Bblp.eur.Nl Bbcswebdav Courses BKB0018-13 Tutorial 1

8/12/2019 Bblp.eur.Nl Bbcswebdav Courses BKB0018-13 Tutorial 1

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Page 1Tutorial 1Management Accounting

1-1 Management accounting measures, analyzes and reports financial and nonfinancialinformation that helps managers make decisions to fulfill the goals of an organization. It focuseson internal reporting and is not restricted by generally accepted accounting principles (GAAP).

Financial accounting focuses on reporting to external parties such as investors,government agencies, and banks. It measures and records business transactions and providesfinancial statements that are based on generally accepted accounting principles (GAAP).

Other differences include (1) management accounting emphasizes the future (not thepast), and (2) management accounting influences the behavior of managers and other employees(rather than primarily reporting economic events).

1-3 Management accountants can help to formulate strategy by providing information aboutthe sources of competitive advantagefor example, the cost, productivity, or efficiencyadvantage of their company relative to competitors or the premium prices a company can chargerelative to the costs of adding features that make its products or services distinctive.

1-6 Management accounting deals only with costs. This statement is misleading at best,and wrong at worst. Management accounting measures, analyzes, and reports financial and non-financialinformation that helps managers define the organizations goals, and make decisions to

fulfill them. Management accounting also analyzes revenues from products and customers inorder to assess product and customer profitability. Therefore, while management accountingdoes use cost information, it is only a part of the organizations information recorded andanalyzed by management accountants.

1-13 The controller is the chief management accounting executive. The corporate controllerreports to the chief financial officer, a staff function. Companies also have business unitcontrollers who support business unit managers or regional controllers who support regionalmanagers in major geographic regions.

1-16 Value chain and classification of costs, computer company.

Cost Item Value Chain Business Function

a.b.c.d.e.f.

g.h.

ProductionDistributionDesign of products and processesResearch and DevelopmentCustomer Service or MarketingDesign of products and processes(or Research and Development)MarketingProduction


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1-22 Five-step decision-making process, service firm.

Action Step in Decision-Making Process

a.b.c.d.e.f.

Obtain informationIdentify the problem and uncertaintiesObtain information and/or make predictions about the futureMake predictions about the futureObtain informationMake decisions by choosing among alternatives

1-24 Planning and control decisions, Internet company.

1. Planning decisionsa. Decision to raise monthly subscription feec. Decision to upgrade content of online services (later decision to inform subscribers

and upgrade online services is an implementation part of control)e. Decision to decrease monthly subscription fee starting in November.

Control decisionsb. Decision to inform existing subscribers about the rate of increasean implementation

part of control decisionsd. Dismissal of VP of Marketingperformance evaluation and feedback aspect of

control decisions

2. Other planning decisions that may be made at WebNews.com: decision to raise or loweradvertising fees; decision to charge a fee from on-line retailers when customers click-throughfrom WebNews.com to the retailers websites.

Other control decisions that may be made at WebNews.com: evaluating how customerslike the new format for the weather information, working with an outside vendor to redesign the

website, and evaluating whether the waiting time for customers to access the website has beenreduced.

1-29 Professional ethics and end-of-year actions.

1. The possible motivations for the snack foods division wanting to take end-of-year actionsinclude:

(a) Management incentives. Gourmet Foods may have a division bonus scheme based onone-year reported division earnings. Efforts to front-end revenue into the current yearor transfer costs into the next year can increase this bonus.

(b) Promotion opportunities and job security. Top management of Gourmet Foods likely

will view those division managers that deliver high reported earnings growth rates asbeing the best prospects for promotion. Division managers who deliver unwelcomesurprises may be viewed as less capable.

(c) Retain division autonomy. If top management of Gourmet Foods adopts amanagement by exception approach, divisions that report sharp reductions in the irearnings growth rates may attract a sizable increase in top management supervision.

2. The Standards of Ethical Conduct . . . require management accountants to


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Perform professional duties in accordance with relevant laws, regulations, andtechnical standards.

Refrain from engaging in any conduct that would prejudice carrying out dutiesethically.

Communicate information fairly and objectively.

Several of the end-of-year actions clearly are in conflict with these requirements and should beviewed as unacceptable by Taylor.

(b) The fiscal year-end should be closed on midnight of December 31. Extending theclose falsely reports next years sales as this years sales.

(c) Altering shipping dates is falsification of the accounting reports.(f) Advertisements run in December should be charged to the current year. The

advertising agency is facilitating falsification of the accounting records.

The other end-of-year actions occur in many organizations and fall into the gray toacceptable area. However, much depends on the circumstances surrounding each one, such asthe following:

(a) If the independent contractor does not do maintenance work in December, there is notransaction regarding maintenance to record. The responsibility for ensuring thatpackaging equipment is well maintained is that of the plant manager. The divisioncontroller probably can do little more than observe the absence of a Decembermaintenance charge.

(d) In many organizations, sales are heavily concentrated in the final weeks of the fiscalyear-end. If the double bonus is approved by the division marketing manager, thedivision controller can do little more than observe the extra bonus paid in December.

(e) If TV spots are reduced in December, the advertising cost in December will bereduced. There is no record falsification here.

(g)Much depends on the means of persuading carriers to accept the merchandise. Forexample, if an under-the-table payment is involved, or if carriers are pressured toaccept merchandise, it is clearly unethical. If, however, the carrier receives no extraconsideration and willingly agrees to accept the assignment because it sees potentialsales opportunities in December, the transaction appears ethical.

