1. Anderson Metals manufactures and sells #3 steel rebar that is used in the construction of slabs and driveways. The steel bar not only strengthens the finished concrete product, but it also has unique properties such that its temperature related expansion and contraction matches that of concrete. The product is manufactured and sold in 20' long "sticks." The product is generally produced and sold to match customer demand, and there is not a significant amount of finished goods inventory at any point in time. Summary information for 20X6 is as follows:
Sales were $20,000,000, consisting of 5,000,000 sticks.
Total variable costs were $11,000,000.
Total fixed costs were $8,000,000.
Net income was $1,000,000.
The general economic conditions appear to be deteriorating heading into 20X7, and there is some concern about a reduction in sales volume. The following questions should each be answered independent of one another.
(a) What is the company's break-even point in "sticks?" Can the company sustain a 30% reduction in total volume, and remain profitable?
(b) The company's sole shareholder, Doug Anderson, generally lives off of dividends paid by the business. The business typically declares and pays a dividend equal to 25% of net income. If Doug needs to receive $100,000 in dividends for normal living expenses, what total revenues must Anderson Metals produce in 20X7?
(c) If total volume is expected to decrease by 20%, and the company wishes to continue to produce a $1,000,000 net income by raising the per unit selling price, what revised per stick price must be imposed? Will this strategy necessarily work?
(d) If the company expects a drop in raw material prices to reduce total variable costs to $2 per stick, but all other revenue and cost factors to be unaffected, what will be the revised break-even point in sales and units?
2. Greg Morrison recently graduated from mortuary school. He is considering opening his own funeral home. A funeral home is a high-fixed cost business, as it requires considerable expenditures for facilities, labor, and equipment, no matter how many families are served. Assume the annual fixed cost of operations is $800,000. Further assume that the only significant variable cost relates to burial containers like urns and caskets. An average casket costs $1,200. Greg's banker has asked a variety of questions in contemplation of providing a loan for this business.
(a) If the average family is charged $6,000 for services and a burial container, how many families must be served to clear the break-even point?
(b) If the banker believes Greg will only serve 100 families during the first year in business, how much will the business lose during its first year of operation?
(c) If Greg believes his profits will be at least $100,000 during the first year, how much is he anticipating for total revenue?
(d) The banker has suggested that Greg can reduce his fixed costs by $150,000 if he will not buy any vehicles. Greg can instead rent vehicles as needed. The variable cost of renting is $700 per family served. Will this suggestion help Greg reach the break-even point sooner?
3. Four of the following eight statements are patently false. Find the four false statements. The other statements are true. For the false statements, mark the words that make the statement false.
1. A simplified explanation of ABC is that it attempts to divide production into its core activities, define the costs for those activities, and then allocate those costs to products based on how much of a particular activity is needed to produce a product.
2. ABC maintains the traditional division between product and period costs.
3. ABC charges products with the costs of manufacturing and nonmanufacturing activities, and some manufacturing costs are not attached to products.
4. Under ABC, idle capacity is typically isolated and allocated to products and services.
5. ABC is suitable for public reporting.
6. With ABC, the "cost objects" are broadened to include not only products/services, but other objects like customers, markets, and so on.
7. The first step in implementing ABC is a detailed study of all business processes and costs.
8. The normal steps in an ABC implementation are (1) study processes and costs, (2) identify activities, (3) identify traceable costs, (4) assign remaining costs to activities, (5) apply costs to objects, and (6) determine per-activity allocation rates.