Exam 2 Additional Practice Questions

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Apr 3, 2024

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1 Exam 2 Additional Practice Questions In addition to these practice questions, you are strongly encouraged to also do the extra ungraded practice problems on D2L in each chapter’s folder . Chapter 5 Review 1) Rose Tyler is considering opening a Car Wash Service with an established company. She estimates that the following costs will be incurred during her first year of operations: Rent $8,000 Depreciation on equipment $6,000, Wages $10,950, Fixed Utility costs $1,400, Single use rags $2.00 per rag. 3 used per wash Cleaning products will cost $2.50 per wash Franchise fee of $1.10 per wash Variable utility costs $.90 per wash Rose Tyler anticipates that she can provide the premium car wash service at $19 each. Instructions : Determine the break-even point in number of car washes and sales dollars. 2) Johnson Company is required to earn net income of $80,000. Assume that fixed costs are $42,000, the contribution margin per oil change is $10 and the sales price per oil change is now $32. How many oil changes must this company make?

2 3) Compute the CVP Income statement with the following information: Sales per unit $60 Variable cost per unit $40 Fixed Cost $1,200,000 Units sold 100,000 Chapter 6 Review 1) Seaver Corporation manufactures mountain bikes. It has fixed costs of $4,140,000. Seaver’s sales mix and contribution margin per unit is shown as follows: Sales Mix Contribution Margin Green 25% $120 Brown 45% $ 60 Blue 30% $ 40 Instructions What is the Weighted Average Contribution Margin? What is the number of each type of bike that the company would need to sell in order to break even under this product mix? 2) Oscar Corporation produces and sells three products. Unit data concerning each product is shown below. Product X Y Z Selling price $200 $300 $250 Variable costs 155 205 166 Contribution Margin ___ ___ ___ Direct labor hours required per unit 3 hrs 5 hrs 4 hrs The company has only 2,000 hours of labor available to build inventory in anticipation of the company's peak season. Management is trying to decide which product should be produced given the limited labor hours.

3 Instructions (a) Determine which product should be produced. (b) How much contribution margin would the company earn if it used the 2,000 labor hours to produce only the most profitable product? 3) Blue Chance Co. sells computers and video game systems. The business is divided into two divisions along product lines. Variable costing income statements for the current year are presented below: Computers VG Systems Total Sales $700,000 $300,000 $1,000,000 Variable costs 420,000 210,000 630,000 Contribution margin $280,000 $ 90,000 370,000 Fixed costs 296,000 Net income $ 74,000 Instructions (a) Calculate the company’s weighted -average contribution margin ratio. (b) Calculate the company’s break -even point in dollars. (c) Determine the sales level, in dollars, for each division at the break-even point. 4) Jones Company reports the following information: Sales (5,000 units) $400,000 Variable costs $200,000 Fixed Costs $120,000 Questions: (each one is independent and related to original information) (a) If management increases the selling price by 10% with no change in variable or fixed costs, what is the change in net income?

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4 (b) If management reduces variable costs to 45% of sales, what is the change in net income? (c) If management increases fixed costs by $10,000 what is the change in break-even units? Chapter 7 Special Order Gregg Company supplies schools with floor mattresses to use in physical education classes. Gregg has received a special order from a large school district to buy 600 mats at $45 each. Acceptance of the special order will not affect fixed costs but will result in $1,200 of shipping costs. For the first 6 months of 2023, the company reported the following operating results while operating at 80% capacity: Sales (100,000 units) $7,000,000 Cost of Goods sold – fixed 1,050,000 Cost of goods sold- variable 3,150,000 Gross profit 2,800,000 Operating expenses - fixed 600,000 Operating expenses – variable 1,400,000 Net income $ 800,000 HINT: determine the cost per unit for critical items for this analysis. Instructions (a) What is the increase or (decrease) in Net Income that would result from accepting the special order?

