Practice_Text_Exercises

Practice Test Exercises Question 2-48 Compute the predicted 2007 operating income for Procter & Gamble and its percentage increase. Explain why the percentage increase in income differs from the percentage increase in sales. Sales ($68,222 x 1.1) = $75,044 COG ($33,125 x 1.1) = $36,438 Selling/General/Admin Exp. $21,848 (no change) Operating Income $16,758.00 Percentage Increase ($16,758-$13,249)/$13,249= 26.5% There was not an increase in all cost which caused the operating income to change from 2006 to 2007. The COG may always increase because it is considered a variable cost. Due to the increase in sales, the percentage increase is much higher. Question 2-61 1. Compute the budgeted profit at the expected volume of 600,000 units under both the old and the new production environments. Old Production Operation New Production Operation Sales (600,000 X 3.10) 1,860,000 1,860,000 Less: Variable Costs (600,000 X 2.10, 1.10) 1,260,000 660,000 Contribution Margin 600,000 1,200,000 Less: Fixed Costs 580,000 1,140,000 Net Income 20,000 60,000 2. Compute the budgeted break-even point under both the old and the new production environments. Unit Contribution Margin $3.10-$2.10=$1.00 $3.10-$1.10=$2.00 Fixed Cost 580,000 1,140,000 Break Even Units (FC/UCM) 580,000/1=580,000 1140,000/2=570,000 Break Even Sales 580,000x3.10=$1,798,000 570,000 x 3.10= $1,767,000 Fixed Cost/Unit Contribution Margin  Old=580,000  New=570,000 3. Discuss the effect on profits if volume falls to 500,000 units under both the old and the new production environments. Old Production Operation New Production Operation Sales (500,000X3.10) $1,550,000 $1,550,000 Less: Variable Costs (500,000 X2.1, 1.1) $1,050,000 $550,000 Contribution Margin $500,000 $1,000,000 Less: Fixed Costs $580,000 $1,140,000 Net Income ($80,000) ($140,000)  Old Production Profit becomes smaller then New Production Profit. There is a rapid decrease under the New Production Operation due to the higher fixed costs. 4. Discuss the effect on profits if volume increases to 700,000 units under both the old and the new production environments. Old Production Operation New Production Operation Sales $2,170,000 $2,170,000 Less: Variable Costs $1,470,000 $770,000 Contribution Margin $700,000 $1,400,000 Less: Fixed Costs $580,000 $1,140,000 Net Income $120,000 $260,000 Old production profit becomes larger than the new production profit due to higher fixed cost. 5. Comment on the riskiness of the new operation versus the old operation.  According to the results above, because of the high fixed cost, the New Production Operation poses more of a risk then the Old Production Operation. Excel Application Exercise, CVP & Break-Even 1. What are the break-even points in units and dollars under proposal A' 2. How did the increased selling price under proposal B impact the break-even points in units and dollars compared to the break-even points calculated under proposal A'  The higher selling price increased the contribution margin and so the breakeven units and dollars were lower in proposal B as compared to proposal A 3. Why did the change in variable cost under proposal C not impact the break-even points in units and dollars as significantly as proposal B did'  In proposal B, the selling price is also higher and so the net impact on contribution margin is much higher as compared to proposal C where the change in contribution margin as compared to proposal A is not much higher. Question 3-38 1. Find monthly fixed maintenance cost and the variable maintenance cost per driver unit using the visual-fit method based on each potential cost driver. Explain how you treated the April data (Please see the image below) Units Produced Fixed Cost = $10,000 Variable Cost is $3.50 per unit Total Cost for is 1,000 is $13,500. The variable cost ($3.50) makes the total cost is (10,000 + 1,000 units x 3.50 =13,500). Total Cost (of 1,000 units) = 10,000 + 3,500 = 13,or (2,000 units) = 17,000. Number of Setups Fixed Cost = $1,000 Variable Cost = 7,000 per set up. Set-up (1) Total Cost = 8,000 Set-up (2) Total Cost = 15,000 The data for the month of April will not be reflected because the plant was not open during that time. 2. Find monthly fixed maintenance cost and the variable maintenance cost per driver unit using the high-low method based on each potential cost driver. Units Cost Low 1,100 15,000 High 4,000 21,000 Change 2,900 6,000 Fixed Cost = $12,724 and Variable Cost = (6,000/2,900) = 2.07 Set-Up Cost Low 1.7 13,000 High 3.6 26,000 Fixed Cost = $1,368 and Variable Cost (Set-up) = 6,842 3. Which cost driver best meets the criteria for choosing cost functions' Explain.  According to the provided information, the costs are related to setup due to the supplies that was used, therefore that is the setup cost driver best meets the criteria.