Exam2_Practice Solutions

PRACTICE EXAM#2 Solutions Problem 1: CVP Analysis A company sells two products: a standard model and a deluxe model. The standard model sells for $50 and has a contribution margin ratio of 40% (CM per unit is $20). The deluxe model sells for $100 and has a contribution margin ratio of 50% (CM per unit is $50). Last year, the company sold 5000 standard units and 2500 deluxe units. There is $200,000 of cost that is “fixed” in the sense that it does not vary with the number of units produced. However, $100,000 of this cost is direct fixed cost: $20,000 is direct fixed cost for Standard, and $80,000 is direct fixed cost for Deluxe. The remaining $100,000 is allocated fixed cost. Standard (5000) # Deluxe (2500) # Total___ Sales 250,000 50 250,000 100 500,000 VariableCost_____________150,000__30_____________125,000 __50__ 275,000_ Contribution Margin 100,000 20 125,000 50 225,000 Direct Fixed Costs_______ 20,000_____________ __80,000______ 100,000__ Segment Margin Allocated/Common Fixed _________________________________________100,000__ Pre-Tax Profit 25,000 1 . If the sales mix stays the same as last year, how many standard and deluxe units would have to be sold next year in order to earn $42,000 after taxes of 40%? Pre-tax profit: 42,000/(1-.4)=70,000 Avg. CM per unit=(100,000+125,000)/(5000+2500)=30 # Units = (200,000+70,000)/30=9,000 avg. units Mix in units: 5000:2500=2:1, So 2/3 *9000= 6000 Standard units And 1/3 * 9000= 3000 Deluxe units 2. If the sales mix stays the same as last year, what sales from standard and deluxe models would have to be in order to earn $42,000 after taxes of 40%? Pre-tax profit: 42,000/(1-.4)=70,000 Avg. CM Ratio=(100,000+125,000)/(250,000+250,000)=45% Average Sales to get targeted profit: = (200,000+70,000)/.45=600,000 average sales Mix in sales: 250,000:250,000=1:1, or 50% t0 50% So 1/2 *600,000=$ 300,000 Sales of Standard model And 1/2 * 600,000=$ 300,000 Sales of Deluxe model 3. Assume that the company decided to eliminate the deluxe model with the hope of increasing their profit by $5,000. Once again, they were disappointed to find that their expected results did not materialize. In the space below, compute the effect on profit of eliminating the deluxe model and briefly explain the flaw in the company’s plan. If the deluxe product line is dropped an additional $50,000 of fixed costs is allocated to the standard product line and this causes pre-tax profit to decline to ($20,000).

Problem #2 Standard-Costing The Sanibel Corporation produces an industrial chemical. They use a standard cost system and apply MOH based on DLH. At the beginning of 2007, the company had the following information: Expected Overhead – Variable $108,000 Expected Overhead - Fixed $216,000 DM per Unit 10 Pounds Cost of DM $1.60 Per Pound DLH per Unit 0.75 DLH Cost of DL $18.00 Per DLH Expected production 72,000 Units Actual Information for 2007 was as follows: Actual production 70,000 Units Quantity of DM purchased 744,000 Pounds Cost of DM $1.50 Per Pound DM used in production 736,000 Pounds Actual DLH 56,000 DLH Cost of DL $1,002,400 Actual Fixed Overhead $214,000 Actual Variable Overhead $175,400 Part 1: Variances DM What is the DM Price variance? DM Price variance = (AP – SP) * AQp DM Price variance = ($1.50/lb - $1.60/lb) * 744,000 lbs DM Price variance = $74,400 Favorable What is the DM Usage variance? DM Usage variance = (AQi – SQ) * SP Where SQ=SQ unit*Actual production=10*70,000=700,000 DM Usage variance = (736,000 lbs – 700,000 lbs) * $1.60/lb DM Usage variance = $57,600 Unfavorable What is applied DM? SP*SQ= 1.60*700,000= 1,120,000 DL What is the DL Rate Variance? DL Rate variance = (AR – SR) * AH DL Rate variance = ($17.90 - $18.00) * 56,000 DLH DL Rate variance = $5,600 Favorable What is the DL Efficiency Variance? DL Efficiency variance = (AH – SH) * SR Where SH=SH unit*Actual production=.75*70,000=52,500 DL Efficiency variance = (56,000 DLH – 52,500 DLH) * $18.00/DLH DL Efficiency variance = 63,000 Unfavorable What is applied DL? SH*SR =52,500*18= 945,000

Problem #3 (Activity-Based Costing) Anderson Company manufactures two products, for which the following estimated information for next year is available. Standard Deluxe Selling Price $125 $195 Number of Units Produced 15,000 5,000 Prime Cost per Unit $85 $125 DLH per unit 2 1 Machine hours (total) 2,000 2,000 Units per batch 30 10 Number of setup hours per batch 1 4 Number of moves per batch 3 1 Engineering Support Hours (total) 3,000 2,000 Number of batches 500 500 Anderson Company uses an activity-based costing system. The company produces Standard Model and Deluxe Model. Anderson Company has used activity based costing to assign costs to Standard Models and Deluxe Model as given in the table below: Activity Total Cost Activity drivers Total drivers Standard drivers Deluxe drivers Activity rate Consumpti on ratios Material Handling $ 60,000 # of moves (per batch) 2,000 1,500 500 30 75% 25% Machines Set-ups $ 200,000 # setup hours (per batch) 2,500 500 2,000 80 20% 80% Engineering support $ 300,000 #engineering support hours 5,000 3,000 2,000 60 60% 40% Power for Machines $ 160,000 # of machine hours 4,000 2,000 2,000 40 50% 50% TOTAL $720,000 Requirements: 1. Assign OH cost for Standard Model using activity rates ( show your work ). OH applied to Standard Model=30*1,500+80*500+60*3,000+40*2,000= 345,000 2. Assign OH cost for Deluxe Model using consumption ratios ( show your work ). OH applied to Deluxe Model=.25*60,000+.8*200,000+.4*300,000+.5*160,000= 375,000 3. Determine the gross profit (per unit) of the Standard and Deluxe models using the ABC information. OH for Standard (per unit): 345,000/15,000 units=$23 per unit OH for Deluxe (per unit):375,000/5,000 units=$75per unit Standard Deluxe Selling price per unit 125 195 -(DM+DL) per unit -85 -125 -OH per unit -23 -75 =Gross profit per unit 17 -5