Midterm Exam II - Fall 2021 - MA_v2 (1)

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1 NEW YORK UNIVERSITY STERN SCHOOL OF BUSINESS Managerial Accounting Professor Yoel Beniluz Fall 2021 Midterm Exam II Student Name: Please write as clearly and neatly as possible, otherwise, I may not be able to read your writing. Do not use cursive writing. Confine your answer to the space provided. Note: this exam has 13 pages and 5 questions for a total of 100 points. To receive credits students must show their calculations and relevant units – no credit for correct answers without calculation / reasoning / explanation / relevant units. This is a closed books and closed notes exam. You are not to use the help of any person during the exam, and not to discuss the exam with any other students for one week after the exam. You are not allowed to copy or share any portion of this exam. Not adhering to these requirements would be considered a violation of the Stern Honor Code with all the associated consequences (see the syllabus for more information). Exams written in pencil will not be considered for a re-grade. Use a pen if you think you might submit your exam for a re-grade request. Please read and accept the following acknowledgement: Acknowledgement of University Regulations and Policies Prohibiting Cheating I acknowledge that I am aware of University Regulations and Policies that prohibit cheating. Cheating includes, but is not limited to, • looking at another student’s test, • copying from another student’s tests, • talking to another student during the test, • contacting any person for help with answering exam questions during the exams, In context of this exam, discussion of any part of the exam (including both questions and answers) with other students is prohibited for a period of one week following the exam. I also acknowledge that I will not violate these regulations and policies during this examination. This exam is conducted on the honor system I am trusting your sense of honor and integrity as befits a Stern student. In submitting your answers, you are also certifying that you followed this honor code. Student’s Signature: Good Luck!

2 1. (30 points) Snowbird Company manufactures snowmobiles. Snowbird annual fixed cost is $4,000,000, and its variable cost per snowmobile is $13,000. Snowbird current annual sales are 950 units at a price of $18,000 per snowmobile. (In this question, ignore taxes, unless specifically asked about.) Show your calculations and relevant units. a) What is the contribution margin per unit? b) What is the contribution margin ratio per unit? c) What is total contribution margin? d) What is the current annual profit? e) What is the break-even point in units? f) What is the break-even point in dollars? g) What is the margin of safety in units? h) What is the margin of safety in dollars?

3 i) Snowbird unit sales in the last 4 years were: 925, 910, 970 and 960. Given this information how safe is the margin of safety you computed above? Explain you answer: j) How many units does the company need to sell to attain a target profit of $1,200,000 (ignore taxes)? k) Calculate the dollar sales needed to attain a target profit of $1,200,000 (ignore taxes)? l) Assume income tax rate is 25%, how many units would the company need to sell to produce a net income of $1,500,000? m) Assume income tax rate is 25%, what should be total sales in dollars to produce a net income of $1,200,000? n) What is the operation leverage (ignore taxes)? o) Explain the meaning of the operating leverage:

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4 p) Explain the difference between the operating leverage and the financial leverage: q) The company is considering enhancing its market share by embarking a marketing campaign costing $500,000. What is the minimum increase in sale volume that would justify the marketing campaign (ignore taxes)?

5 2. (32 points) variable costing vs absorption costing. Jasper Inc. started operation on January 1, 2019 and manufactures a single product. The company provided the following summarized data for 2019 and 2020. Jasper uses the LIFO method to account for its inventory. In all parts of this question show your calculations and relevant units. Selling price per unit 200 Direct materials per unit 25 Direct labor per unit 15 Variable manufacturing overhead costs per unit 30 Variable selling & administration expense per unit 20 Total fixed manufacturing overhead per year 800,000 Total fixed selling & administration expense per year 360,000 Units Produced Units Sold 2020 25,000 29,000 2019 20,000 13,000 a) What is product cost per unit under absorption costing? 2019: 2020: b) What is product cost per unit under variable costing? 2019: 2020: c) 2019 ending inventory under variable costing is: d) 2019 ending inventory under absorption costing is: e) 2019 cost of goods sold under variable costing is: f) 2019 cost of goods sold under absorption costing is:

6 g) Prepare the 2020 income statement based on absorption costing: h) Prepare the 2020 income statement based on variable costing: i) Does income differ between the two methods:

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7 j) If yes, which income is higher? By what amount? Explain why? k) Under what condition your answer to part j would reverse? l) The production manager was not happy to see 2020 inventory going down and wanted to increase production during 2020. The CFO, on the other hand, argued that based on current demand the company would not be able to sell more than 29,000 units in 2020, therefore increasing production will increase costs but not revenues, and would decrease the net income reported to investors (GAAP net income). The production manager, a NYU Stern graduate, told the CFO that GAAP net income would actually increase and that he did not understand accounting and should seek a career in dancing (yes, he is a little blunt…). Do you agree with CFO or the production manager? Support your answer.

