1. Deep Blue manufactures floatation vests in Charleston, South Carolina. Deep Blue's contribution margin income statement for the most recent month contains the following data:
Sales in units 31,000
Sales in revenue $434,000
Variable expenses:
Manufacturing $186,000
Marketing and administrative 110,000
Total variable expenses 296,000
Contribution margin 138,000
Fixed expenses:
Manufacturing 130,000
Marketing and administrative 92,000
Total fixed expenses 222,000
Operating income (loss) $(84,000)
Suppose Boats-n- More wishes to buy 4,600 vests from Deep Blue. Acceptance of the order will not increase Deep Blue's variable marketing and administrative expenses. The Deep Blue plant has enough unused capacity to manufacture the additional vests. Boats-n-More has offered $8 per vest, which is below the normal sale price of $14.
Required:
Determine whether Deep Blue should accept this special sales order.
Identify long-term factors Deep Blue should consider in deciding whether to accept the special sales order.
2. Smith Inc. manufactures and sells fan belts. The selling price for these fan belts is $7.00, which is what Smiths competitors charge, as the fan belt is a commodity. Facts for Smith are as follows:
Smith desires a 12 percent return on its total assets which are $3,000,000.
Smith has a current sales volume of 500,000 units.
Variable costs are $4.50 per unit, $3.00 for manufacturing and $1.50 for marketing and administrative costs.
Fixed costs are $950,000.
Required:
Can Smith achieve its desired profit?
Suppose that Smith follows a strategy of one of its competitors which is to spend $200,000 on advertising so that there is more brand awareness. This would permit them to raise the selling price to $9 but their sales volume would decrease to 425,000 units. Will Smith achieve its desired profit?
3. Suppose Ritz-Carlton has a 400-room hotel in a tropical climate. Management expects occupancy rates to be 90 percent in December, January and February, 85 percent in November, March, and April, and 65 percent the rest of the year. The average room rental is $300 per night. Most of the costs of running the hotel are fixed. The variable costs are only $50 per occupied room per night. Fixed salaries (including benefits) run $650,000 per month, depreciation is $475,000 per month, other fixed operating costs are $225,000 per month, and interest expense is $500,000 per month. The tax rate is 40 percent.
Required:
Determine the net income for the month of December and for the month of June.
If an advertising campaign, costing $350,000, could increase the occupancy rates by five percentage points each month in the off-season (that is, from 65 to 70 percent in May through October), should Ritz-Carlton undertake the campaign? Assume that all off-season months have the same operating income as June.
4. DDD Grills, Inc. makes a single product - a handmade specialty barbeque grill that sells for $350. Data for last year's operations follow;
Units in beginning inventory 0
Units produced 30,000
Units sold 25,000
Units in ending inventory 5,000
Variable costs per unit
Direct materials $ 90
Direct labor 120
Variable manufacturing overhead 70
Variable selling and administrative 20
Total variable cost per unit $ 300
Fixed costs:
Fixed manufacturing overhead $900,000
Fixed selling and administrative 350,000
Total fixed costs $1,250,000
Required:
Compute the unit product cost for one barbeque grill for each of the costing methods described in Chapter 9.
Prepare an income statement for the year using the absorption approach.
Prepare an income statement for the year using the variable costing approach.
5. For many years, Sigma Company has produced a small electrical part that it uses in the production of its standard line of diesel tractors. The company's unit product cost for the part, based on a production level of 70,000 parts per year, is as follows:
Per Part Total
Direct materials $5.00
Direct labor 3.75
Variable manufacturing overhead .50
Fixed manufacturing overhead, traceable 4.00 $250,000
Fixed manufacturing overhead, common
(allocated on the basis of labor-hours) 3.25 $175,000
Unit product cost $16.50
An outside supplier has offered to supply the electrical parts to the Sigma Company for only $12.00 per part. One-half of the traceable fixed manufacturing cost is supervisory salaries and other costs that can be eliminated if the parts are purchased. The other half of the traceable fixed manufacturing costs consists of depreciation of special equipment that has no resale value. The decision to buy the parts from the outside supplier would have no effect on the common fixed costs of the company, and the space being used to produce the parts would otherwise be idle.
Required:
Prepare computations showing how much profits would increase or decrease as a result of purchasing the parts from the outside supplier rather than making them inside the company.
6. Wonderful! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well, " said Kim Clark, president of Martell Company. " Our $18,000 overall manufacturing cost variance is only 1.5 % of the standard $1,200,000 standard cost of products sold during the year. That's well within the 3 % parameter set by management for acceptable variances. It looks like everyone will be in line for a bonus this year."
The company produces and sells a single product. A standard cost card for the product follows:
Standard Cost Card - Per Unit of Product
Direct materials, 2 feet at $8.45 .................. $16.90
Direct labor, 1.4 hours at $8 ..................... 11.20
Variable overhead, 1.4 hours at $2.50 ........... 3.50
Fixed overhead, 1.4 hours at $6 .................. 8.40
Standard cost per unit..................... $ 40.00
The following additional information is available for the year just completed:
The company manufactured 30,000 units of product during the year.
A total of 64,000 feet of material was purchased during the year at a cost of $8.55 per foot. All of this material was used to manufacture the 30,000 units. There were no beginning or ending inventories for the year.
The company worked 45,000 direct labor-hours during the year at a cost of $7.80 per hour.
Overhead is applied to products on the basis of direct labor-hours. Data relating to manufacturing overhead costs follows:
Denominator activity level (direct labor-hours) ..... 35,000
Budget fixed overhead costs
(from the overhead flexible budget) ..................$210,000
Actual variable overhead costs incurred .............. 108,000
Actual fixed overhead costs incurred ................. 211,800
Required:
Compute the direct materials price and quantity variances for the year.
Compute the direct labor rate and efficiency variances for the year.
Compute the variable overhead spending and efficiency variances for the year.
Compute the fixed overhead budget and volume variances for the year.
Total the variances you have computed, and compare the net with the $18,000 mentioned by the president. Do you agree that bonuses should be given to everyone for good cost control during the year? Explain.
7. Fort Worth prepared a budget last period that called for sales of 10,000 units at a price of $10 each. The costs per unit were estimated to amount to $5 variable and $2 fixed. During the period, production was exactly equal to actual sales of 12,000 units. The selling price was $9.50 per unit. Variable costs were $6 per unit. Fixed costs actually incurred were $21,000.
Required:
Prepare a report to show the difference between the actual contribution margin per the static budget and the budgeted contribution margin per the flexible budget.
Explain the significance of the comparisons.