5 Make or Buy Kuhn Bicycle Company has been manufacturing its own seats for its bicycles. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. The direct materials and direct labor cost per unit to make the bicycle seats are $8.00 and $9.00, respectively. Normal production is 50,000 bicycles per year. A supplier offers to make the bicycle seats at a price of $21 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products. Instructions (a) What is the increase or (decrease) in Net Income that would result from purchasing the bicycle seats from the supplier? Sell or Process Further Spencer Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers. In 2023, the company incurred $344,000 of costs to produce 40,000 gallons of the chemical. The selling price of the chemical is $12.00 per gallon. The costs per unit to manufacture a gallon of the chemical are presented below: Direct materials $6.00 Direct labor 1.20 Variable manufacturing overhead .80 Fixed manufacturing overhead .60 Total manufacturing costs $8.60 The company is considering manufacturing the paint itself. If the company processes the chemical further and manufactures the paint itself, the following additional costs per gallon will be incurred: Direct materials $1.70, Direct labor $.60, Variable manufacturing overhead $.50. No increase in fixed manufacturing overhead is expected. The company can sell the paint at $15.50 per gallon. Instructions (a) What is the increase or (decrease) in Net Income that would result from processing the chemical further into paint?

6 Retain or Replace Kinder Enterprises relies heavily on a copier machine to process its paperwork. Recently the copy clerk has not been able to process all the necessary copies within the regular work week. Management is considering updating the copier machine with a faster model. Current Copier New Model Original purchase cost $10,000 $20,000 Accumulated depreciation 8,000 — Estimated operating costs (annual) 7,000 2,600 Useful life 5 years 5 years If sold now, the current copier would have a salvage value of $1,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after five years. Instructions (a) What is the increase or (decrease) in Net Income that would result from replacing the machine? Unprofitable Segment A recent accounting graduate evaluated the operating performance of Fanning Company's four divisions. The following presentation was made to Fanning's Board of Directors. During the presentation, the accountant made the recommendation to eliminate the Southern Division stating that total net income would increase by $60,000. (See analysis below.) Other Three Divisions Southern Division Total Sales $2,000,000 $480,000 $2,480,000 Variable Cost of Goods Sold 760,000 280,000 1,040,000 Fixed Cost of goods sold 190,000 120,000 310,000 Gross Profit 1,050,000 80,000 1,130,000 Operating Expenses - variable 240,000 35,000 275,000 Operating Expenses – Fixed 560,000 105,000 665,000 Net Income $ 250,000 $ (60,000) $ 190,000 If the division is eliminated, only $15,000 of the fixed operating costs will be eliminated. No fixed Manufacturing costs will be eliminated Instructions (a) Do you concur with the new accountant's recommendation? (b) What is the increase or (decrease) in Net Income that would result from eliminating the product line?

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7 Chapter 8 1) Swan Manufacturing is introducing a new consumer good. The company utilizes target costing. Market research indicates that the company can sell 120,000 units of their product if the selling price is no more than $18. The product line required an investment of $1,000,000 in new equipment, and the company requires a 24% ROI. Compute the target cost per unit. 2) Jaymes Corporation produces high-performance rotors. It expects to produce 30,000 rotors in the coming year. It has invested $7,909,091 to produce rotors. The company has a required return on investment of 11%. What is its ROI per unit? 3) Kaspar Corporation makes a commercial-grade cooking griddle. The following information is available for Kaspar Corporation's anticipated annual volume of 32,900 units. Per Unit Total Direct materials $18 Direct labor $5 Variable manufacturing overhead $13 Fixed manufacturing overhead $394,800 Variable selling and administrative expenses $7 Fixed selling and administrative expenses $164,500 The company uses a 44% markup percentage on total cost. a) Compute the target selling price.

8 4) Sheen Co. manufactures a standard cabinet for a Bluray player. The variable cost per unit is $16. The fixed cost per unit is $9. The desired ROI per unit is $6. a. Compute the markup percentage on total unit cost b. Compute the target selling price for the cabinet 5) Freberg Company, a division of Dudge Cars, produces automotive batteries. Freberg sells the batteries to its customers for $92 per unit. The variable cost per unit is $42, and fixed costs per unit are $16. Top management of Dudge Cars would like Freberg to transfer 30,000 batteries to another division within the company at a price of $54. Freberg is operating at full capacity . Compute the minimum transfer price that Freberg would be willing to accept. 6) Freberg Company, a division of Dudge Cars, produces automotive batteries. Freberg sells the batteries to its customers for $92 per unit. The variable cost per unit is $55, and fixed costs per unit are $16. Top management of Dudge Cars would like Freberg to transfer 30,000 batteries to another division within the company at a price of $61. Freberg has sufficient excess capacity to provide the 30,000 batteries to the other division. If Freberg sells the units internally, they will save $3 per unit in variable costs due to reduced selling expenses. Compute the minimum transfer price that Freberg would be willing to accept.