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  2. Assuming the fixed costs are appropriate for a relevant range up to 65,000 units, what is the total forecasted cost to produce the 60,000 cars?

Assuming the fixed costs are appropriate for a relevant range up to 65,000 units, what is the total forecasted cost to produce the 60,000 cars?

Question #1

EZ Ryder Motorcycles is considering whether or not to expand into Germany.  If the price of gas increases, the company expects more interest in fuel-efficient transportation such as motorcycles.  The company is, therefore, considering setting up a motorcycle assembly plant on the outskirts of Berlin.

The CFO expects to convert an existing building to accommodate motorcycle production and has a cost estimate of $850,000. Workers will need trained, at an expected cost of $65,000.  The additional cost to organize the business and to establish relationships is estimated to be $150,000.  The CEO has instructed the sales force to project the profits for this venture.  The estimated sales revenue without considering any of the above expenses is $1,624,000.

Decide whether or not EZ Ryder should expand into Germany.  Use a simple cost-benefit analysis.

Question #2

Auto USA spent $300 million in total to 50,000 cars this year.  The $300 million breaks down as follows:  $50 million in fixed costs and $5,000 of variable costs to produce each car.  Next year it plans to produce 60,000 cars.

  1. Indicate the current average cost per car this year.
  2. Assuming the fixed costs are appropriate for a relevant range up to 65,000 units, what is the total forecasted cost to produce the 60,000 cars?
  3. What will the forecasted average cost per car be for the upcoming year?
  4. Calculate the cost of goods manufactured.

Now…..presume there was a beginning WIP inventory of $5000 for one specific part used in the production process.  Additional information you will need for item d) is:

Component Amount
Direct materials used $24000
Direct labor used $9000
Manufacturing overhead $17000
Ending WIP inventory $4000

 

Question #3

LT Furniture makes sofas, loveseats, and recliners.  The company allocates manufacturing overhead based on direct labor hours.  The CFO has estimated a total of $2 million in manufacturing overhead for the upcoming year.  This is based on an estimated 40,000 direct labor hours for the year.

LT has elected to use job costing for most of their orders and Job 310 is for a batch of 10 recliners.  The direct materials below were requisitioned for this job.

  • Lumber à10 units at $30 per unit
  • Padding à20 yards at $20 per yard
  • Upholstery fabric à60 yards at $25 per yard, sourced from a local manufacturer

Labor time records show the following employees worked on Job 310:

  • Jessee Slothower:  10 hours at $12 per hour
  • Becky Wilken:  15 hours at $18 per hour
  • Chip Lathrop:  12 hours at $15 per hour

 

  1. Compute the company’s predetermined overhead rate
  2. Compute the total amount of direct materials, direct labor, and manufacturing overhead that should be shown on Job 310’s job cost record sheet.
  3. Compute the total cost of Job 310, as well as the cost of each recliner produced in Job 310.

 

Question #4

Indy Auto Parts has a seat-manufacturing department that uses ABC costing.  The activity allocation rates are as follows:

  • Machining # of machine hours $30 per machine hour
  • Assembling # of parts $.50 per part (fifty cents)
  • Packaging # of finished seats $.90 per finished seat

Suppose Ford has asked for a bid on 50,000 baby seats that would be installed as an option on some Ford vehicles.  Each seat has 20 parts and the DM cost per seat is $11.  The job would require 10,000 direct labor hours at a labor wage rate of $25 per hour.  The company will use 400 machine hours to fabricate some of the parts required for the seats.

  1. Compute the total cost of producing and packaging 50,000 baby seats.  Also – what is the average cost per seat?
  2. Indy will add a 30% markup to the total cost.  What price will the company bid for the Ford order?
  3. Suppose that instead of using ABC, the company uses standard costing.  The manufacturing overhead is a plant wide rate of $65 per direct labor hour.  The baby seat order will require 10,000 direct labor hours.  What would the total cost of the baby seats be under this system?  What is the average cost per seat? What price will the company now bid for the Ford order?

