# Consider the following costs:

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• ### Net income formula quizlet

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| | | |Consider the following costs:

|  |Direct materials......................................... |\$33,000 |

|  |Depreciation on factory equipment........... |\$12,000 |

|  |Factory janitor’s salary.............................. |\$23,000 |

|  |Direct labor................................................ |\$28,000 |

|  |Utilities for factory.................................... |\$9,000 |

|  |Selling expenses........................................ |\$16,000 |

|  |Production supervisor’s salary................... |\$34,000 |

What is the total amount of manufacturing overhead included above?

|[pic] |\$78,000 |

|[pic] |\$139,000 |

|[pic] |\$44,000 |

|[pic] |\$37,000 |

| | | |

| |Depreciation on factory equipment |\$12,000 |

| |Factory janitor’s salary |23,000 |

| |Utilities for factory |9,000 |

| |Production supervisor’s salary | 34,000 |

| |Total |\$78,000 |

Consider the following costs incurred in a recent period:

|  |Direct materials......................................... |\$33,000 |

|  |Depreciation on factory equipment........... |\$12,000 |

|  |Factory janitor’s salary.............................. |\$23,000 |

|  |Direct labor................................................ |\$28,000 |

|  |Utilities for factory.................................... |\$9,000 |

|  |Selling expenses........................................ |\$16,000 |

|  |Production supervisor’s salary................... |\$34,000 |

What was the total amount of the period costs listed above for the period?

|[pic] |\$78,000 |

|[pic] |\$71,000 |

|[pic] |\$46,000 |

|[pic] |\$37,000 |

| | | |

| |Selling expenses |\$16,000 |

| |Administrative expenses | 21,000 |

| |Total |\$37,000 |

Forbes Company uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. At the beginning of the period, the company estimated manufacturing overhead would be \$18,000 and direct labor-hours would be 15,000. The actual figures were \$19,500 for manufacturing overhead and 16,000 direct labor-hours. The cost records for the period will show:

|[pic] |overapplied overhead of \$300 |

|[pic] |overapplied overhead of \$1,500 |

|[pic] |underapplied overhead of \$1,500 |

|[pic] |underapplied overhead of \$300 |

| | | |

Predetermined overhead rate = \$18,000 ÷ 15,000 direct labor-hours

= \$1.20 per direct labor-hour

|Applied manufacturing overhead (16,000 × \$1.20) | 19,200 |

|Manufacturing overhead underapplied |\$    300 |

Wayne Company's beginning and ending inventories for the month of June were as follows:

|  |  |June 1 |June 30 |

|  |Direct Materials................. |\$67,000 |\$62,000 |

|  |Work in Process................. |\$145,000 |\$171,000 |

|  |Finished Goods.................. |\$85,000 |\$78,000 |

Production data for the month follow:

|  |Direct labor cost incurred................................................ |\$200,000 |

|  |Direct labor-hours............................................................ |25,000 |

|  |Actual manufacturing overhead cost incurred................ |\$132,000 |

|  |Direct materials purchases............................................... |\$165,000 |

Wayne applies manufacturing overhead cost to jobs based on direct labor-hours, and the predetermined rate is \$5.75 per direct labor-hour. The company does not close underapplied or overapplied manufacturing overhead to Cost of Goods Sold until the end of the year. What is the amount of cost of goods manufactured?

|[pic] |\$508,750 |

|[pic] |\$502,000 |

|[pic] |\$585,000 |

|[pic] |\$487,750 |

| | | |

|Schedule of Cost of Goods Manufactured |

| | | |

|Direct materials: | | |

|Direct materials inventory, beginning |\$ 67,000 | |

|Add purchases of raw materials | 165,000 | |

|Total raw materials available |232,000 | |

|Deduct direct materials inventory, ending |   62,000 | |

|Raw materials used in production | |\$170,000 |

|Direct labor | |200,000 |

|Manufacturing overhead applied (\$ 5.75 × 25,000) | | 143,750 |

|Total manufacturing costs | |513,750 |

|Add: Work in process, beginning | | 145,000 |

| | |658,750 |

|Deduct: Work in process, ending | | 171,000 |

|Cost of goods manufactured | |\$487,750 |

Cavalerio Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 700 units. The costs and percentage completion of these units in beginning inventory were:

