1. (25 points) Circle the correct answer.

A. (4 points) In developing its budget, Strong Enough Inc. has estimated the following total standard costs for various production volumes:

Volume Total standard cost50 units $30060 units $34070 units $380

The company has no step costs. Given the information above, what is the total standard cost at 90 units.

a. $420b. $460c. $360d. $510e. None of the above.

Need to compute the straight line that describes the data using:

Slope = VC/unit = ($380 - $300)/(70 – 50) = $4/unitIntercept = FC = $380 – ($4/unit x 70 units) = $100

For a volume of 90 units, the cost should be $100 = ($4/unit x 90) = $460

Answer is B

B. (4 points) If It Makes you Happy Manufacturing Company produces two products for which the following data have been tabulated. Fixed manufacturing costs are allocated at a rate of $1.00 per machine hour.

Per Unit Happy SadSelling Price $4.00 $3.00Variable manufacturing cost $2.00 $1.50Fixed manufacturing cost $0.75 $0.20Variable selling cost $1.00 $1.00

The sales manager has had a $160,000 increase in the budget allocated for advertising and wants to apply the money to the most profitable product. The products are not substitutes for one another in the eyes (and minds) of the company’s customers.

Suppose the sales manager chooses to devote the entire $160,000 to increased advertising for Sad. The minimum increase in total revenues of Sad required to offset the increased advertising would be:

a. $160,000b. $320,000c. $960,000

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d. $1,600,000e. None of the above.

CM/unit – Sad = $3 - $1.50 - $1.00 = $0.50/unitSo, $160,000/$0.50 = 320,000 units need to be sold to offset the increased advertising costThis means that the addition revenue needed is $3 x 320,000 = $960,000Answer is C

2)

(4 points) The Alpha Division of a company, which is operating at capacity, produces and sells 1,000 units of a certain electronic component in a perfectly competitive market. All components are currently sold to outside customers. Revenue and cost data are as follows:

Sales $50,000Variables costs $34,000Fixed costs $12,000

The Beta Division of the same company is considering buying this component from the Alpha Division. The minimum transfer price that should be charged to the Beta Division for each component is:

a. $12b. $34c. $46d. $50e. None of the above

$50

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3) (25 points)

A Change Would Do You Good (ACWDYG) Company produces cheap sunglasses (sold worldwide under the ZZ TOP brand name and with the motto “I’ve Got My TOP ON So I Can ROCK ON !!!). This year’s expected production is 10,000 units. Currently, ACWDYG also makes the “croakie” for its cheap sunglasses (i.e., the fancy cord that allows you to be cool with your sunglasses handing around your neck). The accountant of ACWDYG, Mr. LA, reports the following costs for making 10,000 units of croakies:

VariableCost TotalPer unit Cost

Direct materials $4.00 $40,000Direct labor $2.00 $20,000Power and utilities $1.50 $15,000Inspection, setup, material handling $2,000Machine lease $2,000Allocated fixed plant administration, taxes, and insurance $30,000

Notes:

Direct materials, direct labor, and power and utility costs vary directly with the number of croakies produced.

The total inspection, setup, and materials handling costs vary with the number of batches in which the croakies are produced. ACWDYG estimates that it will produce the 10,000 croakies in 10 batches.

The costs for the machine lease are the payments ACWDYG makes for renting the equipment used in making the croakies. If the company buys all its croakies from an outside vendor, it can return the machine and can stop making lease payments. If ACWDYG makes any croakies, it must acquire the machine and make the full lease payment.

Outside Offer:

ACWDYG has received an offer from There Goes the Neighborhood Inc. (an outside vendor) to supply any number of croakies the company requires at $8.20 per croakie.

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Required:

a. (6 points) Assume that if ACWDYG purchases the croakies from the outside supplier, the facility where the croakies are currently made will remain idle (i.e., the space will still be owned by ACWDYG but will not be used for any purpose). Should ACWDYG accept the outside supplier’s offer at the anticipated production (and sales) volume of 10,000 croakies? Support your answer with computations.

