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Homework 4 | Complete Solution
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Homework 4

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Identify the letter of the choice that best completes the statement or answers the question.

1.    Claire Whitney, a college student is contemplating the following options for her 3-month summer break:
(1) Take a summer course which will cost \$700 and work half-time making \$1,000 per month.
(2) Work full time at the local dinner making \$2,000 per month.
(3) Take the summer class at a cost of \$700 and not work during the summer.

Claire’s incremental profit or loss if she chooses option 1 over option 2 would be:
A)    (\$4,100)
B)    (\$2,500)
C)    (\$5,300)
D)    (\$3,700)

2.    Lamanex, Inc., a manufacturing company produces 80,000 units of product A at a total cost of \$2.4 million.  Total fixed costs are \$1.4 million.  If the company increases production by 25% and uses a 19% markup, the price per unit will be:
A)    \$31.54
B)    \$37.10
C)    \$30.80
D)    \$51.80

Use the following to answer questions 3-4:

FTE Company's market for the Model 55 has changed significantly, and FTE has had to drop the price per unit from \$265 to \$125.  There are some units in the work in process inventory that have costs of \$150 per unit associated with them.  FTE could sell these units in their current state for \$100 each.  It will cost FTE \$10 per unit to complete these units so that they can be sold for \$125 each.

3.    A new employee looks at the analysis and exclaims, “We'll lose money with either of these alternatives! Let's just throw these units in the trash!” Suppose the alternative to trashing is choosing the more profitable of the two alternatives (that the new employee looked at and did not like). What effect will the trashing option (that the new employee
wants) have on net income?
A)    Net income will increase by \$35 per unit for each unit discarded.
B)    Net income will decrease by \$115 per unit for each unit discarded.
C)    It will have no effect on net income.
D)    Net income will decrease by \$100 per unit for each unit discarded.

4.    When the incremental revenues and expenses are analyzed, the company is better off by
A)    \$15 per unit if they complete the units.
B)    \$25 per unit if they sell the units in their current state.
C)    \$10 per unit if they sell the units in their current state.
D)    \$125 per unit if they complete the units.

5.    A company using activity based pricing marks up the direct cost of goods by 40% plus charges customers for indirect costs based on the activities utilized by the customer.  Indirect costs are charged as follows:  \$6.00 per order placed; \$3.00 per separate item ordered; \$28.00 per return.  A customer places 10 orders with a total direct cost of \$2,000, orders 300 separate items, and makes 5 returns.  What will the customer be charged?
A)    \$3,000
B)    \$3,900
C)    \$5,330
D)    \$5,750

6.    Manufacturing overhead is allocated to products based on the number of machine hours required.  In a year when 20,000 machine hours were anticipated, costs were budgeted at \$125,000.  If a product requires 8,000 machine hours, how much manufacturing overhead will be allocated to this product?
A)    \$41,667
B)    \$31,120
C)    \$43,750
D)    \$50,000

Use the following information to answer questions 7-8:
The Sunrise Hotel has 200 rooms. Each room rents at \$110 per night and variable costs total \$27 per room per night of occupancy. Fixed costs total \$76,000 per month.

7.    If the hotel spends an additional \$20,000 in the month of February on advertising they feel that they can expect occupancy rate to increase by 10%. What would be the financial impact of spending this additional money on advertising for the month of February (28 days)?
A)    Total fixed costs will increase by \$10,500.
B)    Net income will increase by \$16,320.
C)    Net income will increase by \$26,480.
D)    Total fixed costs will remain the same.

8.    If 75% of the rooms are occupied each night in the month of February (28 days) what will total costs be for the month?
A)    \$189,400
B)    \$173,600.
C)    \$197,400
D)    \$155,680.

9.    Johnson Company manufactures widgets.  Old Ham Company has approached Jones with a proposal to sell the company one of the components used to make widgets at a price of \$100,000 for 50,000 units.  Jones is currently making these components in its own factory.  The following costs are associated with this part of the process when 50,000 units are produced:

Direct material    \$44,000
Direct labor    20,000
Total    \$124,000

The manufacturing overhead consists of \$32,000 of costs that will be eliminated if the components are no longer produced by Jones.  The remaining manufacturing overhead will continue whether or not Jones makes the components.
What is the amount of avoidable costs if Jones buys rather than makes the components?
A)    \$60,000
B)    \$96,000
C)    \$124,000
D)    \$100,000

10. Below is a performance report that compares budgeted and actual profit of Boyles Beer
for the month of April:

Budget    Actual    Difference
Sales    \$200,000    \$202,000    \$2,000
Less:
Cost of ingredients    \$162,000    \$166,000    \$4,000
Salaries    \$31,000    \$31,200    \$200

Controllable Profit    \$47,000    \$44,800    -\$2,200

In evaluating the department in terms of its increase in sales and expenses, what will be
most important to investigate?

A)    Sales
B)    Cost of ingredients
C)    Salaries
D)    All three components have equal importance.

