Fundamentals Of Cost Accounting (6th Edition)
6th Edition
ISBN: 9781259969478
Author: WILLIAM LANEN, Shannon Anderson, Michael Maher
Publisher: McGraw Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 4, Problem 71P
a.
To determine
Calculate the operating profit in case of satisfying all the annual demands.
a.
Expert Solution
Answer to Problem 71P
The operating profit is $672,000 in case of satisfying all the annual demands.
Explanation of Solution
Operating profit:
The operating profit is the excess of total revenues over total expenses after adjusting for
Calculate the operating profit:
| Particulars |
Basic (a) |
Classic (a) |
Formal (a) |
Total |
| Total revenue (2) | $600,000 | $640,000 | $5,700,000 | $6,940,000 |
| Less: variable costs | ||||
| Direct material (2) | $200,000 | $60,000 | $360,000 | $620,000 |
| Direct labor (2) | $224,000 | $320,000 | $3,360,000 | $3,904,000 |
| Variable | $56,000 | $80,000 | $840,000 | $976,000 |
| Variable marketing (3) | $60,000 | $64,000 | $570,000 | $694,000 |
| Total variable costs | $540,000 | $524,000 | $5,130,000 | $6,194,000 |
| Contribution margin | $60,000 | $116,000 | $570,000 | $746,000 |
| Fixed cost | $74,000 | |||
| Operating profit | $672,000 |
Table: (1)
Thus, the operating profit is $672,000 in case of satisfying all the annual demands.
Working note 1:
Calculate the revenue and costs:
| Particulars |
Units (a) |
Rate (b) |
Amount |
| Revenue: | |||
| Basic | 20,000 | $30 | $600,000 |
| Classic | 10,000 | $64 | $640,000 |
| Formal | 30,000 | $190 | $5,700,000 |
| Direct material: | |||
| Basic | 20,000 | $10 | $200,000 |
| Classic | 10,000 | $6 | $60,000 |
| Formal | 30,000 | $12 | $360,000 |
| Direct labor: | |||
| Basic | 20,000 | $11 | $224,000 |
| Classic | 10,000 | $32 | $320,000 |
| Formal | 30,000 | $112 | $3,360,000 |
| Variable overhead: | |||
| Basic | 20,000 | $3 | $56,000 |
| Classic | 10,000 | $8 | $80,000 |
| Formal | 30,000 | $28 | $840,000 |
Table: (2)
Working note 3:
Calculate the variable marketing costs:
| Particulars |
Revenue (a) |
Rate (b) | Amount |
| Basic | $600,000 | 10% | $60,000 |
| Classic | $640,000 | 10% | $64,000 |
| Formal | $5,700,000 | 10% | $570,000 |
Table: (3)
b.
To determine
Calculate the most profitable product.
b.
Expert Solution
Answer to Problem 71P
The most profitable product line is classic.
Explanation of Solution
Contribution margin:
The excess of sales price over the variable expenses is referred to as the contribution margin. It is computed by deducting the variable expenses from the sales revenue. A contribution margin income statement is prepared in order to record the contribution margin.
Calculate the contribution margin per constrain:
| Particulars | Basic | Classic | Formal |
| Contribution margin | $60,000 | $116,000 | $570,000 |
| Units | 20000 | 10000 | 30000 |
| Contribution margin per unit | $3 | $11.9 | $19 |
| Hours per unit | 0.7 | 2 | 7 |
| Contribution margin per constrained | $4.29 | $5.80 | $2.71 |
Table: (4)
The product line with the highest contribution margin per constrained resource will be most profitable. The classic product line is the most profitable as the profit is $5.8.
Thus, the most profitable product line is classic.
c.
To determine
Recommend the product mix as per the given information.
c.
Expert Solution
Answer to Problem 71P
The ideal product mix should be 10,000 units of Classic and 14,285 units of Basic.
Explanation of Solution
Product mix:
When a company deals in more than one product, then it has to establish a product mix for its products. The company has limited resources, so it can only produce a limited number of products. It has to consider all the factors and recognize which product mix is most profitable for the company.