Buy: $8.20 x 10,000 = $82,000Make: ($4 DM + $2 DL + $1.50 Pwr + $0.20 Insp + $0.20 Lease) x 10,000 = $79,000Only include the relevant costs. Note: the lease is relevant because it is only incurred when the company makes croakiesInsp/unit = $2,000/10,000So, you should Make

b. (6 points) For this question, assume that if the croakies are purchased outside, the facilities where the croakies are currently made will be used to upgrade the cheap sunglasses by adding a special pinking coating to the lenses. As a consequence, the selling price on cheap sunglasses will be raised by $20. The variable cost per unit for the upgrade would be $18, and additional tooling costs of $16,000 would be required. Should ACWDYG make or buy the croakies, assuming that the 10,000 croakies are produced (and sold)? Support your answer with computations.

Change in revenue = $20 x 10,000 = $200,000Change in costs = $18 x 10,000 (variable) + $16,000 add’l tooling = $196,000You make $4,000 if you purchase croakies on the outside and you upgradeSo, the net cost to purchasing croakies on the outside is $82,000 - $4,000 = $78,000Cost to making the croakies internally = $79,000 (from part a)So, you should buy croakies on the outside

The sales manager at ACWDYG is concerned that the estimate of 10,000 units may be too high and believes that only 6,200 units will be sold. Production is cut back, which opens up more work space. Now there is room to add the special pink coating whether ACWDYG goes outside for the croakies or makes them in-house. However, the additional tooling costs of $16,000 would still be required if the company adds the special pink coating. At this lower output level, ACWDYG will produce the croakies in 8 batches of 775 units each. Use this information to answer parts c and d below.

c. (6 points) Given the information above, should ACWDYG retool and upgrade the cheap sunglasses by adding a special pink coating to the lenses? Support you answer with computations.

You now have space to do the upgrade.Cost to upgrade = $16,000Additional revenue = 6,200 x ($20 - $18) = $12,400So, you should not upgrade/retool

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d. (7 points) Assume that ACWDYG decides not to retool. Given the information above, should ACWDYG purchase the croakies from the outside vendor? Support your answer with computations.

Buy: $8.20 x 6,200 = $50,840Make: ($4 DM + $2 DL + $1.50 Pwr + Batch Cost/unit + Lease Cost/unit) x 6,200Note: batch cost varies with number of batches (and batches are decreasing from 10 to 8)Batch Cost/unit = [($2000/10) x 8]/6,200 = $0.258/unitNote: the lease is relevant because croakies are made internally and this causes you to lease the machineLease Cost/unit = $2,000/6,200 = $0.3226/unit – actually all $2,000 is a cost to make regardless of the number of units madeCost to Make = ($4 DM + $2 DL +$1.50 Pwr) x 6,200 + $1,600 Batch Cost + $2,000 Lease Cost = $50,100So, you would make the croakies

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4)

Big Ben, Inc. had the following budget for November 2007 for its line of red head bands:

The budget was derived based on estimated sales of 1 million units, standard costs for direct materials and labor, and a pre-determined fixed overhead allocation rate per unit of output.

The standards of production include 0.5 square feet of cloth for direct materials per unit of output. The standards also call for 100 units of output for each direct labor hour.

Big Ben’s actual results were as follows:

Management was pleased with the results for several reasons: Sales were $500,000 above budget without any price discounting. (Per unit selling

price matched the budget.) The purchasing agent was able to obtain cloth at one cent per square foot below

standard cost. The work force was unusually efficient, producing 125 units of output per direct labor

hour.

Required:Big Ben strictly follows Just-In-Time (JIT) inventory practices (i.e., no beginning or ending inventories). For parts (a) through (g), determine the amount for November 2007. For variances, be sure to circle FAV or UNFAV as appropriate, in addition to providing the amount of the variance.