 

Question #5

A Tile company produces ceramic tiles in two sequential production departments – 1) Tile Forming and 2) Tile Finishing.

Information for the Tile Forming division for the month of May is as follows:

Information about UNITS

Component Units Notes
Beg WIP 2,000 units  
Started in production 18,000 units  
Completed and transferred 16,000 units  
End WIP 4,000 units 25% complete to direct materials; 55% complete for conversion costs

 

Information about COSTS

Component Costs Notes
Beg WIP $4,800 ($800 is DM and $4000 is conversion)
Direct materials used in May $6,000  
Conversion costs incurred in May $32,400  

 

Utilizing process costing, complete the following:

  1. Calculate the units completed and transferred out.
  2. Calculate the units still in WIP ending inventory.
  3. What journal entries are needed at month-end to transfer the costs to the next department?

Question #6

As the new manager of a local fitness club, you have been studying the club’s financial data.  You would like to determine how the clubs costs behave in order to make accurate predictions for next year.  Here is the information that you found for the last six months:

Month Club Memberships Total Operating Cost Avg. Operating Cost
July 450 $8,900 $19.78
August 480 $9,800 $20.42
September 500 $10,100 $20.20
October 550 $10,150 $18.45
November 560 $10,500 $18.75
December 525 $10,200 $19.43

 

  1. Use the high-low method to determine the club’s monthly operating cost equation.
  2. Use your answer above to predict total monthly operating costs if the club has 600 members.
  3. Construct a basic traditional income statement for JULY.  Assume your cost equation that you previously came up with is accurate for your income statement preparation.  The club charges members $30 per month for unlimited access to the facility.
  4. Construct a contribution margin income statement for the month of JULY as well.

 

Question #7

Fleet Foot buys hiking socks for $6 per pair and resells them at $10 a pair.  Management budgets monthly fixed expenses of $10,000 for any sales volume between 0 and 12,000 pairs.

  1. Use the data above to determine the breakeven point in units.
  2. Use the contribution margin ratio approach (short-cut) to compute the breakeven point in sales revenue.
  3. If Fleet Foot desires a $14,000 operating income, what are the monthly sales in units needed to hit this desired level?
  4. Assume Fleet Foot has been selling 8,000 pairs of socks per month.  What is the current margin of safety in units?  In sales dollars?

 

 

Question #8

Aziz produces Standard and Deluxe sunglasses.  A standard pair sells for $40 and has variable expenses of $16.  The Deluxe sunglasses sell at $30 a pair and have variable expenses of $21.  The company only has 15,000 machine hours that they can produce both standard and deluxe models.  In one hour, Aziz can produce 70 pairs of standard glasses OR 30 pairs of the deluxe model.

  1. Which model would you suggest Aziz should emphasize?
  2. From the information given, can you determine how many of each type of sunglasses the company should make?

 

Question #9

Explain the steps a company will go through to complete a budget process.  (Hint: We start with SALES FORECASTS).

  1. Complete the sales budget, including a separate section that details the type of sales made (Cash/Credit).  The selling price is $14. Use the following information:
Month Expected Unit Sales
January 100,000
February 110,000
March 115,000

 

  1. Prepare the 2nd step of the budget process presuming the company would like to maintain an ending stock of finished pillows equal to 20% of the next month’s sales.  Sales in units are the same as in a) above. April has a projected unit sales figure of 120,000 units.

 

Question #10

Sonoma is considering investing in a solar paneling roof for one of its large distribution facilities.  The investment will cost $9,000,000.  It is expected to last 6 years and has no salvage value.  The company expects the yearly utility savings to increase over time as follows:

Year 1 $1,000,000

Year 2 $1,500,000

Year 3 $2,000,000

Year 4 $2,500,000

Year 5 $3,500,000

Year 6 $4,500,000

In screening their projects, the company uses the payback period and the Accounting Rate of Return equal to at least 10%.  Any potential investments that DO NOT hit BOTH criteria are immediately rejected.

  1. Calculate the payback period for the solar panels.
  2. Calculate the ARR for the solar panel project.
  3. Discuss whether the company should consider the project or reject the project.

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