Calculate the ideal product mix:
The classic product line is the most profitable product line. It has the highest contribution margin of $5.8, so the management if the company should produce the product of classic line to its highest demand which is 10,000 units.
Company total has 30,000 hours. 10,000 units of Classic product will require 20,000
Thus, the ideal product mix should be 10,000 units of Classic and 14,285 units of Basic.
d.
To determine
Calculate the operating profit in case of ideal product mix.
d.
Expert Solution
Answer to Problem 71P
The operating profit is $84,855 in case of ideal product mix.
Explanation of Solution
Operating profit:
The operating profit is the excess of total revenues over total expenses after adjusting for depreciation and taxes.
Calculate the operating profit in case of ideal product mix:
| Particulars | Basic | Classic | Total |
| Total revenue | $428,550 | $640,000 | $1,068,550 |
| Less: variable costs | |||
| Direct material | $142,850 | $60,000 | $202,850 |
| Direct labor | $159,992 | $320,000 | $479,992 |
| Variable overhead | $39,998 | $80,000 | $119,998 |
| Variable marketing | $42,855 | $64,000 | $106,855 |
| Total variable costs | $385,695 | $524,000 | $909,695 |
| Contribution margin | $42,855 | $116,000 | $158,855 |
| Fixed cost | $74,000 | ||
| Operating profit | $84,855 |
Table: (5)
Thus, the operating profit is $84,855 in case of ideal product mix.
Working note 4:
Calculate the revenue and costs:
| Particulars | Units | Rate | Amount |
| Revenue: | |||
| Basic | 14,285 | $30 | $428,550 |
| Classic | 10,000 | $64 | $640,000 |
| Direct material: | |||
| Basic | 14,285 | $10 | $142,850 |
| Classic | 10,000 | $6 | $60,000 |
| Direct labor: | |||
| Basic | 14,285 | $11 | $159,992 |
| Classic | 10,000 | $32 | $320,000 |
| Variable overhead: | |||
| Basic | 14,285 | $3 | $39,998 |
| Classic | 10,000 | $8 | $80,000 |
Table: (6)
Working note 5:
Calculate the variable marketing costs:
| Particulars | Revenue | Rate | Amount |
| Basic | $428,550 | 10% | $42,855 |
| Classic | $640,000 | 10% | $64,000 |
Table: (7)
e.
To determine
Calculate the additional company should produce as per the conditions.
e.
Expert Solution
Answer to Problem 71P
The operating profit is $5,143 in case of ideal product mix.
Explanation of Solution
Contribution margin:
Contribution margin is the amount left for the profit and fixed cost of the business. It is calculated by subtracting the variable cost from the revenue of the business.
Calculate the change in contribution margin:
Contribution margin before the increase in the labor costs is $3, $11.6 and $19 for Basic, Classic, and Formal.
| Particulars | Contribution margin | Labor hours | Hour cost | Labor costs | Adjusted contribution margin |
| Basic | $3 | 0.7 | $3 | $2.10 | $0.90 |
| Classic | $11.6 | 2.0 | $3 | $6.00 | $5.60 |
| Formal | $19 | 7.0 | $3 | $21.00 | -$2.00 |
Table: (8)
The contribution margin is highest in case of Classic, but it cannot produce any more units because it has already produced till the highest potential. So it has to produce the product with the second highest contribution margin which is Basic.
It is already producing 14,285 units of Basic so it can produce 5,715
The profit on one unit of Basic is $0.9, so the Company can earn $5,143
Thus, the operating profit is $5,143 in case of ideal product mix.
Want to see more full solutions like this?
Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
CleanTech manufactures equipment to mitigate the environmental effects of waste. (a) If Product A has fixed expenses of $15,000 per year and each unit of product has a $0.20 variable cost, and Product B has fixed expenses of $5000 per year and a $0.50 variable cost, at what number of units of annual production will A have the same overall cost as B? (b) As a manager at CleanTech what other data would you need to evaluate these two products?
