Gamma Corp. creates enhancement kits for home - 35714

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(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:



Income Statement

For the Month Ended August 31


Sales                                                                                                    $450,000

Less operating expenses:

            Indirect labor cost                               $  12,000

            Utilities                                                   15,000

            Direct labor cost                                      70,000

            Depreciation, factory equipment            21,000

            Raw materials purchased                      165,000

            Depreciation, sales equipment                18,000

            Insurance                                                   4,000

            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:

                                                                                                Deluxe                         Standard


                        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.


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