Each of the (a), (d), (e), and (g) end-of-year actions may well disadvantage Gourmet Foods inthe long run. For example, lack of routine maintenance may lead to subsequent equipmentfailure. The divisional controller is well advised to raise such issues in meetings with the divisionpresident. However, if Gourmet Foods has a rigid set of line/staff distinctions, the divisionpresident is the one who bears primary responsibility for justifying division actions to seniorcorporate officers.

3. If Taylor believes that Ryan wants her to engage in unethical behavior, she should firstdirectly raise her concerns with Ryan. If Ryan is unwilling to change his request, Taylor shoulddiscuss her concerns with the Corporate Controller of Gourmet Foods. She could also initiate aconfidential discussion with an IMA Ethics Counselor, other impartial adviser, or her ownattorney. Taylor also may well ask for a transfer from the snack foods division if she perceivesRyan is unwilling to listen to pressure brought by the Corporate Controller, CFO, or evenPresident of Gourmet Foods. In the extreme, she may want to resign if the corporate culture ofGourmet Foods is to reward division managers who take end-of-year actions that Taylor views


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as unethical and possibly illegal. It was precisely actions along the lines of (b), (c), and (f) thatcaused Betty Vinson, an accountant at WorldCom to be indicted for falsifying WorldComsbooks and misleading investors.

2-3 Managers believe that direct costs that are traced to a particular cost object are moreaccurately assigned to that cost object than are indirect allocated costs. When costs are allocated,managers are less certain whether the cost allocation base accurately measures the resourcesdemanded by a cost object. Managers prefer to use more accurate costs in their decisions.

2-8 A unit cost is computed by dividing some amount of total costs (the numerator) by therelated number of units (the denominator). In many cases, the numerator will include a fixed costthat will not change despite changes in the denominator. It is erroneous in those cases to multiplythe unit cost by activity or volume change to predict changes in total costs at different activity orvolume levels.

2-9 Manufacturing-sector companiespurchase materials and Ashtonnents and convert theminto various finished goods, for example automotive and textile companies.

Merchandising-sector companies purchase and then sell tangible products without

changing their basic form, for example retailing or distribution.Service-sector companiesprovide services or intangible products to their customers, for

example, legal advice or audits.

2-18 Classification of costs, service sector.

Cost object: Each individual focus groupCost variability: With respect to the number of focus groups

There may be some debate over classifications of individual items, especially with regardto cost variability.

Cost Item D or I V or FA D VB I FC I VaD I FE D VF I FG D VH I V

aSome students will note that phone call costs are variable when each call has a separate charge. It may be a fixed

cost if Consumer Focus has a flat monthly charge for a line, irrespective of the amount of usage.bGasoline costs are likely to vary with the number of focus groups. However, vehicles likely serve multiplepurposes, and detailed records may be required to examine how costs vary with changes in one of the manypurposes served.

2-25 Cost drivers and functions.


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1.

Function Representative Cost Driver

1. Accounting Number of transactions processed2. Human Resources Number of employees3. Data processing Hours of computer processing unit (CPU)4. Research and development Number of research scientists

5. Purchasing Number of purchase orders6. Distribution Number of deliveries made7. Billing Number of invoices sent

2.

Function Representative Cost Driver

1. Accounting Number of journal entries made2. Human Resources Salaries and wages of employees3. Data Processing Number of computer transactions4. Research and Development Number of new products being developed5. Purchasing Number of different types of materials purchased

6. Distribution Distance traveled to make deliveries7. Billing Number of credit sales transactions


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4. Using the calculations shown in the table in requirement 2, we can construct the cost-per-attendee graph shown below:

As president of the student association requesting a grant for the party, you should not use theper unit calculations to make your case. The person making the grant may assume an attendance

of 500 students and use a low number like $7.20 per attendee to calculate the size of your grant.Instead, you should emphasize the fixed cost of $1,600 that you will incur even if no students orvery few students attend the party, and try to get a grant to cover as much of the fixed costs aspossible as well as a variable portion to cover as much of the $4 variable cost to the studentassociation for each person attending the party.

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

0 100 200 300 400 500 600 700

CostperAtte

ndee($)

Number of Attendees


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2-29 Computing cost of goods purchased and cost of goods sold.

1a. Marvin Department StoreSchedule of Cost of Goods Purchased

For the Year Ended December 31, 2011

(in thousands)

Purchases $155,000Add transportation-in 7,000

162,000Deduct:Purchase returns and allowances $4,000Purchase discounts 6,000 10,000

Cost of goods purchased $152,000

1b. Marvin Department StoreSchedule of Cost of Goods Sold

For the Year Ended December 31, 2011(in thousands)

Beginning merchandise inventory 1/1/2011 $ 27,000Cost of goods purchased (see above) 152,000Cost of goods available for sale 179,000Ending merchandise inventory 12/31/2011 34,000Cost of goods sold $145,000

2. Marvin Department Store

Income Statement

Year Ended December 31, 2011(in thousands)

Revenues $280,000Cost of goods sold (see above) 145,000Gross margin 135,000Operating costs

Marketing, distribution, and customerservice costs $37,000

Utilities 17,000General and administrative costs 43,000

Miscellaneous costs 4,000Total operating costs 101,000

Operating income $ 34,000


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2-37 Terminology, interpretation of statements (continuation of 2-34).