Vice President for Sales and Marketing at Waterways Corporation is planning for production needs to meet sales demand in the
coming year. He is also trying to determine how the company's profits might be increased in the coming year. This problem asks you to
use cost-volume-profit concepts to help Waterways understand contribution margins of some of its products and decide whether to
mass-produce any of them.
Waterways markets a simple water control and timer that it mass-produces. Last year, the company sold 735,000 units at an average
unit selling price of $3.60. The variable costs were $1,852,200, and the fixed costs were $508,032.
Vice President for Sales and Marketing at Waterways Corporation is planning for production needs to meet sales demand in the
coming year. He is also trying to determine how the company's profits might be increased in the coming year. This problem asks you to
use cost-volume-profit concepts to help Waterways understand contribution margins of some of its products and decide whether to
mass-produce any of them.
Waterways markets a simple water control and timer that it mass-produces. Last year, the company sold 635,000 units at an average
unit selling price of $5.00. The variable costs were $2,222,500, and the fixed costs were $619,125.
(a1)
Your answer is correct.
What is the product's contribution margin ratio? (Round ratio to O decimal places, e.g. 25%.)
Contribution margin ratio
30
%
(a2)
eTextbook and Media
Your answer is correct.
What is the company's break-even point in sales units and in sales dollars for this product?
Break-even point in units
412750
units
Break-even point in…
Chapter 4 Solutions
Fundamentals Of Cost Accounting (6th Edition)
Ch. 4 - Fixed costs are often defined as fixed over the...Ch. 4 - What is the difference between a sunk cost and a...Ch. 4 - Are sunk costs ever differential costs? Explain.Ch. 4 - What is the difference between short-run and...Ch. 4 - What costs are included in the full cost of a...Ch. 4 - What costs are included in the full cost of a...Ch. 4 - What costs should be considered for a special...Ch. 4 - What are life-cycle product costing and pricing?Ch. 4 - Prob. 9RQCh. 4 - What do the terms target cost and target price...
Ch. 4 - What is predatory pricing? Why is it illegal in...Ch. 4 - What is dumping? What role would a cost accountant...Ch. 4 - What is price discrimination? How could a cost...Ch. 4 - If we want to maximize profit, why do we use unit...Ch. 4 - A company has learned that a particular input...Ch. 4 - Why are production constraints important in...Ch. 4 - What are some nonfinancial factors in decisions to...Ch. 4 - Prob. 18RQCh. 4 - Prob. 19CADQCh. 4 - Prob. 20CADQCh. 4 - As a marketing manager for an airline, would you...Ch. 4 - Prob. 22CADQCh. 4 - You buy an airline ticket to New York City to see...Ch. 4 - Consider the Business Application item,...Ch. 4 - One of your acquaintances notes, This whole...Ch. 4 - A manager in your organization just received a...Ch. 4 - Many airline frequent-flier programs upgrade elite...Ch. 4 - Consider the opportunity costs you identified in...Ch. 4 - Prob. 29CADQCh. 4 - Prob. 30CADQCh. 4 - Prob. 31CADQCh. 4 - Prob. 32CADQCh. 4 - Prob. 33CADQCh. 4 - Prob. 34CADQCh. 4 - Prob. 35CADQCh. 4 - Prob. 36ECh. 4 - Prob. 37ECh. 4 - Pricing Decisions Assume that MTA Sandwiches sells...Ch. 4 - Pricing Decisions Rutkey Collectibles is a small...Ch. 4 - Prob. 40ECh. 4 - Special Order Fairmount Travel Gear produces...Ch. 4 - Target Costing and Pricing Sids Skins makes a...Ch. 4 - Target Costing and Pricing Domingo Corporation...Ch. 4 - Target Costing and Purchasing Decisions Mira Mesa...Ch. 4 - Target Costing Kearney, Inc., makes kitchen tools....Ch. 4 - Make-or-Buy Decisions Mobility Partners makes...Ch. 4 - Make-or-Buy Decisions Mels Meals 2 Go purchases...Ch. 4 - Prob. 49ECh. 4 - Dropping Product Lines Freeflight Airlines is...Ch. 4 - Pappy’s Toys makes two models of a metal...Ch. 4 - Christine’s Chronographs makes two models of a...Ch. 4 - Unter Components manufactures low-cost navigation...Ch. 4 - Special Orders Sherene Nili manages a company that...Ch. 4 - Prob. 55PCh. 4 - M. Anthony, LLP, produces music in a studio in...Ch. 4 - Davis Kitchen Supply produces stoves for...Ch. 4 - Make or Buy King City Specialty Bikes (KCSB)...Ch. 4 - Prob. 59PCh. 4 - Prob. 60PCh. 4 - Prob. 61PCh. 4 - Prob. 62PCh. 4 - Prob. 63PCh. 4 - Agnew Manufacturing produces and sells three...Ch. 4 - Prob. 65PCh. 4 - Power Music owns five music stores, where it sells...Ch. 4 - You have been asked to assist the management of...Ch. 4 - Prob. 68PCh. 4 - Prob. 69PCh. 4 - Prob. 70PCh. 4 - Prob. 71PCh. 4 - Prob. 72PCh. 4 - Slavin Corporation manufactures two products,...Ch. 4 - Prob. 74PCh. 4 - Prob. 75P
