(15 pts) 2. Gamma Corp. creates enhancement kits for home entertainment centers. Sales have been very erratic, with some months showing a loss. The company's contribution format income statement for the most recent month is given below:
Sales (10,000 units at $300 per unit) $3,000,000
Variable expenses 2,100,000
Contribution margin 900,000
Fixed expenses 1,000,000
Net operating loss $ (100,000)
a) Compute the company's contribution margin ratio and its break-even point in both units and dollars.
b) The sales manager feels that a $20,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $300,000 increase in monthly sales. If the sales manager is right, what will be the effect on the company's monthly net operating income or loss?
c) Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $35,000 in the monthly advertising budget, will cause unit sales to increase by 50 percent. What will the new contribution format income statement look like if these changes are adopted?
d) Refer to the original data. The company's advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $5.00 per unit. Assuming no other changes, how many units would have to be sold each month to earn a pretax profit of $150,000?
(10 pts) 3. James Co. manufacturers a part, VW72, used in automobiles. Three processes are involved in the production of VW72: drilling, inserting, and packaging. Each process is performed at a separate workstation, and has these performance characteristics.
· The drilling function can drill 90,000 parts per hour.
· The inserting function can insert 15,000 parts per 5 minutes.
· The packaging function can package 40,000 parts per half hour.
James Co. sells the VW72 to automotive manufacturers for $20 per unit. The variable costs for the VW72 are $15 per unit. Fixed costs would remain the same, if the production volume is changed. James Co.’s plant operates 70 hours per week, 50 weeks each year. Each requirement is independent of the others.
a) Management has determined that if they were to spend $10,000,000 on a new information system that the inserting function would improve to 5,000 parts per 5 minutes. Should the information system be acquired? Explain.
b) Management has determined that new machinery in the packaging function would result in 45,000 parts per half hour. The cost of the machinery is $40,000,000. Should the new machinery be acquired? Explain.
(20 pts) 4. Swift Company was organized on March 1 of the current year. After five months of start-up losses, management had expected to earn a profit during August, the most recent month. Management was disappointed, however, when the income statement for August also showed a loss. August’s income statement follows:
For the Month Ended August 31
Less operating expenses:
Indirect labor cost $ 12,000
Direct labor cost 70,000
Depreciation, factory equipment 21,000
Raw materials purchased 165,000
Depreciation, sales equipment 18,000
Rent on facilities 50,000
Selling and administrative salaries 32,000
Advertising 75,000 $462,000
Net loss $(12,000)
After seeing the $12,000 loss for August, Swift’s president stated, “I was sure we’d be profitable within six months, but our six months are up and this loss for August is even worse than July’s. I think it’s time to start looking for someone to buy out the company assets - if we don’t, within a few months there won’t be any assets to sell. By the way, I don’t see any reason to look for a new controller. We’ll just limp along with Sam for the time being.”
The company’s controller resigned a month ago. Sam, a new assistant in the controller’s office, prepared the income statement above. Sam has had little experience in manufacturing operations. Additional information about the company follows:
Some 60% of the utilities cost and 75% of the insurance apply to factory operations. The remaining amounts apply to selling and administrative activities.
Inventory balances at the beginning and end of August were:
August 1 August 31
Raw materials $ 8,000 $13,000
Work in progress 16,000 21,000
Finished goods 40,000 60,000
Only 80 % of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities.
The president has asked you to check over the income statement and make a recommendation as to whether the company should look for a buyer for its assets.
a) As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured for August.
b) As a second step, prepare a new income statement for August.
c) Based on your statements prepared in (1) and (2) above, would you recommend that the company look for a buyer?
(12 pts) 5. Jim’s flooring makes three types of flooring products: tile, carpet, and parquet. Cost analysis reveals the following costs (expressed on a per-square-yard basis) are expected for 2013.
TILE CARPET PARQUET
Direct materials $5.20 $3.25 $8.80
Direct labor 1.80 .40 6.40
Variable overhead 1.00 .15 1.75
Variable selling expenses .50 .25 2.00
Variable administrative expenses .20 .10 .30
Fixed overhead $760,000
Fixed selling expenses 240,000
Fixed administrative expenses 200,000
Per-yard expected selling prices are: tile, $16.40, carpet, $8.00; and parquet $25.00. In 2013 sales were as follows and the mix is expected to continue in 2014.
TILE CARPET PARQUET
Square yards 18,000 144,000 12,000
Review of recent tax returns reveals an expected tax rate of 40 percent.
a) How many square yards of each product are expected to be sold at the breakeven point?
b) Assume that the company desires an after-tax profit of $680,000. How many square yards of each type of product would need to be sold to generate this profit level? How much revenue would be required?
(20 pts) 6. Geo Manufacturing produces two types of entry doors, deluxe and standard. The assignment basis for support costs has been direct labor dollars. For 2012 Geo compiled the following data for the two products:
Sales units 50,000 400,000
Sales price per unit $650.00 $475.00
Direct material and labor costs per unit $180.00 $130.00
Manufacturing support costs per unit $30.00 $120.00
Last year Geo Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information for 2012.
Activity Cost Driver Cost Total Deluxe Standard
Setups #of setups $500,000 500 400 100
Machine–related #of machine hours $44,000,000 600,000 300,000 300,000
Packing #of shipments $5,000,000 250,000 50,000 200,000
a. Using the current system, what is the estimated
1. total cost of manufacturing one unit for each type of door?
2. profit per unit for each type of door?
b. Using the activity-based costing data presented above.
1. Compute the revised total cost to manufacture one unit of each type of entry door.
2. Compute the profit per unit for each type of door.
c. Explain the pros and cons of activity based costing.