Costs in the short run versus in the long run

Ike’s Bikes is a major manufacturer of bicycles. Currently, the company produces bikes using only one factory. However, it is considering expanding production to two or even three factories. The following table shows the company’s short-run average total cost (SRATC) each month for various levels of production if it uses one, two, or three factories. (Note: Q equals the total quantity of bikes produced by all factories.)

Suppose Ike’s Bikes is currently producing 100 bikes per month in its only factory. Its short-run average total cost isper bike.

Suppose Ike’s Bikes is expecting to produce 100 bikes per month for several years. In this case, in the long run, it would choose to produce bikes using .

On the following graph, plot the three SRATC curves for Ike’s Bikes from the previous table. Specifically, use the green points (triangle symbol) to plot its SRATC curve if it operates one factory (SRATC1SRATC1); use the purple points (diamond symbol) to plot its SRATC curve if it operates two factories (SRATC2SRATC2); and use the orange points (square symbol) to plot its SRATC curve if it operates three factories (SRATC3SRATC3). Finally, plot the long-run average total cost (LRATC) curve for Ike’s Bikes using the blue points (circle symbol).

Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.

SRATC1SRATC2SRATC3LRATC0100200300400500600700800720640560480400320240160800AVERAGE TOTAL COST (Dollars per bike)QUANTITY OF OUTPUT (Bikes)

In the following table, indicate whether the long-run average cost curve exhibits economies of scale, constant returns to scale, or diseconomies of scale for each range of bike production.

5. Costs in the short run versus in the long run

Ike’s Bikes is a major manufacturer of bicycles. Currently, the company produces bikes using only one factory. However, it is considering expanding production to two or even three factories. The following table shows the company’s short-run average total cost (SRATC) each month for various levels of production if it uses one, two, or three factories. (Note: Q equals the total quantity of bikes produced by all factories.)

Suppose Ike’s Bikes is currently producing 50 bikes per month in its only factory. Its short-run average total cost is

per bike.

Suppose Ike’s Bikes is expecting to produce 50 bikes per month for several years. In this case, in the long run, it would choose to produce bikes using   .

On the following graph, plot the three SRATC curves for Ike’s Bikes from the previous table. Specifically, use the green points (triangle symbol) to plot its SRATC curve if it operates one factory (SRATC1SRATC1); use the purple points (diamond symbol) to plot its SRATC curve if it operates two factories (SRATC2SRATC2); and use the orange points (square symbol) to plot its SRATC curve if it operates three factories (SRATC3SRATC3). Finally, plot the long-run average total cost (LRATC) curve for Ike’s Bikes using the blue points (circle symbol).

Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.

SRATC1SRATC2SRATC3LRATC05010015020025030035040036032028024020016012080400AVERAGE TOTAL COST (Dollars per bike)QUANTITY OF OUTPUT (Bikes)

In the following table, indicate whether the long-run average cost curve exhibits economies of scale, constant returns to scale, or diseconomies of scale for each range of bike production.

5. Costs in the short run versus in the long run

Ike’s Bikes is a major manufacturer of bicycles. Currently, the company produces bikes using only one factory. However, it is considering expanding production to two or even three factories. The following table shows the company’s short-run average total cost (SRATC) each month for various levels of production if it uses one, two, or three factories. (Note: Q equals the total quantity of bikes produced by all factories.)

Suppose Ike’s Bikes is currently producing 450 bikes per month in its only factory. Its short-run average total cost is

per bike.

Suppose Ike’s Bikes is expecting to produce 450 bikes per month for several years. In this case, in the long run, it would choose to produce bikes using   .

On the following graph, plot the three SRATC curves for Ike’s Bikes from the previous table. Specifically, use the green points (triangle symbol) to plot its SRATC curve if it operates one factory (SRATC1SRATC1); use the purple points (diamond symbol) to plot its SRATC curve if it operates two factories (SRATC2SRATC2); and use the orange points (square symbol) to plot its SRATC curve if it operates three factories (SRATC3SRATC3). Finally, plot the long-run average total cost (LRATC) curve for Ike’s Bikes using the blue points (circle symbol).

Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.

SRATC1SRATC2SRATC3LRATC075150225300375450525200180160140120100806040200AVERAGE TOTAL COST (Dollars per bike)QUANTITY (Bikes)

In the following table, indicate whether the long-run average cost curve exhibits economies of scale, constant returns to scale, or diseconomies of scale for each range of bike production.

Johansen Corporation uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. The Corporation has provided the following estimated costs for the next year:

Jameson estimates that 20,000 direct labor-hours will be worked during the year. The predetermined overhead rate per hour will be:

A) $2.50 per direct labor-hour

B) $2.79 per direct labor-hour

C) $3.00 per direct labor-hour

D) $4.00 per direct labor-hour

Beat Corporation uses a job-order costing system with a single plant-wide predetermined overhead rate based on machine-hours. The company based its predetermined overhead rate for the current year on the following data:

Recently, Job M759 was completed. It required 60 machine-hours. The amount of overhead applied to Job M759 is closest to:

A) $750

B) $516

C) $984

D) $234

The following data have been recorded for recently completed Job 450 on its job cost sheet. Direct materials cost was $3,044. A total of 46 direct labor-hours and 104 machine-hours were worked on the job. The direct labor wage rate is $15 per labor-hour. The Corporation applies manufacturing overhead on the basis of machine-hours. The predetermined overhead rate is $13 per machine-hour. The total cost for the job on its job cost sheet would be:

A) $4,332

B) $3,734

C) $3,072

D) $5,086

Odonnel Corporation uses a job-order costing system with a single plantwide predetermined overhead rate based on direct labor-hours. The company based its predetermined overhead rate for the current year on total fixed manufacturing overhead cost of $36,000, variable manufacturing overhead of $2.80 per direct labor-hour, and 10,000 direct labor-hours.