1. Direct materials used $108 millionDirect manufacturing labor costs 42 millionPrime costs $150 million

Direct manufacturing labor costs $ 42 millionIndirect manufacturing costs 63 millionConversion costs $105 million

2. Inventoriable costs (in millions) for Year 2011Plant utilities $ 9Indirect manufacturing labor 27Depreciationplant and equipment 6Miscellaneous manufacturing overhead 15Direct materials used 108Direct manufacturing labor 42Plant supplies used 4

Property tax on plant 2Total inventoriable costs $213

Period costs (in millions) for Year 2011Marketing, distribution, and customer-service costs $ 94

3. Design costs and R&D costs may be regarded as product costs in case of contracting witha governmental agency. For example, if the Air Force negotiated to contract with Lockheed tobuild a new type of supersonic fighter plane, design costs and R&D costs may be included in thecontract as product costs.

4. Direct materials used = $108,000,000 2,000,000 units = $54 per unit

Depreciation on plant and equipment = $6,000,000 2,000,000 units = $3 per unit

5. Direct materials unit cost would be unchanged at $54. Depreciation unit cost would be$6,000,000 3,000,000 = $2 per unit. Total direct materials costs would rise by 50% to$162,000,000 ($54 per unit 3,000,000 units). Total depreciation cost of $6,000,000 wouldremain unchanged.

6. In this case, equipment depreciation is a variable cost in relation to the unit output. Theamount of equipment depreciation will change in direct proportion to the number of unitsproduced.(a)Depreciation will be $2 million (2 million $1) when 2 million units are produced.

(b)Depreciation will be $3 million (3 million $1) when 3 million units are produced.


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3-2 The assumptions underlying the CVP analysis outlined in Chapter 3 are

1. Changes in the level of revenues and costs arise only because of changes in the numberof product (or service) units sold.

2. Total costs can be separated into a fixed component that does not vary with the units soldand a variable component that changes with respect to the units sold.

3. When represented graphically, the behaviors of total revenues and total costs are linear

(represented as a straight line) in relation to units sold within a relevant range and timeperiod.

4. The selling price, variable cost per unit, and fixed costs are known and constant.

3-7 CVP certainly is simple, with its assumption of output as the only revenue and costdriver, and linear revenue and cost relationships. Whether these assumptions make it simplisticdepends on the decision context. In some cases, these assumptions may be sufficiently accuratefor CVP to provide useful insights. The examples in Chapter 3 (the software package context inthe text and the travel agency example in the Problem for Self-Study) illustrate how CVP canprovide such insights. In more complex cases, the basic ideas of simple CVP analysis can beexpanded.

3-10 Examples include:Manufacturingsubstituting a robotic machine for hourly wage workers.Marketingchanging a sales force compensation plan from a percent of sales dollars to

a fixed salary.Customer servicehiring a subcontractor to do customer repair visits on an annual

retainer basis rather than a per-visit basis.

3-13 CVP analysis is always conducted for a specified time horizon. One extreme is a veryshort-time horizon. For example, some vacation cruises offer deep price discounts for peoplewho offer to take any cruise on a days notice. One day prior to a cruise, most costs are fixed.

The other extreme is several years. Here, a much higher percentage of total costs typically isvariable.

CVP itself is not made any less relevant when the time horizon lengthens. What happensis that many items classified as fixed in the short run may become variable costs with a longertime horizon.


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3-17 CVP computations.

1a. Sales ($68 per unit 410,000 units) $27,880,000Variable costs ($60 per unit 410,000 units) 24,600,000Contribution margin $ 3,280,000

1b. Contribution margin (from above) $3,280,000Fixed costs 1,640,000Operating income $1,640,000

2a. Sales (from above) $27,880,000Variable costs ($54 per unit 410,000 units) 22,140,000Contribution margin $ 5,740,000

2b. Contribution margin $5,740,000Fixed costs 5,330,000Operating income $ 410,000

3. Operating income is expected to decrease by $1,230,000 ($1,640,000 $410,000) if Ms.Schoenens proposal is accepted.

The management would consider other factors before making the final decision. It islikely that product quality would improve as a result of using state of the art equipment. Due toincreased automation, probably many workers will have to be laid off. Garretts managementwill have to consider the impact of such an action on employee morale. In addition, the proposalincreases the companys fixed costs dramatically. This will increase the companys operatingleverage and risk.


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3-20 CVP exercises.

1a. [Units sold (Selling priceVariable costs)]Fixed costs = Operating income[5,000,000 ($0.50$0.30)]$900,000 = $100,000

1b. Fixed costs Contribution margin per unit = Breakeven units$900,000 [($0.50$0.30)] = 4,500,000 units

Breakeven units Selling price = Breakeven revenues4,500,000 units $0.50 per unit = $2,250,000

or,

Contribution margin ratio =priceSelling

costsVariablepriceSelling -

=$0.50

$0.30-$0.50= 0.40

Fixed costs Contribution margin ratio = Breakeven revenues$900,000 0.40 = $2,250,000

2. 5,000,000 ($0.50$0.34)$900,000 = $ (100,000)

3. [5,000,000 (1.1) ($0.50$0.30)][$900,000 (1.1)] = $ 110,000

4. [5,000,000 (1.4) ($0.40$0.27)][$900,000 (0.8)] = $ 190,000

5. $900,000 (1.1) ($0.50$0.30) = 4,950,000 units

6. ($900,000 + $20,000) ($0.55$0.30) = 3,680,000 units


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3-25 Operating leverage.

1a. Let Q denote the quantity of carpets sold

Breakeven point under Option 1

$500Q $350Q = $5,000$150Q = $5,000

Q = $5,000 $150 = 34 carpets (rounded up)

1b. Breakeven point under Option 2

$500Q $350Q (0.10 $500Q) = 0100Q = 0

Q = 0

2. Operating income under Option 1 = $150Q $5,000Operating income under Option 2 = $100Q

Find Q such that $150Q $5,000 = $100Q$50Q = $5,000

Q = $5,000 $50 = 100 carpetsRevenues = $500 100 carpets = $50,000For Q = 100 carpets, operating income under both Option 1 ($150 100 $5,000) and

Option 2 ($100 100) = $10,000

For Q > 100, say, 101 carpets,

Option 1 gives operating income = ($150 101) $5,000 = $10,150

Option 2 gives operating income = $100 101 = $10,100So Color Rugs will prefer Option 1.

