Practice_Test_Exercises_Q_2-48

Practice Test Exercises | | | | June 28, 2010 | | | | | | | | * Question 2-48, CVP and Financial Statements for a Mega-Brand Company, on p. 82 | | | | Net sales | $ 75,044.20 | | | Cost of products sold | $ 33,125.00 | | | Selling, general, & administrative expense | $ 21,848.00 | | | Operating Income | $ 20,071.20 | | 33% INCREASE | | | | | | | | | The percentage increase for operating income is different than the percentage difference than sales because | the costs of products sold and selling expense is a percentage of net sales. | | | | | | | | | | Question 2-61, CVP in a Modern Manufacturing Company, on p. 87 | | 1. Budgeted Profit Old | | Budgeted Profit New | | 600,000 * 3.10= 1,860,000 | | 1,860,000 - 1,140,000 | | 1,860,000 - 580,000 = | | | | 1,280,000 | | $ 720,000.00 | | | | | | 2. Old BE Point | | New BE Point | | Sales- Var Exp- Fixed Exp = Net Income | | | | 1,860,000 - 732,000- 528,000 | | 1,860,000 - 132,000- 528,000 | | $600,000 | | 1,200,000 | | | | | | 3. If the volume decrease to 500000, the profit and BE point decreases by the 100,000 which is the qty decrease amount. | | | | | 4. If the volume increased to 700,000 so the profit and BE point increase by 100,000 | | | | | | 5. The new operation doubles in profit of the old operations which makes it more profitable than the old. | | | | | | | | | Chapter 2 Decision Guideline | Phonetronix | Cost-Volume-Profit (CVP) Analysis | June 28, 2010 | | | | | | | | | | Proposal A | Proposal B | Proposal C | Selling Price | $99 | $129 | $99 | Variable Cost | 55 | 55 | 49 | Contribution Margin | $44 | $74 | $50 | Contribution Margin Ratio | 44.44% | 57.36% | 50.51% | | | | | Fixed Costs | $110,000 | $110,000 | $110,000 | | | | | Breakeven Units | 2,500 | 1,486 | 2,200 | | | | | Breakeven Dollars | $247,500 | $191,757 | $217,800 | | | | | | | | | | | | | 1.) 2,500 units; $247,500 | | | | 2.) The increase in selling price caused the break-even point to decline. | 3.) This is because the dollar change in Project B is greater than the dollar change in project C. | Question 3-38, Mixed Cost, Choosing Cost Drivers, and High-Low and Visual-Fit Methods, on p. 121-122 | | | | | Based on the visual-fit method, the Fixed Maintenance Cost based on Units Produced is approximately $13,000 (shown by the lower end of line). Using one of the points in the graph (indicated by the blue arrow), the Variable Cost per Unit is approximately $2.25 Per Unit computed as ($17,500 - $13,000) / 2,000 units. This can be express by the cost function: Y = $13,000 + $2.25 x No. of Units Produced On the other hand, the Fixed Maintenance Cost based on number of Setups is approximately $5,100 (shown by the lower end of line). Using one of the points in the graph (indicated by the blue arrow), the Variable Cost per Unit is approximately $760 Per Setup computed as ($26,000 - $5,100) / 27.5 Setups. This can be express by the cost function: Y = $5,100 + $760 x No. of Setups 2) In using high-low method, we should know the exact figures; however, since we are relying on graph, the following answers will be just approximations. Based on the high-low method, the Fixed Maintenance Cost based on Units Produced is approximately $11,500 and the Variable Cost per Unit is approximately $2.50 Per Unit. Please refer to the computation below:   | Maintenance Cost | Units Produced | High Level Activity | 21,000 | 3,800 | Low Level Activity | 14,500 | 1,200 | Difference | 6,500 | 2,600 | Variable Cost per Unit = $6,500 / 2,600 units = $2.50 per unit Fixed Maintenance Cost = $21,000 – (3,800 x $2.50) = $11,500 This can be express by the cost function: Y = $11,500 + $2.50 x No. of Units Produced On the other hand, based on the high-low method, the Fixed Maintenance Cost based on Number of Setups is approximately $7,093.75 and the Variable Cost per Unit is approximately $687.50 Per Setup. Please refer to the computation below:   | Maintenance Cost | Units Produced | High Level Activity | 26,000 | 27.50 | Low Level Activity | 15,000 | 11.50 | Difference | 11,000 | 16.00 | Variable Cost per Unit = $11,000 / 16 setups = $687.50 per Setup Fixed Maintenance Cost = $26,000 – (27.50 x $687.50) = $7,093.75 This can be express by the cost function: Y = $7,093.75 + $687.50 x No. of Setups 3) Both cost drivers seem plausible. Since this is a Maintenance Department, it is most likely that costs are incurred during the setting up of machine rather than during the production phase, thus, I believe that the Number of Setups is the better cost driver.