8 m) Assume that you must decide quickly whether to accept a special one-time order for 100 units for $150 per unit. Which income statement presents the most relevant data? Determine the apparent profit or loss on the special order based solely on these data. Mark Ture or False each of the following statements regarding the advantages and disadvantages of absorption vs. variable costing: n) Absorption costing is more consistent with the matching principle of accounting. o) Variable costing is required under GAAP. p) Variable costing is better suited for decision making. q) Under absorption costing income can be increased by increasing production costs.

9 3. (15 points) . OBX Inc. manufactures two types of fishing rods: graphite and carbon. OBX uses specialized machines to produce their world-class fishing rods, with a maximum capacity of 3000 machine hours per month. OBX’s monthly fixed costs are $50,000. The following data pertain to its monthly operation. In all parts of this question show your calculations and relevant units. Product - Fishing Rods Graphite Carbon Selling price 80 240 Variable costs per unit 30 100 Machine time required (hours) 2 4 Assume that OBX faces the following monthly demand for its products: 1000 graphite fishing rods and 400 carbon fishing rods. a) What is the contribution margin per unit for each type of fishing rod? Graphite: Carbon: b) What is the contribution margin ratio for each type of fishing rod? Graphite: Carbon: c) What’s the production allocation of Graphite and carbon fishing rods that maximizes profit? Graphite: carbon: d) Total contribution margin at this production allocation is: e) Maximum profit is: f) OBX is considering creating a night shift to operate the specialized machines during the night times. The night-shift operation of the equipment would increase the maximum machine hours capacity to 4000 machine-hour per month. What is the maximum amount that OBX would be willing to pay per month as extra-compensation to the night-shift workers?

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10 Assume now (and for the rest of this question) that OBX enjoys great reputation for its fishing rods and face unlimited demand for its fishing rods and can sell any amount of graphite or carbon fishing rods that it can manufacture. g) What should be the production allocation of graphite and carbon fishing rods that maximizes profit? Graphite: Carbon: h) Total contribution margin at this production allocation is: i) Maximum profit is: j) What is the maximum amount that OBX would be willing to pay per month as extra- compensation to the night-shift workers to increase its equipment production capacity to 4000 machine-hour per month?

11 4. (15 points). Encuentro Company manufactures surfboards and its manufacturing equipment has a production capacity of 1,500 surfboards per month. Encuentro currently anticipates a monthly demand of 1,200 surfboards at $700 per surfboard. Cost information for the current expected activity level is as follows: Revenues (1,200 units x $700) 840,000 Variable manufacturing costs per unit 200 Fixed Manufacturing costs per unit 110 Variable SG&A costs per unit 90 Fixed SG&A costs per unit 70 The SG&A costs include $20 of fixed marketing costs per unit and $12 of variable marketing costs per unit. Encuentro has received a one-time special order of 120 surfboards from Waves Inc. for $550 per surfboard. Special stamping equipment costing $7,500 to engrave Waves’ beautiful logo would be needed to process the order; the equipment would be then discarded. No marketing costs will be necessary for the one-time special order. a) Should Encuentro accept Waves’ special order? b) If Encuentro accepted the offer, would profit increase or decrease and by what amount (explain your answer and show your calculation)? Assume now that Waves’ special order is for 440 surfboards and that it is an “all or nothing” offer. c) Should Encuentro accept Waves’ special order? d) If Encuentro accepted the offer, would profit increase or decrease and by what amount? Explain your answer and show your calculation.

12 e) If your answers to parts c and d differ than those for parts a and b, what cost is causing that difference? What is the amount of that cost? 5. A robotic equipment maker conducted its first customer-profitability study in January 2021, using 2020 data. The decision was made to allocate all indirect costs (variable and fixed), either to products or to individual customers (of course indirect product costs allocated to products were eventually associated with the customers buying those products). At the initial meeting to evaluate the findings, the executive in charge of the study distributed the “whale chart” reproduced below. 2020

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13 a. [4 points]. Point A on the “whale chart” shows: A. The company’s total 2020 profit; B. The company’s most profitable customer; C. The 2020 profit the company would have achieved if all unprofitable customers were “fired”; D. The profit of the average customer; E. None of the above. b. [4 points]. Point B on the “whale chart” shows: A. The company’s total 2020 profit; B. The company’s most profitable customer; C. The 2020 profit the company would have achieved if all unprofitable customers were “fired”; D. The profit of the average customer; E. None of the above. END

Midterm Exam II - Fall 2021 - MA_v2 (1)

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