11.    Latimer’s Diner has a contribution margin ratio of 17%.  If fixed costs are \$176,800, how many dollars of revenue must K-Henry's generate in order to reach the break-even point?
A)    \$282,880
B)    \$1,040,000
C)    \$1,060,800
D)    \$1,105,000

12.    New Insights, Inc. is looking to achieve a net income of 15 percent of sales.  Here’s the firm’s profile: Unit sales price is \$10; variable cost per unit is \$6; total fixed costs are \$40,000.  What is the level of sales in units required to achieve a net income of 15 percent of sales?
A)    12,000 units
B)    21,000 units
C)    16,000 units
D)    20,000 units

13.    At Zeke’s Apparel, the break-even point is 2,400 units.  If fixed costs total \$300,000 and variable costs are \$25 per unit, what is the selling price per unit?
A)    \$210
B)    \$180
C)    \$5
D)    \$150

14.  Which of the following situations will most likely violate cost-volume-profit
A)    When production volume increases beyond the capacity of the plant, a second shift will be added instead of building a new plant.
B)    The company’s raw material supplier typically allows volume discounts when larger amounts of the raw material are purchased.
C)    Fixed costs per unit decrease as volume increases.
D)    As volume increases, per unit fixed manufacturing overhead remain constant.

15.  One Small Grill Company is a start up with the following profile:
Unit selling price = \$200; Variable cost per unit = \$100; Fixed Costs = \$36,000;
Tax rate = 25%.  How many units should Small Grill sell to achieve an after-tax target
income of \$6,000?
A)    200
B)    460
C)    440
D)    300

16.    Western Apparel Company owns two stores and management is considering eliminating the East store due to declining sales.  Segmented contribution income statements are as follows and common fixed costs are allocated on the basis of sales.
West    East    Total
Sales    \$525,000    90,000    \$615,000
Variable costs    262,500    45,000    307,500
Direct fixed costs    62,500    25,000    87,500
Segment margin    200,000    20,000    220,000
Allocated fixed costs    137,500    35,000    172,500
Net Income    \$62,500    (\$15,000)    \$47,500

Western feels that if they eliminate the East store that sales in the West store will decline by 25%.  If they close the East store, overall company net income will:
A)    decline by \$90,000.
B)    decline by \$85,625.
C)    decline by \$62,000.
D)    decline by \$20,000.

17.    ForestField, a best-selling toy has a selling price of \$15.  If the contribution margin ratio is 40% and if the fixed costs are \$60,000, how many ForestFields must the company sell to realize a profit of \$450,000?
A)      30,000
B)      34,000
C)      85,000
D)    100,000

Information for Questions 18

Anderson Manufacturing makes a single product.  Budget information regarding the current period is given below:

Revenue (100,000 units at \$8.00)    \$800,000
Direct materials     150,000
Direct labor     125,000
Net income    \$180,000

Dye Company approaches Anderson with a special order for 15,000 units at a price of \$7.50 per unit. Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company's orders.  However, Anderson is operating at capacity and will incur an additional \$50,000 in fixed manufacturing overhead if the order is accepted.

18.    What is the incremental income (loss) associated with accepting the special order?
A)    (\$14,000)
B)    \$36,000
C)    (\$23,500)
D)    \$27,000

19.    Target believes it can sell 3,500,000 of a new vehicle charger for \$8 each.  There will be \$3,000,000 in fixed costs associated with the charger.  If the company desires to make a profit of \$2,000,000 on the charger, what is the target variable cost per charger?
A)    \$7.25
B)    \$9.00
C)    \$6.57
D)    \$9.40

20.    On July 26, 2012, radio Shack announced disappointing 2nd quarter earnings that caused the stock to fall 29% to all time lows.  Although sales were up 1.2% to \$953.2 million gross profit fell 16.6% to \$360.3 million.  Assuming Radio Shack’s store count and fixed costs were the same in the 2nd quarter of 2011 and 2012, which of the following statements is the best explanation for the decrease in the firm’s profitability?
A)    Opportunity costs decreased.
B)    Margin of safety decreased.
C)    Contribution margin decreased.
D)    Selling price decreased.

21    Paul's Pizza produced and sold 2,000 pizzas last month and had fixed costs of \$6,000.  If production and sales are expected to increase by 10% next month, which of the following statements is true?
A)    Total fixed costs will decrease.
B)    Fixed cost per unit will decrease.
C)    Total fixed costs will increase.
D)    Fixed cost per unit will increase.

22.    The Dynamics Company uses cost-plus pricing with a 50% mark-up.  The company is currently selling 100,000 units at \$12 per unit.  Each unit has a variable cost of \$6.  In addition, the company incurs \$200,000 in fixed costs annually.  If demand falls to 80,000 units and the company wants to continue to earn a 50% return, what price should the company charge?
A)    \$13.50
B)    \$14.55
C)    \$12.75
D)    \$10.95

Use the following to answer question 23:
Taylor's Treasures has collected the following information over the last six months.

Month    Units produced    Total costs
March    10,000    \$25,600
April    12,000    26,200
May    18,000    27,600
June    13,000    26,450
July    12,000    26,000
August    15,000    26,500

23.    Using the high-low method, what is the variable cost per unit?
A)    \$0.25
B)    \$2.56
C)    \$0.22
D)    \$2.00

24.    During 2014, Reko Inc. reported revenues of \$925,400 and profits of \$88,500.  Fixed costs were \$456,250 and 37,016 units were sold.  If costs and prices are expected to stay the same in 2015, and Reko expects to sell 40,000 units, what will be the company’s budgeted profit?
A)    \$95,457
B)    \$132,414
C)    \$525,000
D)    \$667,957

25.    Visit finance.yahoo.com and determine which of the following statements is incorrect:
A)    The current market cap of Google is greater than the market cap of Microsoft.
B)    The current ratio for the most recent quarter for Microsoft is greater than the current ratio for Google.
C)    The current price per share of Google is more than ten times that of Microsoft.
D)    Return on equity for the most recent quarter for Microsoft is higher than return on equity for Google.

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Homework 4 | Complete Solution
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