1. Reader's Corner is a small book store that rents space in a neighborhood shopping mall for $19,200 a year. Utilities add another $7,800 yearly. The total staff salaries and benefits projected for next year equal $56,000. Also, Readers Corner spends $1,300 on advertising and $2,600 on professional services. Other overhead expenses total $11,500.
Ms. Downey, the company's owner, would like to make a $40,000 profit after taxes next year. Her tax rate will be 33 percent. The book store sells hardbound books, paperback books, and magazines. The average cost of each category of items and Reader's markup on cost is: hardbacks, $12.00 and 50 percent: paperbacks, $2.40 and 60 percent; magazines, $1.90 and 60 percent.(Note the selling price is the average variable cost plus the markup on the cost.)
In past years 70 percent of the store's sales revenue came from hardback books, 20 percent from paperbacks, and the remaining 10 percent from magazines.
Required:
a) What is the contribution margin of each sales item?
b) What are the projected fixed costs of the company next year?
c) What is the breakeven point for Reader's Corner?
d) What sales dollar level will the company need to reach the target after-tax profit?
2. Gorden Company produces a variety of electronic equipment. One of its plants produces two dot matrix printers, the superior and the regular. At the beginning of the year 2013, the following data were prepared for this plant:
Superior Regular
Quantity 50,000 400,000
Selling price $475.00 $300.00
Unit prime cost* $180.00 $110.00
Unit overhead cost $20.00 $130.00
Prime cost equals direct materials and direct labor.
The unit overhead cost is calculated using the predetermined overhead application rate based on direct labor-hours.
Upon examining the data, the manager of marketing was particularly impressed with the per-unit profitability of the superior printer and suggested that more emphasis be placed on producing and selling this product. The plant supervisor objected to this strategy, arguing that the cost of the superior printer was understated. He argued that overhead costs could be assigned more accurately by using multiple cost drivers that reflected each product's consumption. To convince top management that multiple rates could produce a significant difference in product costs, he obtained the following projected information from the controller for the preceding production output:
Activity Consumption
Overhead Activity Cost Driver Pool Rate Superior Regular
Setups Number of setups $2,800 200 100
Machine costs Machine-hours $81.12 100,000 400,000
Engineering Engineering-hours $40 45,000 120,000
Packing Packing orders $20 50,000 200,000
*Cost per unit of cost driver
Required:
a) Using the projected data based on traditional costing, calculate gross profit per unit, and total gross profit for each product.
b) Using the pool rates, calculate the overhead cost per unit for each product. Using this new unit cost, calculate gross profit per unit, and total gross profit for each product.
c) In view of the outcome in requirement 2, evaluate the suggestion of the manager of marketing to switch the emphasis to the superior model.
3. Boeing is the largest commercial airplane manufacturer in the world. In 1996 it began development of the 757-300, a 240-passenger plane with a range up to 4,010 miles. First deliveries of the passenger jet are at a price of about $70 million per plane.
Assume that Boeing's annual fixed costs for the 757-300 are $950 million, and its variable cost per airplane is $45 million.
Required:
a) Compute Boeing's break-even point in number of 757-300 airplanes and in dollars of sales.
b) Suppose Boeing plans to sell forty-two 757-300 airplanes in 2013. Compute Boeing's projected operating profit.
c) Suppose Boeing increased its fixed costs by $84 million and reduced variable costs per airplane by $2 million. Compute its operating profit if forty-two 757-300 airplanes are sold.
4. University Hospital has an outpatient surgery center that treats patients in three activity centers: (1) Surgery, which does surgery on the patients, (2) Phase I recovery, where patients recover from surgery while still asleep, and (3) Phase II surgery, where the patients continue recovering after they awake. At the end of Phase II surgery, patients go home. Daily capacities and production levels are as follows:
Surgery Phase I Recovery Phase II Recovery
Daily capacity 40 surgeries 30 surgeries 60 surgeries
Daily production 30 surgeries 30 surgeries 30 surgeries
The hospital receives an average of $1,000 per surgery. (The surgeon's fee and anesthesiologist's fee are billed separately.) The variable cost per surgery is $300. There is sufficient demand for surgeries that the hospital could perform 60 per day. Surgeries not performed by the outpatient surgery center are sent to the hospital's regular surgery rooms in the hospital. The variable cost per surgery for the regular surgery rooms is $700, while the hospital still receives $1000 per surgery.
Here are some alternatives that management is considering.
a. Continue performing 30 surgeries per day in the outpatient surgery center and send 30 patients to the hospital's regular surgery rooms for the other 30 patients.
b. Rebuild the recovery rooms so that some of the Phase II space could be used for Phase I recovery. This would cost $2,000 per day and would enable the outpatient surgery center to perform 40 surgeries per day and send 20 patients to the hospital's regular operating rooms.
c. Expand the facilities of the outpatient surgery center at a differential cost of $15,000 per day so it could perform 60 surgeries per day, service 60 patients per day in Phase I recovery, and continue to service 60 patients per day in Phase II recovery.
Required:
Write a report to the management of University Hospital recommending which of the above alternatives it should take and why.
5. Consider the following information for American Marine Craft, Inc. for the year ended December 31, 2012:
Depreciation expense - Administrative office $ 32,000
Depreciation expense - Plant and equipment 65,000
Direct labor - Wages 435,000
Direct materials inventory, Dec. 31, 2012 18,000
Direct materials inventory, Jan 1, 2012 18,000
Direct material purchases 144,000
Finished goods inventory, Dec. 31, 2012 28,000
Finished goods inventory, Jan 1, 2012 15,000
Heat, light & power - Plant 36,000
Indirect labor 25,000
Property taxes - Plant 34,000
Sales representatives' salaries 145,000
Sales revenue 1,500,000
Plant supervisor's salary 56,000
Supplies - Administrative office 6,000
Supplies - Plant 23,000
Work-in-Progress inventory, Dec 31, 2012 12,000
Work-in-Progress inventory, Jan 1, 2012 23,000
Determine:
a) The cost of goods manufactured.
b) The gross profit.
c) The operating income.