Knowledge Booster
Similar questions
- Vice President for Sales and Marketing at Waterways Corporation is planning for production needs to meet sales demand in the coming year. He is also trying to determine how the company's profits might be increased in the coming year. This problem asks you to use cost-volume-profit concepts to help Waterways understand contribution margins of some of its products and decide whether to mass-produce any of them. Waterways markets a simple water control and timer that it mass-produces, Last year, the company sold 630,000 units at an average unit selling price of $4.40. The variable costs were $1,663,200, and the fixed costs were $742,896. Show Transcribed Text Margin of safety in dollars What is the margin of safety, both in dollars and as a ratio? (Round ratio to 0 decimal places, e.g. 25%.) Margin of safety ratio 3 $ Ć %arrow_forwardThe corporate office is giving the managers of each channel the option of a customer relationship management system that will allow the managers to gather data about their customers and be more effective in their marketing efforts. The system will cost $930,000 and is expected to generate $168,000 in additional annual segment margin. Calculate the residual income of each distribution channel assuming it purchases the new customer relationship management system. (If the residual income is a loss then enter with a negative sign preceding the number, e.g. -5,125 or parenthesis, e.g. (5,125).) $ Retail $ Online $ Catalog Residual Incomearrow_forwardNote:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward
- An investment banker is analyzing two companies that specialize in the production and sale of candied yams. Sheridan Yams uses a labor-intensive approach, and Sunland Yams uses a mechanized system. CVP income statements for the two companies are shown below. Sales Variable costs Contribution margin Fixed costs Net income Sheridan Yams $394,000 310,000 84,000 34,000 $50,000 Sunland Yams $394,000 156,000 238,000 188,000 $50,000 The investment banker is interested in acquiring one of these companies. However, she is concerned about the impact that each company's cost structure might have on its profitability.arrow_forwardInternational Paper is trying to find the best paper rolling machine to maximize sales volume. There are three machine options: Machine A, Machine B, and Machine C. Annual revenue is expected to be at one of three possible levels, High, $6 million; Medium, $3 million; or Low, $2 million; but is impacted by machine selection as the probabilities show in the table below: High Revenue Medium Revenue Low Revenue Machine A .1 .3 .6 Machine B .4 .4 .2 Machine C .5 .4 .1 Which machine should International Paper purchase to maximize the expected revenue, and wh sthe expected revenue? Group of answer choices Machine A, $2.7 million Machine B, $4.0 million Machine B, S4.6 million Machine C, $4.4 million none of the answers provided are correctarrow_forwardTheory of constraints, throughput margin, and relevant costs. Washington Industries manufactures electronic testing equipment. Washington also installs the equipment at customers’ sites and ensures that it functions smoothly. Additional information on the manufacturing and installation departments is as follows (capacities are expressed in terms of the number of units of electronic testing equipment): Washington manufactures only 250 units per year because the installation department has only enough capacity to install 250 units. The equipment sells for $55,000 per unit (installed) and has direct material costs of $30,000. All costs other than direct material costs are fixed. The following requirements refer only to the preceding data. There is no connection between the requirements.arrow_forward