For Q < 100, say, 99 carpets,

Option 1 gives operating income = ($150 99) $5,000 = $9,850

Option 2 gives operating income = $100 99 = $9,900So Color Rugs will prefer Option 2.

3. Degree of operating leverage =Contribution margin

Operating income

Contribution margin per unit Quantity of carpets sold

Operating income

Under Option 1, contribution margin per unit = $500$350, soDegree of operating leverage =

$10,000

100$150= 1.5

Under Option 2, contribution margin per unit = $500$3500.10 $500, so

Degree of operating leverage =$10,000

100$100= 1.0


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4. The calculations in requirement 3 indicate that when sales are 100 units, a percentagechange in sales and contribution margin will result in 1.5 times that percentage change inoperating income for Option 1, but the same percentage change in operating income for Option2. The degree of operating leverage at a given level of sales helps managers calculate the effectof fluctuations in sales on operating incomes.

3-28 Sales mix, three products.

1. Coffee BagelsSPVCUCMU

$2.501.25

$1.25

$3.751.75

$2.00

The sales mix implies that each bundle consists of 4 cups of coffee and 1 bagel.

Contribution margin of the bundle = 4 $1.25 + 1 $2 = $5.00 + $2.00 = $7.00

Breakeven point in bundles =Fixed costs $7,000

1,000 bundlesContribution margin per bundle $7.00

Breakeven point is:

Coffee: 1,000 bundlex 4 cups per bundle = 4,000 cups

Bagels: 1,000 bundles 1 bagel per bundle = 1,000 bagels

Alternatively,Let S = Number of bagels sold

4S = Number of cups of coffee soldRevenuesVariable costsFixed costs = Operating income[$2.50(4S) + $3.75S][$1.25(4S) + $1.75S]$7,000 = OI

$13.75S$6.75S$7,000 = OI$7.00S=$7,000S= 1,000 units of the sales mix

orS=1,000 bagels sold4S=4,000 cups of coffee sold

Breakeven point, therefore, is 1,000 bagels and 4,000 cups of coffee when OI = 0

Check

Revenues ($2.50 4,000) + ($3.75 1,000) $13,750

Variable costs ($1.25 4,000) + ($1.75 1,000) 6,750Contribution margin 7,000Fixed costs 7,000Operating income $ 0


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2. Coffee BagelsSPVCUCMU

$2.501.25

$1.25

$3.751.75

$2.00

The sales mix implies that each bundle consists of 4 cups of coffee and 1 bagel.

Contribution margin of the bundle = 4 $1.25 + 1 $2 = $5.00 + $2.00 = $7.00

Breakeven point in bundles

=Fixed costs + Target operating income $7, 000 $28,000

5,000 bundlesContribution margin per bundle $7.00

Breakeven point is:

Coffee: 5,000 bundles 4 cups per bundle = 20,000 cups

Bagels: 5,000 bundles 1 bagel per bundle = 5,000 bagels

Alternatively,Let S = Number of bagels sold

4S = Number of cups of coffee soldRevenuesVariable costsFixed costs = Operating income[$2.50(4S) + $3.75S][$1.25(4S) + $1.75S]$7,000 = OI[$2.50(4S) + $3.75S][$1.25(4S) + $1.75S]$7,000 = 28,000$13.75S$6.75S= 35,000$7.00S=$35,000S= 5,000 units of the sales mix

orS=5,000 bagels sold

4S=20,000 cups of coffee sold

The target number of units to reach an operating income before tax of $28,000 is 5,000 bagelsand 20,000 cups of coffee.

Check

Revenues ($2.50 20,000) + ($3.75 5,000) $68,750

Variable costs ($1.25 20,000) + ($1.75 5,000) 33,750Contribution margin 35,000Fixed costs 7,000Operating income $28,000

3. Coffee Bagels Muffins

SPVCUCMU

$2.501.25

$1.25

$3.751.75

$2.00

$3.000.75

$2.25

The sales mix implies that each bundle consists of 3 cups of coffee, 2 bagels and 1 muffin


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Contribution margin of the bundle = 3 $1.25 + 2 $2 + 1 $2.25= $3.75 + $4.00 + $2.25 = $10.00

Breakeven point in bundles =Fixed costs $7,000

700 bundlesContribution margin per bundle $10.00

Breakeven point is:Coffee: 700 bundles 3 cups per bundle = 2,100 cups

Bagels: 700 bundles 2 bagels per bundle = 1,400 bagels

Muffins: 700 bundles 1 muffin per bundle = 700 muffins

Alternatively,Let S = Number of muffins sold

2S = Number of bagels sold3S = Number of cups of coffee sold

RevenuesVariable costsFixed costs = Operating income[$2.50(3S) + $3.75(2S) +3.00S][$1.25(3S) + $1.75(2S) + $0.75S]$7,000 = OI

$18.00S$8S$7,000 = OI$10.00S=$7,000S = 700 units of the sales mix

orS=700 muffins2S=1,400 bagels3S=2,100 cups of coffee

Breakeven point, therefore, is 2,100 cups of coffee 1,400 bagels, and 700 muffins when OI = 0

Check

Revenues ($2.50 2,100) + ($3.75 1,400) +($3.00 700) $12,600Variable costs ($1.25 2,100) + ($1.75 1,400) +($0.75 700) 5,600Contribution margin 7,000Fixed costs 7,000Operating income $ 0

Bobbie should definitely add muffins to her product mix because muffins have the highestcontribution margin ($2.25) of all three products. This lowers Bobbies overall breakeven point.If the sales mix ratio above can be attained, the result is a lower breakeven revenue ($12,600) ofthe options presented in the problem.