|  |  |Cost |Percent Complete |

|  |Materials costs................... |\$9,100 |80% |

|  |Conversion costs............... |\$5,400 |25% |

A total of 7,200 units were started and 6,400 units were transferred to the second processing department during the month. The following costs were incurred in the first processing department during the month:

|  |Materials costs................... |\$96,700 |

|  |Conversion costs............... |\$180,700 |

The ending inventory was 80% complete with respect to materials and 70% complete with respect to conversion costs.  The cost per equivalent unit for materials for the month in the first processing department is closest to:

|[pic] |\$12.72 |

|[pic] |\$13.92 |

|[pic] |\$13.39 |

|[pic] |\$12.24 |

| |To solve for ending work in process: | |

|+ |Work in process, beginning |700 |

|+ |Units started into production during the month |7,200 |

|− |Units completed and transferred out during the month |6,400 |

|= |Work in process, ending |1,500 |

|Equivalent units of production | |

| |Materials |

|Transferred to next department |6,400 |

|Ending work in process (1,500 units × 80% complete) |1,200 |

|Equivalent units of production |7,600 |

| | |

|Cost per Equivalent Unit | |

| |Materials |

|Cost of beginning work in process |\$    9,100 |

|Cost added during the period |    96,700 |

|Total cost (a) |\$105,800 |

| | |

|Equivalent units of production (b) |7,600 |

|Cost per equivalent unit, (a) ÷ (b) |\$13.92 |

The following production and average cost data for a month's operations have been supplied by a company that produces a single product.

|  |Production volume........................ |1,000 units |2,000 units |

|  |Direct materials............................. |\$4.00 per unit |\$4.00 per unit |

|  |Direct labor.................................... |\$3.50 per unit |\$3.50 per unit |

|  |Manufacturing overhead............... |\$10.00 per unit |\$6.20 per unit |

The total fixed manufacturing cost and variable manufacturing cost per unit are as follows:

|[pic] |\$3,600; \$7.50 |

|[pic] |\$3,600; \$9.90 |

|[pic] |\$7,600; \$7.50 |

|[pic] |\$7,600; \$9.90 |

| | | |

First, calculate the variable manufacturing cost per unit:

| |Production Volume |Average Cost |Total Manufacturing Overhead Cost |

| |(Units) |per Unit |(units × average cost per unit) |

|High activity level |2,000 |\$6.20 |\$12,400 |

|Low activity level |1,000 |\$10.00 |\$10,000 |

Variable manufacturing overhead cost = Change in cost ÷ Change in activity

= (\$12,400 − \$10,000) ÷ (2,000 – 1,000) = \$2.40

Fixed cost element of manufacturing overhead = Total cost − Variable cost element

= \$12,400 − (\$2.40 × 2,000) = \$7,600

Total variable cost per unit = Direct material + Direct labor + Variable manufacturing overhead = \$4.00 + \$3.50 + \$2.40 = \$9.90

There are no fixed direct materials or direct labor, so the total fixed costs would be equal to the fixed cost portion of manufacturing overhead, or \$7,600.

Escareno Corporation has provided its contribution format income statement for June. The company produces and sells a single product.

|  |Sales (8,400 units)......................... |\$764,400 |

|  |Variable expenses.......................... | 445,200 |

|  |Contribution margin...................... |319,200 |

|  |Fixed expenses.............................. | 250,900 |

|  |Net operating income.................... |\$ 68,300 |

If the company sells 8,200 units, its total contribution margin should be closest to:

|[pic] |\$301,000 |

|[pic] |\$311,600 |

|[pic] |\$319,200 |

|[pic] |\$66,674 |

| | | |

Current contribution margin ÷ Current sales in units = Contribution margin per unit

\$319,200 ÷ 8,400 = \$38 contribution margin per unit

If 8,200 units are sold, the total contribution margin will be 8,200 × \$38, or \$311,600.

