, what are the prices it will charge and how much will it sell in each block?

Building of its reputation for manufacturing no-thrills, efficient and affordable automobiles, the Indian car manufacturers Indy Car Limited, is ready to launch an international marketing campaign, specifically targeting low- to- medium income customers in Asia and Europe. In preparation for the expected demand increase, a new production facility will be added in the state of Andhra Pradesh near Hyderabad to complement the already existing plants in Mumbai and New Delhi. The Company’s CFO, Raja Jain is planning to raise the required funds of Indian Rupees 10 billion ($222.4 million) in the form of a 20- year annual coupon paying corporate bond. The company’s current debt rating with Standard & Poor is “A” with a positive outlook, indicating the likelihood of a rating upgrade to “AA” in the near future. In that case, the market’s required rate of return could drop by as much as 75 basis points from 6.80 percent to 6.05 percent. Mr. Jain is wondering if the bond should be issued at a premium or a discount and if the company should offer a fixed or floating rate or instead of making explicit interest payments, issue a zero- coupon bond instead. Each bond will have a nominal value of Rs. 1,000. The intended issue date is 1st July 2019. You are required to: Q1. Advise Mr. Jain on the impact of the following set of bond features and characteristics on the cost of debts: sinking fund, asset backing, seniority conversion feature, differed call and make whole call provision, a put provision, and a floating rate as well as positive & a negative covenants. Q2. Compute the expected issue price based on the required rate of return of 6.8 percent for: (a). A fixed annual interest payment of Rs 64 per bond. (b). A fixed annual interest payment of Rs 72 per bond. (c). does your answer of (a) and (b) change if semi annual interest payments of Rs 32 and Rs 36 respectively, are made? If so why? (d). a zero- coupon bond Q3. Recompute your results of 2 (a), (b) and (d), assuming an upgrade in the company’s credit rating and determine the impact on the expected issue price. Q4. Explain to Mr. Jain if an affluent investor would rather buy a premium or a discount bond.

A profit-maximizing firm is currently producing output, Q = 3 units and selling at a price of p = $10. What MUST be true about the firm's costs?

A

The firm's Average Variable Cost is less than $10.

B

The firm's Average Total Cost is less than $10.

C

The firm's Marginal Cost is equal to $10.

D

The firm's Average Fixed cost must be less than $10.

Consider a firm with the following production function:
Q = K^1/2L^1/2

Assume that we are in the short run so the capital stock is fixed at 4 units. The wage rate is $16 and the rental rate of capital is $10. Please graph the firm's short run margical cost, average variable cost, average fixed cost, and average total cost curves. Remember to label the axes and curves accurately.

Date

Transaction

Number of Units

Per Unit

Total

Jan.1Inventory7,500$ 75.00$ 562,50010Purchase22,50085.001,912,50028Sale11,250150.001,687,50030Sale3,750150.00562,500Feb.5Sale1,500150.00225,00010Purchase54,00087.504,725,00016Sale27,000160.004,320,00028Sale25,500160.004,080,000Mar.5Purchase45,00089.504,027,50014Sale30,000160.004,800,00025Purchase7,50090.00675,00030Sale26,250160.004,200,000

3. Determine the inventory on March 31 and the cost of goods sold for the three-month period, using the weighted average cost method and the periodic inventory system. Round the weighted average unit cost to the nearest cent and use that amount in subsequent computations.