- As the newly appointed Controller of Lynbrook, Inc. you have been asked to evaluate several scenarios that management is considering to improve the overall profitability of the company. Lynbrook manufactures and sells a product called a Wren, its only product. The company normally produces and sells 60,000 Wrens each year at a selling price of $32 per unit. The company's unit costs at this level of activity are included below: Direct materials $10.00 Direct labor 4.50 Variable manufacturing 2.30 overhead Fixed manufacturing overhead 5.00 ($300,000 total) Variable selling expenses 1.20 Fixed selling expenses 3.50 ($210,000 total) Total cost per unit $26.50 The CFO of Lynbrook would like your response to the following three (3) independent situations to present to the management team early next week. Situation #1 Assume that Lynbrook has sufficient capacity to produce 90,000 Wrens each year without any increase in fixed manufacturing overhead costs. The company could increase its unit…arrow_forwardThe management of a firm wants to introduce a new product. The product will sell for $3 a unit and can be produced by either of two scales of operation. In the first, total costs are TC = $3,500 + $2.7Q. In the second scale of operation, total costs are TC = $7,910 + $2.4Q. What is the break-even level of output for each scale of operation? Round your answers to the nearest whole number. The first scale of operation: units The second scale of operation: units What will be the firm’s profits for each scale of operation if sales reach 14,700 units? Round your answers to the nearest dollar. The first scale of operation: $ The second scale of operation: $ One-half of the fixed costs are noncash (depreciation). All other expenses are for cash. If sales are 11,400 units, will cash receipts cover cash expenses for each scale of operation? Enter your answers as positive values. Round your answers to the nearest dollar. The first scale of operation generates a cash flow of $ . The…arrow_forwardPlease provide Solutionsarrow_forward
- An investment banker is analyzing two companies that specialize in the production and sale of candied yams. Traditional Yams uses a labor-intensive approach, and Auto-Yams uses a mechanized system. CVP income statements for the two companies are shown below. Sales Variable costs Contribution margin Fixed costs Net income Traditional Yams $397,000 329,000 68,000 18,000 $50,000 Auto-Yams $397,000 162,000 235,000 185,000 $50,000 The investment banker is interested in acquiring one of these companies. However, she is concerned about the impact that each company's cost structure might have on its profitability.arrow_forwardDivine Electronics Ltd. manufactures a line of headphones. Sales are increasing, and management is concerned that the company may not have sufficient capacity to meet the expected demand for the coming year. The following data are available for planning purposes: Product Estimated Demand Next Year Selling Price Direct Materials Direct Labour 1 Wire 78,000 $25.00 $7.30 $5.00 2 Wire 75,000 20.00 10.20 3.20 3 Wire 115,000 17.50 2.80 5.00 The following additional information is available: 1. With the strong competition, the company feels that it can't increase its selling prices above those indicated 2. The direct labour rate is $10 per hour; this rate is expected to remain unchanged during the coming year. 3. Fixed manufacturing costs total $640,000 per year. Variable manufacturing overhead costs are equal to 25% of the direct labour costs. 4. The company's plant has a capacity of 110,000 direct labour-hours per…arrow_forwardBecause Lanisha Motors operates in a very competitive environment, it is essential for the management team to understand its cost structure and how it affects the company's profitability. For one of the key products, Lanisha notes a selling price of $12 and a variable cost of $4 per unit, fixed costs associated with this product line are $20,000. Lanisha Motors is subject to a tax rate of 25%. If Lanisha wants to generate operating income of $10,000, how many units of this product must be sold? How many must be sold to generate $12,000 of after-tax income?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning