Q1. What are some different managerial uses of cost information? ( 3-1, pg 121 )

Management accounting iiiTutorial 2Q1. What are some different managerial uses of cost information? ( 3-1, pg 121 )

The uses of cost information is pervasive throughout decision-making situations.

Pricing, organizations use cost information in the pricing decision in two ways. In markets where the organization faces a market-determined price, the organization will use product cost information to decide whether its cost structure will allow it to compete profitability. For markets where the organization can set its price, organizations will often set a price that is an increment of its product cost. This approach is known as cost plus pricing.

Product Planning, organizations use a tool called target costing to focus efforts in product and process design on developing a product that has a good profit potential in view of market requirements.

Budgeting, the most widespread in used, which is a management accounting tool that projects or forecasts costs for various level of production and sales activity. Budgets are important in planning, which sets the organizations direction for the budget period. It provide the basis for earnings forecasts that senior executives issue to the stock market.

Performance Evaluation, managers compare the actual results from the budget period with expectations that were reflected in the budget to assess how well the organization did in light of its expectations.

Q1. Why should decision makers focus only on the relevant costs for decision making? ( 3-9, pg 121 )

This is because relevant costs are those future costs and revenues that will be changed due to a result of some decisions.By focusing only on relevant cost, it can reduce distraction to the decision maker.Q2. Patterson Parkas Companys sales revenue is $50 per unit, variable costs are $30 per unit, and fixed costs are $180,000. ( 3-28, pg 123 ) RequiredCompute Pattersons contribution margin per unit and contribution margin ratio.$Sales Revenue50Variable costs 30Contribution margin20Contribution margin ratio = 20/50 x 100% = 40% Requiredb. Determine the number of units Patterson must sell to break even.$Sales Revenue50Variable costs 30Contribution margin20Breakeven point = fixed cost / contribution = $180,000 / $20 = 9,000 units Requiredc. Determine the sales revenue required to earn (pretax) income equal to 20% of the revenue.Target sales (value) = FC + Profit / Contribution margin ratio

x = $180,000 + 0.2x / 0.4

0.4x = $180,000 + 0.2x

0.2x = 180,000

x = $ 900,000 Requiredd. How many units must Patterson sell to generate an after-tax profit of $120,000 if the tax rate is 40% ? Profit before tax = 120,000/ (1-0.4) = $200,000Target sales (unit) = 180,000 + 200,000/ $20= 19,000 unitsNo. of units = $380,000 / $20 = 19,000 unitsRequirede. Patterson is considering increasing its advertising expenses by $40,000. how much of an increase in sales units is necessary from expanded advertising to justify this expenditure (generate an incremental contribution margin of $40,000) ?9Q3) 3-31

Florida Favourites Company produces toy allogator and toy dolphins. Fixed costs are $1,290,000 per year. Sales revenue and variable costs per unit are as follow:

AlligatorDolphinSelling price $20 $25Variable costs 8 10(a) Suppose the company currently sells 140,000 alligators per year and 60,000 dolphins per year. Assuming the sales mix stays constant, how many alligators and dolphins must the company sell to break even per year?a)AlligatorDolphinTotalUnit sold per year 140,00060,000200,000Ratio0.70.31Selling price$20$14$25 $7.5$21.5Variable costs 85.61038.6Contribution margin128.4154.512.9(b) Suppose the company currently sells 60,000 alligators per year and 140,000 dolphins per year. Assuming the sales mix stays constant, how many alligators and dolphins must the company sell to break even per year?b)AlligatorDolphinTotalUnit sold per year60,000140,000200,000Ratio0.30.71Selling price$20$6$25$17.5$23.5Variable cost82.41079.4Contribution margin123.61510.514.1c) Explain why the total number of toys needed to break even in part (a) is the same as or different from the number in part (b).

Answer:The total number of toys needed to break even from both part is different because of the sales mix. Total contribution margin in part (b) ($14.1) is higher than part (a) ($12.90) and thus result in different break even units. (Q4) 3-33 Healthy Hearth specializes in lunches for health-conscious people. The company produces a small selection of lunch offerings each day. The menu selections vary from day to day, but Healthy Hearth charges the same price per menu selection because it adjusts the portion sizes according to the cost of producing the selection. Healthy Hearth currently sells 5,000 meals per month. A government agency has recently proposed that Healthy Hearth provide 1,000 meals next month for senior citizens at $3.50 per meal. Volunteers will deliver the meals to the senior citizens at no charge.

(a) Suppose Healthy Hearth has sufficient idle capacity to accommodate the government order for next month. What will be the impact on Healthy Hearths operating income if it accepts this order?

a) Contribution margin per meal = $3.50 - $3= $0.50

Additional operating income= $0.50 x 1000 = $ 500

(b) Suppose that Healthy Hearth would have to give up regular sales of 500 meals, at a price of $4.50 each, to accommodate the government order for next month. What will be the impact on Healthy Hearths operating income if it accepts the government order?b) Opportunity cost : 500 meals @ $4.50 per meal

Contribution margin per meal = $4.50 - $3= $1.50

Reduction in operating income= $1.50 x 500= $750

Loss in operating income = $500 - $750= $200

Q5. 3-36List out the relevant costs: Old Grinding Machine:Current salvage value RM6,000 New Grinding Machine:Cost RM60,000Annual operating costs RM8,000 Overhaul of Old Grinding Machine:Cost of overhaul RM35,000Annual operating cost after overhaul RM13,000b) Which is the sunk costs?Original cost of the machine RM60,000Accumulated depreciation RM48,000Annual operating costs RM20,000

c) What should the plant manager do?

Since the cost of overhaul the old machine is moreexpensive than buying an new machine, thus the plantmanager should buy a new machine.Buying an new machineOverhaul the old machineCosts$60,000$35,000Annual operating costs:-$8000 x 5 Years-$13000 x 5 Years$40,000$65,000Current salvage value($6,000)-$96,000$100,000Q6. 3-38a)

MakeBuySmartphone($140 x 50000 units)7,000,0007,000,000Components:Internal : $35 x 50000 units

Outsource $34 x 50000 units

1,750,0001,700,000Total relevant cost (take the lowest)8,750,0008,700,000b)

MakeBuySmartphone($140 x 50000 units)7,000,0007,000,000Components:Internal : $30 x 50000 units

Outsource $34 x 50000 units

1,500,0001,700,000Total relevant cost (take the lowest)8,500,0008,700,000Q7 3-49 (pg.130)Fixed CostRMVariable Cost RMSales staff salaries80,000Carpenter labor 600,000Office & showroom rental150,000Wood to make the shelves450,000Depreciation on carpentry equipment50,000Sales commission based on units sold180,000Advertising200,000Miscellaneous variable O/H350,000Miscellaneous fixed O/H150,000Total Variable Cost 1,580,000Rent for building 300,000Depreciation for office equipment10,000Variable cost per unit=1580000/50000Total Fixed Cost940,000=31.60Total contribution Fixed Cost = Net Profit(SP-VC)x 940,000 = 500,000(70-31.6)x 940,000 = 500,00038.4x = 1,440,000X =37,500 unitsQ8 3-57 (pg.133)(a) Practical capacity profit =(SP-VC)2000chips FC=($500-$450)2000 $75,000=$25,000(b) Estimate change in profit=($480-$450) * 200chips= $6,000(c)

New order profit(480-450)*600chips$18,000Opportunity cost(500-450)*200-$10,000Net increase $8,000