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3-36 CVP analysis, income taxes.

1. RevenuesVariable costsFixed costs =rateTax1

incomenetTarget

Let X = Net income for 2011

20,000($25.00)20,000($13.75)$135,000 =X

1 0.40

$500,000$275,000$135,000 = X0.60

$300,000$165,000$81,000 = XX = $54,000

Alternatively,Operating income = RevenuesVariable costsFixed costs

= $500,000$275,000$135,000 = $90,000

Income taxes = 0.40 $90,000 = $36,000

Net income = Operating incomeIncome taxes

= $90,000$36,000 = $54,000

2. Let Q = Number of units to break even$25.00Q$13.75Q$135,000 = 0

Q = $135,000 $11.25 = 12,000 units

3. Let X = Net income for 2012

22,000($25.00)22,000($13.75)($135,000 + $11,250) =X

1 0.40

$550,000$302,500$146,250 =X

0.60

$101,250 =X

0.60

X = $60,750

4. Let Q = Number of units to break even with new fixed costs of $146,250$25.00Q$13.75Q$146,250 = 0

Q = $146,250 $11.25 = 13,000 units

Breakeven revenues = 13,000 $25.00 = $325,000

5. Let S = Required sales units to equal 2011 net income

$25.00S$13.75S$146,250 =$54,000

0.60

$11.25S = $236,250S = 21,000 units

Revenues = 21,000 units $25 = $525,000

6. Let A = Amount spent for advertising in 2012

$550,000$302,500($135,000 + A) =$60,000

0.60

$550,000$302,500$135,000A = $100,000$550,000$537,500 = A


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A = $12,500


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3-45 Multi-product CVP and decision making.

1. Faucet filter:Selling price $80Variable cost per unit 20Contribution margin per unit $60

Pitcher-cum-filter:Selling price $90Variable cost per unit 25Contribution margin per unit $65

Each bundle contains 2 faucet models and 3 pitcher models.

So contribution margin of a bundle = 2 $60 + 3 $65 = $315

BreakevenFixed costs $945,000

point in = 3,000 bundles

Contribution margin per bundle $315bundles

Breakeven point in units of faucet models and pitcher models is:Faucet models: 3,000 bundles 2 units per bundle = 6,000 unitsPitcher models: 3,000 bundles 3 units per bundle = 9,000 unitsTotal number of units to breakeven 15,000 units

Breakeven point in dollars for faucet models and pitcher models is:Faucet models: 6,000 units $80 per unit = $ 480,000Pitcher models: 9,000 units $90 per unit = 810,000Breakeven revenues $1,290,000

(2 $60) + (3 $65)Alternatively, weighted average contribution margin per unit = = $6

5$945,000

Breakeven point = 15,000 units$63

2Faucet filter: 15,000 units = 6,000 units

53

Pitcher-cum-filter: 155

,000 units 9,000 units

Breakeven point in dollars

Faucet filter: 6,000 units $80 per unit = $480,000Pitcher-cum-filter: 9,000 units $90 per unit = $810,000

2. Faucet filter:Selling price $80Variable cost per unit 15Contribution margin per unit $65


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Pitcher-cum-filter:Selling price $90Variable cost per unit 16Contribution margin per unit $74

Each bundle contains 2 faucet models and 3 pitcher models.

So contribution margin of a bundle = 2 $65 + 3 $74 = $352

BreakevenFixed costs $945,000 $181,400

point in = 3,200 bundlesContribution margin per bundle $352

bundles

Breakeven point in units of faucet models and pitcher models is:Faucet models: 3,200 bundles 2 units per bundle = 6,400 unitsPitcher models: 3,200 bundles 3 units per bundle = 9,600 unitsTotal number of units to breakeven 16,000 units

Breakeven point in dollars for faucet models and pitcher models is:Faucet models: 6,400 bundles $80 per unit = $ 512,000Pitcher models: 9,600 bundles $90 per unit = 864,000Breakeven revenues $1,376,000

(2 $65) + (3 $74)Alternatively, weighted average contribution margin per unit = = $7

5$945,000 + $181,400

Breakeven point = 16,000 units$70.40

2Faucet filter: 16,000 units = 6,400 units

5Pitcher-

3cum-filter: 16,000 units 9,600 units

5Breakeven point in dollars:Faucet filter: 6,400 units $80 per unit = $512,000Pitcher-cum-filter: 9,600 units $90 per unit = $864,000

3. Let x be the number of bundles for Pure Water Products to be indifferent between theold and new production equipment.

Operating income using old equipment = $315 x $945,000

Operating income using new equipment = $352 x $945,000$181,400

At point of indifference:

$315 x $945,000 = $352 x $1,126,400

$352 x $315 x = $1,126,400$945,000

$37 x = $181,400

x = $181,400 $37 = 4,902.7 bundles= 4,903 bundles (rounded)


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Faucet models = 4,903 bundles 2 units per bundle = 9,806 unitsPitcher models = 4,903 bundles 3 units per bundle = 14,709 unitsTotal number of units 24,515 units

Letxbe the number of bundles,

When total sales are less than 24,515 units (4,903 bundles), $315 $945,000 >x

$352 $1,126,400,x so Pure Water Products is better off with the old equipment.