Creswell Corporation's fixed monthly expenses are \$29,000 and its contribution margin ratio is 56%. Assuming that the fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a month when sales are \$95,000?

|[pic] |\$12,800 |

|[pic] |\$24,200 |

|[pic] |\$53,200 |

|[pic] |\$66,000 |

| | | |

|Sales |\$95,000 |

|Variable expenses (\$95,000 × 44%) | 41,800 |

|Contribution margin (\$95,000 × 56%) |53,200 |

|Fixed expenses | 29,000 |

|Net operating income |\$24,200 |

Feldpausch Corporation has provided the following data from its activity-based costing system:

|  |Activity Cost Pool |Total Cost |Total Activity |

|  |Assembly..................... |\$1,137,360 |84,000 |machine-hours |

|  |Processing orders......... |\$28,479 |1,100 |orders |

|  |Inspection.................... |\$97,155 |1,270 |inspection-hours |

The company makes 470 units of product W26B a year, requiring a total of 660 machine-hours, 50 orders, and 40 inspection-hours per year. The product's direct materials cost is \$40.30 per unit and its direct labor cost is \$42.22 per unit. The product sells for \$118.00 per unit. According to the activity-based costing system, the product margin for product W26B is:

|[pic] |\$6,444.70 |

|[pic] |\$4,679.20 |

|[pic] |\$3,384.70 |

|[pic] |\$16,675.60 |

| | | |

| | |(a) |(b) |(a) ÷ (b) |

| |Activity Cost Pool |Total Cost |Total Activity |Activity Rate |

| |Assembly |\$1,137,360 |84,000 machine-hours |\$13.54 per |

| | | | |machine-hour |

| |Processing Orders |28,479 |1,100 orders |\$25.89 per order |

| |Inspection |97,155 |1,270 inspection-hours |\$76.50 per inspection-hour |

| | |(a) |(b) |(a) × (b) |

| |Activity Cost Pool |Activity Rate |Total Activity |ABC Cost |

| |Assembly |\$13.54 per MH |660 MHs |\$8,936.40 |

| |Processing Orders |\$25.89 per order |50 orders |\$1,294.50 |

| |Inspection |\$76.50 per IH |40 IHs |\$3,060.00 |

| |Sales | |\$55,460.00 |

| |Costs: | | |

| | Direct materials (470 × \$40.30) |\$18,941.00 | |

| | Direct labor (470 × \$42.22) |19,843.40 | |

| | Assembly |8,936.40 | |

| | Processing |1,294.50 | |

| | Inspection | 3,060.00 | 52,075.30 |

| |Product margin | |\$ 3,384.70 |

Pitkins Company collects 20% of a month's sales in the month of sale, 70% in the month following sale, and 6% in the second month following sale. The remainder is uncollectible. Budgeted sales for the next four months are:

|  |January |February |March |April |

|Budgeted sales....... |\$200,000 |\$300,000 |\$350,000 |\$250,000 |

Cash collections in April are budgeted to be:

|[pic] |\$321,000 |

|[pic] |\$313,000 |

|[pic] |\$320,000 |

|[pic] |\$292,000 |

| | | |

|April sales (\$250,000 × 20%) |\$ 50,000 |

|March sales (\$350,000 × 70%) |245,000 |

|February sales (\$300,000 × 6%) | 18,000 |

|Total |\$313,000 |

Depasquale Corporation is working on its direct labor budget for the next two months. Each unit of output requires 0.41 direct labor-hours. The direct labor rate is \$8.10 per direct labor-hour. The production budget calls for producing 5,000 units in May and 5,400 units in June. If the direct labor work force is fully adjusted to the total direct labor-hours needed each month, what would be the total combined direct labor cost for the two months?

|[pic] |\$16,605.00 |

|[pic] |\$17,933.40 |

|[pic] |\$17,269.20 |

|[pic] |\$34,538.40 |

| | | |

Total direct labor-hours = 0.41 × (5,000 + 5,400) = 4,264

Direct labor cost = 4,264 × \$8.10 = \$34,538.40

Information on the actual sales and inventory purchases of the Law Company for the first quarter follow:

|  |  |Sales |Inventory Purchases |

|  |January.................. |\$120,000 |\$60,000 |

|  |February................ |\$100,000 |\$78,000 |

|  |March.................... |\$130,000 |\$90,000 |

Collections from Law Company's customers are normally 60% in the month of sale, 30% in the month following sale, and 8% in the second month following sale. The balance is uncollectible. Law Company takes full advantage of the 3% discount allowed on purchases paid for by the end of the following month.