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a) Number of units sold (3 Points)

1,125,000

Direct materialsb) standard cost

per square foot(3 Points)

1.75

875,000/1,000,000 = $0.875/unit – 2 units per sq feet $1.75/sq ft

c) Direct materialsPrice variance

(3 Points)

$5,850 F

Actual sq. feet*(AP – SP)SP = 1.75AP = 1.74Actual sq. feet = 1,017,900/1.74 = 585,000

d) Direct laborEfficiency variance

(3 Points)

40,500 F

SP*(Actual hours – Standard hours to produce actual output)SP = $180,000*(1/1,000,000 units)*(1/100 units/hr) = $18/hr18*(1,125,000/125 – 1,125,000/100) =

e) Fixed overheadSpending variance

(3 Points)

90,000 U

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5)Fukodome Company produces baseballs. It can operate its factory with one, two or three eight-hour shifts. Fukodome has $10 million per year of fixed costs that arise regardless of the number of shifts operating. It incurs an additional $3 million per year of fixed costs for each shift operating (i.e. $3, $6 or $9 million).

During the first two shifts, variable costs are $6 per unit for standard baseballs and $8 per unit for premium baseballs. During the third shift, there is a $1 per unit additional variable cost for both types of baseballs, due to the higher pay required by workers on the “graveyard” shift.

Fukodome must operate the same number of shifts for the entire year, due to a provision in its union contract. Annual capacity is 1 million baseballs per year per shift. Standard baseballs sell for $15 each. Premium baseballs sell for $20.

Required:a) (8 Points) If Fukodome were to produce only standard baseballs, find all of its

breakeven point(s), expressed in number of baseballs.

Let u be the number of units produced (all standard).One shift: Two shifts: Three shifts: The one-shift solution exceeds one-shift capacity of 1 million units, so it is not a breakeven. The breakeven points are 1,777,778 units and 2,125,000 units.

List all breakeven levels (in units) here and make no other entries in this box. Use space above to show work.

1,777,778 units and 2,125,000 units

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b) (8 Points) Find the mix of baseballs (number of standard and premium baseballs) such that Fukodome’s profit is $12.7 million when it operates at full capacity.

Let s be the number of standard baseballs produced.

1.1 million standard baseballs and 1.9 million premium baseballs.Note: First two terms in the equation are contribution margins on standard and premium baseballs, before considering the $1 per unit additional cost during the third shift. Since the additional cost during the third shirt is the same for both standard and premium baseballs, it is just $1 million – the next term. The last term represents fixed costs.

Show the number of standard and premium baseballs here and make no other entries in this box. Use space above to show your work.

1.1 million standard baseballs and 1.9 million premium baseballs

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6)Brady Corporation has two products: footballs and extremely thin mop handles know as bundschens. Brady has always allocated overhead to its two product lines based on direct labor hours used in production. Direct labor costs are $20 per hour for both product lines.

The following were Brady’s per unit costs and production levels in 2006.

a) (7 Points) What is Brady’s overhead allocation rate (stated in dollars per direct labor hour)?

Footballs use $15/$20 = 0.75 direct labor hours per unit. So an overhead allocation of $18.75 implies an allocation rate of $18.75/0.75=$25 per direct labor hour. (This computation can also be based on bundschens: $5/$20 = 0.25 direct labor hours and $6.25/0.25=$25.)

$ 25 / DL hour

b) (7 Points) Suppose Brady had allocated overhead based on direct labor dollars rather than direct labor hours. Would the total per unit cost of footballs have been greater than, less than, or the same as the $58.75 shown above? Explain your answer.

Because the direct labor rate is the same for footballs and bundschens, the overhead allocation between the two products would have been the same had the base been direct labor dollars, so the per unit cost of footballs would have been the same.