When total sales are greater than 24,515 units (4,903 bundles), $352 $1,126,400 >x

$315 $945,000,x so Pure Water Products is better off buying the new equipment.

At total sales of 30,000 units (6,000 bundles), Pure Water Products should buy the newproduction equipment.

Check$352 6,000$1,126,400 = $985,600 is greater than $315 6,000$945,000 =

$945,000.

3-47 Gross margin and contribution margin.

1. Ticket sales ($24 525 attendees) $12,600Variable cost of dinner ($12a 525 attendees) $6,300Variable invitations and paperwork ($1b 525) 525 6,825Contribution margin 5,775Fixed cost of dinner 9,000Fixed cost of invitations and paperwork 1,975 10,975Operating profit (loss) $ (5,200)

a $6,300/525 attendees = $12/attendeeb $525/525 attendees = $1/attendee

2. Ticket sales ($24 1,050 attendees) $25,200Variable cost of dinner ($12 1,050 attendees) $12,600Variable invitations and paperwork ($1 1,050) 1,050 13,650Contribution margin 11,550Fixed cost of dinner 9,000Fixed cost of invitations and paperwork 1,975 10,975Operating profit (loss) $ 575

10-3 A linear cost function is a cost function where, within the relevant range, the graph of totalcosts versus the level of a single activity related to that cost is a straight line. An example of alinear cost function is a cost function for use of a videoconferencing line where the terms are afixed charge of $10,000 per year plus a $2 per minute charge for line use. A nonlinear costfunction is a cost function where, within the relevant range, the graph of total costs versus thelevel of a single activity related to that cost is not a straight line. Examples include economies ofscale in advertising where an agency can double the number of advertisements for less than twicethe costs, step-cost functions, and learning-curve-based costs.


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10-4 No. High correlation merely indicates that the two variables move together in the dataexamined. It is essential also to consider economic plausibility before making inferences aboutcause and effect. Without any economic plausibility for a relationship, it is less likely that a highlevel of correlation observed in one set of data will be similarly found in other sets of data.

10-12 Frequently encountered problems when collecting cost data on variables included in a costfunction are1. The time period used to measure the dependent variable is not properly matched with the

time period used to measure the cost driver(s).2. Fixed costs are allocated as if they are variable.3. Data are either not available for all observations or are not uniformly reliable.4. Extreme values of observations occur.5. A homogeneous relationship between the individual cost items in the dependent variable

cost pool and the cost driver(s) does not exist.6. The relationship between the cost and the cost driver is not stationary.7. Inflation has occurred in a dependent variable, a cost driver, or both.

10-19 Matching graphs with descriptions of cost and revenue behavior.

a. (1)b. (6) A step-cost function.c. (9)d. (2)e. (8)f. (10) It is data plottedon a scatter diagram, showing a linear variable cost function with

constant variance of residuals. The constant variance of residuals implies thatthere is a uniform dispersion of the data points about the regression line.

g. (3)h. (8)


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10-24 Estimating a cost function, high-low method.

1. See Solution Exhibit 10-24. There is a positive relationship between the number of servicereports (a cost driver) and the customer-service department costs. This relationship iseconomically plausible.

2. Number of Customer-Service

Service Reports Department CostsHighest observation of cost driver 455 $21,500Lowest observation of cost driver 115 13,000Difference 340 $ 8,500Customer-service department costs = a + b(number of service reports)

Slope coefficient (b) =$8,500

340= $25 per service report

Constant (a) = $21,500($25 455) = $10,125= $13,000($25 115) = $10,125

Customer-service = $10,125 + $25 (number of service reports)department costs

3. Other possible cost drivers of customer-service department costs are:a. Number of products replaced with a new product (and the dollar value of the new

products charged to the customer-service department).b. Number of products repaired and the time and cost of repairs.

SOLUTION EXHIBIT 10-24

Plot of Number of Service Reports versus Customer-Service Dept. Costs for Capitol Products

10-26 Cost-volume-profit and regression analysis.


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1a. Average cost of manufacturing =Total manufacturing costs

Number of bicycle frames

=$1,056,000

32,000= $33 per frame

This cost is higher than the $32.50 per frame that Ryan has quoted.

1b. Goldstein cannot take the average manufacturing cost in 2012 of $33 per frame andmultiply it by 35,000 bicycle frames to determine the total cost of manufacturing 35,000 bicycleframes. The reason is that some of the $1,056,000 (or equivalently the $33 cost per frame) arefixed costs and some are variable costs. Without distinguishing fixed from variable costs,Goldstein cannot determine the cost of manufacturing 35,000 frames. For example, if all costs arefixed, the manufacturing costs of 35,000 frames will continue to be $1,056,000. If, however, all

costs are variable, the cost of manufacturing 35,000 frames would be $33 35,000 = $1,155,000.If some costs are fixed and some are variable, the cost of manufacturing 35,000 frames will besomewhere between $1,056,000 and $1,155,000.

Some students could argue that another reason for not being able to determine the cost ofmanufacturing 35,000 bicycle frames is that not all costs are output unit-level costs. If some costs

are, for example, batch-level costs, more information would be needed on the number of batchesin which the 35,000 bicycle frames would be produced, in order to determine the cost ofmanufacturing 35,000 bicycle frames.

2.Expected cost to make

35,000 bicycle frames = $435,000 + $19 35,000

= $435,000 + $665,000 = $1,100,000

Purchasing bicycle frames from Ryan will cost $32.50 35,000 = $1,137,500. Hence, it

will cost Goldstein $1,137,500 $1,100,000 = $37,500 more to purchase the frames from Ryanrather than manufacture them in-house.