The company expects sales in April of \$150,000 and inventory purchases of \$100,000. Selling and administrative expenses for the month of April are expected to be \$38,000, of which \$15,000 is salaries and \$8,000 is depreciation. The remaining selling and administrative expenses are variable with respect to the amount of sales in dollars. Those selling and administrative expenses requiring a cash outlay are paid for during the month incurred. Law Company's cash balance on March 1 was \$43,000, and on April 1 was \$35,000.

The expected cash collections from customers during April would be:

|[pic] |\$150,000 |

|[pic] |\$137,000 |

|[pic] |\$139,000 |

|[pic] |\$117,600 |

| | | |

|April sales (\$150,000 × 60%) |\$ 90,000 |

|March sales (\$130,000 × 30%) |39,000 |

|February sales (\$100,000 × 8%) | 8,000 |

|Expected cash collections |\$137,000 |

Information on the actual sales and inventory purchases of the Law Company for the first quarter follow:

|  |  |Sales |Inventory Purchases |

|  |January.................. |\$120,000 |\$60,000 |

|  |February................ |\$100,000 |\$78,000 |

|  |March.................... |\$130,000 |\$90,000 |

Collections from Law Company's customers are normally 60% in the month of sale, 30% in the month following sale, and 8% in the second month following sale. The balance is uncollectible. Law Company takes full advantage of the 3% discount allowed on purchases paid for by the end of the following month.

The company expects sales in April of \$150,000 and inventory purchases of \$100,000. Selling and administrative expenses for the month of April are expected to be \$38,000, of which \$15,000 is salaries and \$8,000 is depreciation. The remaining selling and administrative expenses are variable with respect to the amount of sales in dollars. Those selling and administrative expenses requiring a cash outlay are paid for during the month incurred. Law Company's cash balance on March 1 was \$43,000, and on April 1 was \$35,000.

The expected cash disbursements during April for inventory purchases would be:

|[pic] |\$100,000 |

|[pic] |\$97,000 |

|[pic] |\$90,000 |

|[pic] |\$87,300 |

Expected cash disbursements for April for inventory purchases = March inventory purchases × (100% − discount percentage for paying by end of month)

= \$90,000 × (100% − 3%) = \$90,000 × 97% = \$87,300

Buckler Company manufactures desks with vinyl tops. The standard material cost for the vinyl used per Model S desk is \$27.00 based on 12 square feet of vinyl at a cost of \$2.25 per square foot. A production run of 1,000 desks in March resulted in usage of 12,600 square feet of vinyl at a cost of \$2.00 per square foot, a total cost of \$25,200. The materials quantity variance resulting from the above production run was:

|[pic] |\$1,200 unfavorable |

|[pic] |\$1,350 unfavorable |

|[pic] |\$1,800 favorable |

|[pic] |\$3,150 favorable |

| | | |

Standard quantity = Standard quantity per unit × Actual output

= 12 × 1,000 = 12,000

Materials quantity variance = Standard price × (Actual quantity − Standard quantity) = \$2.25 × (12,600 − 12,000) = \$1,350 unfavorable

Magno Cereal Corporation uses a standard cost system to collect costs related to the production of its “crunchy pickle” cereal. The pickle (materials) standards for each batch of cereal produced are 1.4 pounds of pickles at a standard cost of \$3.00 per pound. During the month of August, Magno purchased 78,000 pounds of pounds at a total cost of \$253,500. Magno used all of these pickles to produce 60,000 batches of cereal. What is Magno's materials quantity variance for the month of August?

|[pic] |\$1,500 unfavorable |

|[pic] |\$18,000 favorable |

|[pic] |\$19,500 unfavorable |

|[pic] |\$54,000 unfavorable |

| | | |

Standard quantity = Standard quantity per unit × Actual output

= 1.4 × 60,000 = 84,000

Materials quantity variance = Standard price × (Actual quantity − Standard quantity) = \$3 × (78,000 − 84,000) = \$18,000 favorable

