Week 5 Accounting Problems
Week 5 Accounting Problems
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Brief Exercise 18-8
Rice Company has a unit selling price of $630, variable costs per unit of $410, and fixed costs of $200,000. Compute the break-even point in units using (a) the mathematical equation and (b) unit contribution margin. (Round answers to 0 decimal places, e.g. 1,225.)
| (a) Mathematical Equation | (b) Unit contribution margin | ||||||
| Break-even point | units |
Brief Exercise 18-10
For Flynn Company, variable costs are 65% of sales, and fixed costs are $186,000. Management’s net income goal is $68,000. Compute the required sales in dollars needed to achieve management’s target net income of $68,000. (Use the contribution margin approach.) (Round answer to 0 decimal places, e.g. 1,225.)
| Required sales | $
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Brief Exercise 19-16
The Rock Company produces basketballs. It incurred the following costs during the year.
| Direct materials | $14,250 | |
| Direct labor | $25,950 | |
| Fixed manufacturing overhead | $12,300 | |
| Variable manufacturing overhead | $29,800 | |
| Selling costs | $21,400 |
What are the total product costs for the company under variable costing?
| Total product costs | $
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20-CD
CURRENT DESIGNS
Current Designs faces a number of important decisions that require incremental analysis. Consider each of the following situations independently.
Situation 1
Recently, Mike Cichanowski, owner and CEO of Current Designs, received a phone call from the president of a brewing company. He was calling to inquire about the possibility of Current Designs producing “floating coolers” for a promotion his company was planning. These coolers resemble a kayak but are about one-third the size. They are used to float food and beverages while paddling down the river on a weekend leisure trip. The company would be interested in purchasing 100 coolers for the upcoming summer. It is willing to pay $250 per cooler. The brewing company would pick up the coolers upon completion of the order.
Mike met with Diane Buswell, controller, to identify how much it would cost Current Designs to produce the coolers. After careful analysis, the following costs were identified.
| Direct materials | $80/unit | Variable overhead | $20/unit |
| Direct labor | $60/unit | Fixed overhead | $1,000 |
Current Designs would be able to modify an existing mold to produce the coolers. The cost of these modifications would be approximately $2,000.
Instructions
(a)
Prepare an incremental analysis to determine whether Current Designs should accept this special order to produce the coolers.
(b)
Discuss additional factors that Mike and Diane should consider if Current Designs is currently operating at full capacity.
Situation 2
Current Designs is always working to identify ways to increase efficiency while becoming more environmentally conscious. During a recent brainstorming session, one employee suggested to Diane Buswell, controller, that the company should consider replacing the current rotomold oven as a way to realize savings from reduced energy consumption. The oven operates on natural gas, using 17,000 therms of natural gas for an entire year. A new, energy-efficient rotomold oven would operate on 15,000 therms of natural gas for an entire year. After seeking out price quotes from a few suppliers, Diane determined that it would cost approximately $250,000 to purchase a new, energy-efficient rotomold oven. She determines that the expected useful life of the new oven would be 10 years, and it would have no salvage value at the end of its useful life. Current Designs would be able to sell the current oven for $10,000.
Instructions
(a)
Prepare an incremental analysis to determine if Current Designs should purchase the new rotomold oven, assuming that the average price for natural gas over the next 10 years will be $0.65 per therm.
(b)
Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm, discuss how that might change your conclusion in (a).
Situation 3
One of Current Designs’ competitive advantages is found in the ingenuity of its owner and CEO, Mike Cichanowski. His involvement in the design of kayak molds and production techniques has led to Current Designs being recognized as an industry leader in the design and production of kayaks. This ingenuity was evident in an improved design of one of the most important components of a kayak, the seat. The “Revolution Seating System” is a one-of-a-kind, rotating axis seat that gives unmatched, fullcontact, under-leg support. It is quickly adjustable with a lever-lock system that allows for a customizable seat position that maximizes comfort for the rider.
Having just designed the “Revolution Seating System,” Current Designs must now decide whether to produce the seats internally or buy them from an outside supplier. The costs for Current Designs to produce the seats are as follows.
| Direct materials | $20/unit | Direct labor | $15/unit |
| Variable overhead | $12/unit | Fixed overhead | $20,000 |
Current Designs will need to produce 3,000 seats this year; 25% of the fixed overhead will be avoided if the seats are purchased from an outside vendor. After soliciting prices from outside suppliers, the company determined that it will cost $50 to purchase a seat from an outside vendor.
Instructions
(a)
Prepare an incremental analysis showing whether Current Designs should make or buy the “Revolution Seating System.”
(b)
Would your answer in (a) change if the productive capacity released by not making the seats could be used to produce income of $20,000?
· CT21-1.
DECISION-MAKING ACROSS THE ORGANIZATION
Palmer Corporation operates on a calendar-year basis. It begins the annual budgeting process in late August when the president establishes targets for the total dollar sales and net income before taxes for the next year.
The sales target is given first to the marketing department. The marketing manager formulates a sales budget by product line in both units and dollars. From this budget, sales quotas by product line in units and dollars are established for each of the corporation’s sales districts. The marketing manager also estimates the cost of the marketing activities required to support the target sales volume and prepares a tentative marketing expense budget.
The executive vice president uses the sales and profit targets, the sales budget by product line, and the tentative marketing expense budget to determine the dollar amounts that can be devoted to manufacturing and corporate office expense. The executive vice president prepares the budget for corporate expenses. She then forwards to the production department the product-line sales budget in units and the total dollar amount that can be devoted to manufacturing.
The production manager meets with the factory managers to develop a manufacturing plan that will produce the required units when needed within the cost constraints set by the executive vice president. The budgeting process usually comes to a halt at this point because the production department does not consider the financial resources allocated to be adequate.
When this standstill occurs, the vice president of finance, the executive vice president, the marketing manager, and the production manager meet together to determine the final budgets for each of the areas. This normally results in a modest increase in the total amount available for manufacturing costs and cuts in the marketing expense and corporate office expense budgets. The total sales and net income figures proposed by the president are seldom changed. Although the participants are seldom pleased with the compromise, these budgets are final. Each executive then develops a new detailed budget for the operations in his or her area.
None of the areas has achieved its budget in recent years. Sales often run below the target. When budgeted sales are not achieved, each area is expected to cut costs so that the president’s profit target can be met. However, the profit target is seldom met because costs are not cut enough. In fact, costs often run above the original budget in all functional areas (marketing, production, and corporate office).
The president is disturbed that Palmer has not been able to meet the sales and profit targets. He hired a consultant with considerable experience with companies in Palmer’s industry. The consultant reviewed the budgets for the past 4 years. He concluded that the product line sales budgets were reasonable and that the cost and expense budgets were adequate for the budgeted sales and production levels.
Instructions
With the class divided into groups, answer the following.
(a)
Discuss how the budgeting process employed by Palmer Corporation contributes to the failure to achieve the president’s sales and profit targets.
(b)
Suggest how Palmer Corporation’s budgeting process could be revised to correct the problems.
(c)
Should the functional areas be expected to cut their costs when sales volume falls below budget? Explain your answer.
(CMA adapted)
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