3. Goldstein would need to consider several factors before being confident that the equationin requirement 2 accurately predicts the cost of manufacturing bicycle frames.a. Is the relationship between total manufacturing costs and quantity of bicycle frames

economically plausible? For example, is the quantity of bicycles made the only costdriver or are there other cost-drivers (for example batch-level costs of setups,production-orders or material handling) that affect manufacturing costs?

b. How good is the goodness of fit? That is, how well does the estimated line fit the data?c. Is the relationship between the number of bicycle frames produced and total

manufacturing costs linear?d. Does the slope of the regression line indicate that a strong relationship exists between

manufacturing costs and the number of bicycle frames produced?

e.Are there any data problems such as, for example, errors in measuring costs, trends inprices of materials, labor or overheads that might affect variable or fixed costs over

time, extreme values of observations, or a nonstationary relationship over time betweentotal manufacturing costs and the quantity of bicycles produced?

f.How is inflation expected to affect costs?g.Will Ryan supply high-quality bicycle frames on time?

10-29 Learning curve, cumulative average-time learning model.


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The direct manufacturing labor-hours (DMLH) required to produce the first 2, 4, and 8 units giventhe assumption of a cumulative average-time learning curve of 85%, is as follows:

85% Learning Curve

Cumulative Cumulative Cumulative

Number Average Time Total Time:

of Units (X) per Unit (y): Labor Hours Labor-Hours

(1) (2) (3) = (1) (2)

1 6,000 6,0002 5,100 = (6,000 0.85) 10,2004 4,335 = (5,100 0.85) 17,3408 3,685 = (4,335 0.85) 29,480

Alternatively, to compute the values in column (2) we could use the formula

y = aXb

where a= 6,000,X= 2, 4, or 8, and b =0.234465, which gives

whenX= 2, y= 6,000 20.234465= 5,100

whenX= 4, y= 6,000 40.234465= 4,335

whenX= 8, y= 6,000 80.234465= 3,685

Variable Costs of Producing

2 Units 4 Units 8 Units

Direct materials $160,000 2; 4; 8Direct manufacturing labor

$30 10,200; 17,340; 29,480Variable manufacturing overhead

$20 10,200; 17,340; 29,480Total variable costs

$320,000

306,000

204,000$830,000

$ 640,000

520,200

346,800$1,507,000

$1,280,000

884,400

589,600$2,754,000


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10-30 Learning curve, incremental unit-time learning model.

1. The direct manufacturing labor-hours (DMLH) required to produce the first 2, 3, and 4units, given the assumption of an incremental unit-time learning curve of 85%, is as follows:

85% Learning Curve

Cumulative

Number of Units (X)

Individual Unit Time for Xth

Unit (y): Labor Hours

Cumulative Total Time:

Labor-Hours

(1) (2) (3)

1 6,000 6,0002 5,100 = (6,000 0.85) 11,1003 4,637 15,7374 4,335 = (5,100 0.85) 20,072

Values in column (2) are calculated using the formulay = aXbwhere a= 6,000,X= 2, 3, or4, and b =0.234465, which gives

whenX= 2, y= 6,000 20.234465= 5,100

whenX= 3, y= 6,000 30.234465= 4,637

whenX= 4, y= 6,000 40.234465= 4,335

Variable Costs of Producing

2 Units 3 Units 4 Units

Direct materials $160,000 2; 3; 4Direct manufacturing labor

$30 11,100; 15,737; 20,072Variable manufacturing overhead

$20 11,100; 15,737; 20,072Total variable costs

$320,000

333,000

222,000$875,000

$ 480,000

472,110

314,740$1,266,850

$ 640,000

602,160

401,440$1,643,600

2. Variable Costs ofProducing

2 Units 4 Units

Incremental unit-time learning model (from requirement 1)Cumulative average-time learning model (from Exercise 10-29)Difference

$875,000830,000

$ 45,000

$1,643,6001,507,000

$ 136,600

Total variable costs for manufacturing 2 and 4 units are lower under the cumulativeaverage-time learning curve relative to the incremental unit-time learning curve. Directmanufacturing labor-hours required to make additional units decline more slowly in the

incremental unit-time learning curve relative to the cumulative average-time learning curve whenthe same 85% factor is used for both curves. The reason is that, in the incremental unit-timelearning curve, as the number of units double only the last unit produced has a cost of 85% of theinitial cost. In the cumulative average-time learning model, doubling the number of units causesthe average cost of allthe units produced (not just the last unit) to be 85% of the initial cost.


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10-38 Regression; choosing among models. (chapter appendix)1. Solution Exhibit 10-38A presents the regression output for (a) setup costs and number of setupsand (b) setup costs and number of setup-hours.

SOLUTION EXHIBIT 10-38ARegression Output for (a) Setup Costs and Number of Setups and (b) Setup Costs and Number ofSetup-Hours

a.

b.

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.686023489

R Square 0.470628228

Adjusted R Square 0.395003689

Standard Error 51385.93104

Observations 9

ANOVA

df SS MS F Significance F Regression 1 16432501924 16432501924 6.223221 0.04131511

Residual 7 18483597365 2640513909

Total 8 34916099289

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

Intercept 12889.92611 61364.96556 0.210053505 0.839609 -132215.1596 157995.0118 -132215.1596 157995.0118

X Variable 1 426.7711823 171.0753629 2.494638474 0.041315 22.24223047 831.3001341 22.24223047 831.3001341

SUMMARY OUTPUT

Regression StatisticsMul tiple R 0.92242169

R Square 0.850861774



Observations 9

ANOVA

df SS MS F Significance F

Regression 1 29708774168 29708774168 39.93632322 0.000396651

Residual 7 5207325121 743903588.7

Total 8 34916099289

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 6573.417913 25908.17948 0.253719792 0.807002921 -54689.69157 67836.5274 -54689.69157 67836.5274

X Variable 1 56.27403095 8.904796227 6.319519224 0.000396651 35.21753384 77.33052805 35.21753384 77.33052805


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2. Solution Exhibit 10-38B presents the plots and regression lines for (a) number of setups versussetup costs and (b) number of setup hours versus setup costs.