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c) (7 Points) Brady has just completed a marketing and competitor study. It found that although it is producing footballs in a state-of-the-art fashion and is undoubtedly the low-cost producer in the industry, it is only marginally profitable. Competitors seem to be pricing footballs at around Brady’s cost, which appears to be below their own costs. In contrast, bundschens are produced with old, inefficient equipment but somehow the product line appears to be extremely profitable. The prices of bundschens, for some reason, are much higher than Brady’s costs, providing very healthy margins.

What is the most likely cause of the marketing study results? Explain your answer. (You must explain your answer to receive any credit, even for a correct answer. Do not assume the study is flawed. That is, do not explain the results as being due to a mistake in the marketing study.)

The disparate profitabilities, given the two products competitive positions, are symptomatic of product subsidization. If footballs are absorbing more overhead than they “cause” and bundschens less, footballs will appear less profitable than they really are and the bundschens will seem to be more profitable. This can happen under a traditional overhead allocation system that uses an allocation base not tied to the cost driver(s) that actually cause overhead to be incurred.

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7)Rachel Ray Coffee Company (RRCC) produces two lines of coffee: Mildly Irritating and Immensely Irritating. In 2007, RRCC produced 200,000 pounds of Mildly Irritating coffee and 50,000 pounds of Immensely Irritating coffee.

RRCC is developing an activity-based costing system and has the following data about 2007, which is considered to be a representative year.

a) (9 Points) What are the allocation rates for each of the three cost pools under an ABC system?

Purchasing: $200,000/1,000 orders = $200 per order

Purchasing $ 200 /order

Roasting: $400,000/1,500 roaster hours = $266.67 per roaster hour

Roasting $ 266.67 /roaster hour

Packaging: $60,000/1,000 = $60 per packing hour.

Packaging $ 60 /packing hour

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8)b) (16 Points) For each product, what are the per pound costs by component under an

ABC system?

Mildly Irritating Immensely Irritating

Direct materials $4.20 $3.20

Direct labor $0.30 $0.30

Purchasing600/200,000 = 0.003 orders per pound 0.003 x $200 = $0.60

400/50,000 = 0.008 orders per pound 0.008 x $200 = $1.60

Roasting1400/200,000 =

0.007 roaster hours per pound 0.007

x $266.67 = $1.87

100/50,000 = 0.002 roaster hours per pound 0.002 x $266.67 = $0.53

Packaging750/200,000 =

0.00375 packing hours per pound

0.00375 x $60 = $0.23

250/50,000 = 0.005 packing hours per

pound 0.005 x $60 = $0.30

Total $7.20 $5.93

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Question VI (15 points):Skiles Corporation has three divisions: presses, drills, and hardwood. Following are Skiles’ results for 2007, which are typical. Skiles does not expect any significant change in the prospects of any of the businesses going forward.

Skiles is considering whether to discontinue the Hardwood Division due to its continuing losses. The floor space that would be freed up could be subleased to Sloan Company for $575,000 per year. Skiles has hired Bahstuhn Consulting to help determine the best course of action.

Bahstuhn has determined that $120,000 of Skiles’ total fixed overhead is “avoidable” and could be eliminated if the Hardwood Division were eliminated. However, one half of those overhead savings would not be possible if the space were subleased to Sloan, due to the continuing need to supply utilities and other amenities to Sloan under the terms of the lease.

Skiles must now decide from among the following alternatives: Continue operating the Hardwood Division with no changes. Eliminate the Hardwood Division and close off the space it had been occupying. Eliminate the Hardwood Division but sublease the space it occupied to Sloan.

Required: Which course of action do you recommend? (You must justify your answer with computations showing it is the optimal strategy.)The analysis below shows that closing the Hardwood Division and subleasing the space is the optimal choice. It results in an increase in profit relative to the current situation. In contrast, closing the Hardwood Division only reduces profit, even though the division is not profitable, because not all the costs allocated to it are avoidable.

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