The estimated total manufacturing overhead is closest to:

A) $64,000

B) $36,000

C) $28,000

D) $36,003

Marigold Company’s Assembly Department has materials cost at $2 per unit and conversion cost at $5 per unit. There are 19200 units in ending work in process, all of which are 60% complete as to conversion costs and 60% complete as to materials. How much are total costs to be assigned to inventory?

Produce a direct materials budget with the following additional information.

Units = 83,000

Direct material Cost    Usage

Steel    $8.00/lb 12.100 oz/unit

Plastic    $3.50/lb 10.897 oz/unit

What is the total direct materials cost?

Note: lb = pound = 16 oz

For manufacturing operations, it is sometimes wise to disperse them – as a means of controlling risk, or where the shipping cost of getting to the customer is a high percentage of the total product cost. What are any two reasons why you might elect to centralize manufacturing all in one spot, rather than dispersing?

The beginning inventory at Midnight Supplies and data on purchases and sales for a three-month period ending March 31, are as follows:

FIFO

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in

Exhibit 3

, using the first-in, first-out method.

Chart of Accounts

Journal

2. Determine the total sales and the total cost of merchandise sold for the period. Journalize the entries in the sales and cost of merchandise sold accounts. Assume that all sales were on account and date your journal entry March 31. Refer to the chart of accounts for the exact wording of the account titles. CNOW journals do not use lines for journal explanations. Every line on a journal page is used for debit or credit entries. CNOW journals will automatically indent a credit entry when a credit amount is entered.

PAGE 10

JOURNAL

ACCOUNTING EQUATION

Final Questions

3. Determine the gross profit from sales for the period.

4. Determine the ending inventory cost as of March 31.

5. Based upon the preceding data, would you expect the inventory using the last-in, first-out method to be higher or lower?

Lower

Higher

1. Cost of Production Report

The Cutting Department of Karachi Carpet Company provides the following data for January. Assume that all materials are added at the beginning of the process.

a. Prepare a cost of production report for the Cutting Department. If an amount is zero or a blank, enter in "0". For the cost per equivalent unit computations, round your answers to two decimal places.

b. Compute and evaluate the change in the costs per equivalent unit for direct materials and conversion from the previous month (December). If required, round your answers to two decimal places.

2. Cost of Production and Journal Entries

AccuBlade Castings Inc. casts blades for turbine engines. Within the Casting Department, alloy is first melted in a crucible, then poured into molds to produce the castings. On May 1, there were 1,100 pounds of alloy in process, which were 40% complete as to conversion. The Work in Process balance for these 1,100 pounds was $125,840, determined as follows:

During May, the Casting Department was charged $1,091,800 for 10,300 pounds of alloy and $41,880 for direct labor. Factory overhead is applied to the department at a rate of 150% of direct labor. The department transferred out 10,700 pounds of finished castings to the Machining Department. The May 31 inventory in process was 30% complete as to conversion.

a1. Prepare the May journal entry for the Casting Department for the materials charged to production.

a2. Prepare the May journal entry for the Casting Department for the conversion costs charged to production. If an amount box does not require an entry, leave it blank.

a3. Prepare the May journal entry for the Casting Department for the completed production transferred to the Machining Department.

b. Determine the Work in Process—Casting Department May 31 balance.
$

c. Compute the change in the costs per equivalent unit for direct materials and conversion from the previous month (April).

This question has 3 parts. Thank you.

1 A

PB Publishing identified the following overhead activities, their respective costs, and their cost drivers to produce the three types of textbooks the company publishes.

Deluxe textbooks are made with the finest-quality paper, six-color printing, and many photographs. Moderate texts are made with three colors and a few photographs spread throughout each chapter. Economy books are printed in black and white and include pictures only in chapter openings.

Required

1. PB Publishing currently allocates all overhead costs based on machine hours. The company produced the following number of books during the prior year:

Determine the overhead cost per book for each book type.

2. Determine the overhead cost per book, assuming that the volume-based allocation system described in Requirement a is replaced with an activity-based costing system.

1B

PB Publishing produces two kinds of skateboards. Selected unit data for the two boards for the last quarter follow:

PB Publishing allocates production overhead using activity-based costing. It allocates delivery expense and sales commissions, which amount to $55,500 per quarter, to the two products equally.

Required

1. Compute the per-unit cost for each product. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

2. Compute the profit for each product.

1C

PB Publishing produces video games in three market categories: commercial, home, and miniature. PB has traditionally allocated overhead costs to the three products using the companywide allocation base of direct labor hours. The company recently implemented an ABC system when it installed computer-controlled assembly stations that rendered the traditional costing system ineffective. In implementing the ABC system, the company identified the following activity cost pools and cost drivers:

     
Additional data for each of the product lines follow:     

    
Required

1. Determine the total cost and cost per unit for each product line, assuming that overhead costs are allocated to each product line using direct labor hours as a companywide allocation base. Also determine the combined cost of all three product lines.

2. Determine the total cost and cost per unit for each product line, assuming that an ABC system is used to allocate overhead costs. Determine the combined cost of all three product lines.