SOLUTION EXHIBIT 10-38BPlots and Regression Lines for (a) Number of Setups versus Setup Costs and (b) Number of Setup-Hours versus Setup Costs

$-

$50,000

$100,000

$150,000

$200,000

$250,000

0 100 200 300 400 500 600

SetupC

osts

Number of Setups

Tilbert Toys

Setup Costs and Number of Setups

$-

$50,000

$100,000

$150,000

$200,000

$250,000

0 1,000 2,000 3,000 4,000 5,000

Setup Hours

Tilbert Toys

Setup Costs and Number of Setup Hours


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3.

Number of Setups Number of Setup Hours

Economicplausibility

A positive relationshipbetween setup costsand the number of setupsis economically plausible.

A positive relationship between setupcosts and the number of setup-hours isalso economically plausible,especially since setup time is notuniform, and the longer it takes tosetup, the greater the setup costs, suchas costs of setuplabor and setup equipment.

Goodness of fit r2 = 47%Standard error of regression =$51,386Reasonable goodness of fit.

r2 = 85%

Standard error of regression =$27,275Excellent goodness of fit.

Significance ofIndependent

Variables

The t-value of 2.49 is significant at the0.05 level.

The t-value of 6.32 is highlysignificant at the 0.05 level. In fact,

thep-value of 0.0004 (< 0.01)indicates that the coefficient issignificant at the 0.01 level.

Specificationanalysis ofestimationassumptions

Based on a plot of the data, thelinearity assumption holds, but theconstant variance assumption may beviolated. The Durbin-Watson statisticof 1.65 suggests the residuals areindependent. The normality ofresiduals assumption appears to hold.However, inferences drawn from only9 observations are not reliable.

Based on a plot of the data, theassumptions of linearity, constantvariance, independence of residuals(Durbin-Watson = 1.50), andnormality of residuals hold. However,inferences drawn from only 9observations are not reliable.

4. The regression model using number of setup-hours should be used to estimate set up costsbecause number of setup-hours is a more economically plausible cost driver of setup costs(compared to number of setups). The setup time is different for different products and the longerit takes to setup, the greater the setup costs such as costs of setup-labor and setup equipment.The regression of number of setup-hours and setup costs also has a better fit, a substantiallysignificant independent variable, and better satisfies the assumptions of the estimation technique.


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10-39 Multiple regression (continuation of 10-38).

1. Solution Exhibit 10-39 presents the regression output for setup costs using both number of setupsand number of setup-hours as independent variables (cost drivers).

SOLUTION EXHIBIT 10-39

Regression Output for Multiple Regression for Setup Costs Using Both Number of Setups andNumber of Setup-Hours as Independent Variables (Cost Drivers)

2.

Economicplausibility A positive relationship between setup costs and each of the independentvariables (number of setups and number of setup-hours) is economicallyplausible.

Goodness of fit r = 86%, Adjusted r = 81%Standard error of regression =$28,997Excellent goodness of fit.

Significance ofIndependentVariables

The t-value of 0.44 for number of setups is not significant at the 0.05 level.The t-value of 4.00 for number of setup-hours is significant at the 0.05level. Moreover, thep-value of 0.007 (< 0.01) indicates that the coefficientis significant at the 0.01 level.

Specificationanalysis ofestimationassumptions

Assuming linearity, constant variance, and normality of residuals, theDurbin-Watson statistic of 1.38 suggests the residuals are independent.However, we must be cautious when drawing inferences from only 9observations.

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.924938047

R Square 0.855510391



Observations 9

ANOVA

df SS MS F Significance F Regression 2 29871085766 14935542883 17.76274 0.003016545

Residual 6 5045013522 840835587.1

Total 8 34916099289

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

Intercept -2807.097769 34850.24247 -0.080547439 0.938421 -88082.56893 82468.37339 -88082.56893 82468.37339

Number of Setups 58.61773979 133.416589 0.439358705 0.675783 -267.8408923 385.0763718 -267.8408923 385.0763718

Setup Hours 52.30623518 13.08375044 3.997801352 0.007137 20.29145124 84.32101912 20.29145124 84.32101912


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3. Multicollinearity is an issue that can arise with multiple regression but not simple regressionanalysis. Multicollinearity means that the independent variables are highly correlated.

The correlation feature in Excels Data Analysis reveals a coefficient of correlation of0.69 between number of setups and number of setup-hours. This is very close to the threshold of

0.70 that is usually taken as a sign of multicollinearity problems. As evidence, note thesubstantial drop in the t-value for setup hours from 6.32 to 4.00, despite a fairly small change inthe estimated coefficient (from $56.27 to $52.31).

4. The simple regression model using the number of setup-hours as the independent variableachieves a comparable r2to the multiple regression model. However, the multiple regressionmodel includes an insignificant independent variable, number of setups. Adding this variabledoes not improve Williams ability to better estimate setup costs and introduces multicollinearityissues. Bebe should use the simple regression model with number of setup-hours as theindependent variable to estimate costs.

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