Beakins Company produces a single product. The standard cost card for the product follows:

|  |Direct materials (4 yards @ \$5 per yard)................................... |\$20 |

|  |Direct labor (1.5 hours @ \$10 per hour).................................... |\$15 |

|  |Variable manufacturing overhead (1.5 hrs @ \$4 per /hour)....... |\$6 |

During a recent period the company produced 1,200 units of product. Various costs associated with the production of these units are given below:

|  |Direct materials purchased (6,000 yards).............. |\$28,500 |  |

|  |Direct materials used in production...................... |5,000 |yards |

|  |Direct labor cost incurred (2,100 hours)................ |\$17,850 |  |

|  |Variable manufacturing overhead cost incurred... |\$10,080 |  |

The company records all variances at the earliest possible point in time. Variable manufacturing overhead costs are applied to products on the basis of direct labor hours.

The materials price variance for the period is:

|[pic] |\$1,250 F |

|[pic] |\$1,500 F |

|[pic] |\$1,250 U |

|[pic] |\$1,500 U |

| | | |

Materials price variance = (Actual quantity purchased × Actual price) − (Actual quantity purchased × Standard price) = \$28,500 − (6,000 × \$5) = \$1,500 favorable

Beakins Company produces a single product. The standard cost card for the product follows:

|  |Direct materials (4 yards @ \$5 per yard)................................... |\$20 |

|  |Direct labor (1.5 hours @ \$10 per hour).................................... |\$15 |

|  |Variable manufacturing overhead (1.5 hrs @ \$4 per /hour)....... |\$6 |

During a recent period the company produced 1,200 units of product. Various costs associated with the production of these units are given below:

|  |Direct materials purchased (6,000 yards).............. |\$28,500 |  |

|  |Direct materials used in production...................... |5,000 |yards |

|  |Direct labor cost incurred (2,100 hours)................ |\$17,850 |  |

|  |Variable manufacturing overhead cost incurred... |\$10,080 |  |

The company records all variances at the earliest possible point in time. Variable manufacturing overhead costs are applied to products on the basis of direct labor hours.

The materials quantity variance for the period is:

|[pic] |\$950 U |

|[pic] |\$5,000 F |

|[pic] |\$1,000 U |

|[pic] |\$6,000 F |

| | | |

Standard quantity = Standard quantity per unit × Actual output

= 4 × 1,200 = 4,800

Materials quantity variance = Standard price × (Actual quantity − Standard quantity) = \$5 × (5,000 − 4,800) = \$1,000 unfavorable

Beakins Company produces a single product. The standard cost card for the product follows:

|  |Direct materials (4 yards @ \$5 per yard)................................... |\$20 |

|  |Direct labor (1.5 hours @ \$10 per hour).................................... |\$15 |

|  |Variable manufacturing overhead (1.5 hrs @ \$4 per /hour)....... |\$6 |

During a recent period the company produced 1,200 units of product. Various costs associated with the production of these units are given below:

|  |Direct materials purchased (6,000 yards).............. |\$28,500 |  |

|  |Direct materials used in production...................... |5,000 |yards |

|  |Direct labor cost incurred (2,100 hours)................ |\$17,850 |  |

|  |Variable manufacturing overhead cost incurred... |\$10,080 |  |

The company records all variances at the earliest possible point in time. Variable manufacturing overhead costs are applied to products on the basis of direct labor hours.

The labor rate variance for the period is:

|[pic] |\$3,150 U |

|[pic] |\$2,700 F |

|[pic] |\$2,700 U |

|[pic] |\$3,150 F |

| | | |

Labor rate variance = (Actual hours × Actual rate) − (Actual hours × Standard rate)

= \$17,850 − (2,100 × \$10) = \$3,150 favorable

Beakins Company produces a single product. The standard cost card for the product follows:

|  |Direct materials (4 yards @ \$5 per yard)................................... |\$20 |

|  |Direct labor (1.5 hours @ \$10 per hour).................................... |\$15 |

|  |Variable manufacturing overhead (1.5 hrs @ \$4 per /hour)....... |\$6 |

During a recent period the company produced 1,200 units of product. Various costs associated with the production of these units are given below:

|  |Direct materials purchased (6,000 yards).............. |\$28,500 |  |

|  |Direct materials used in production...................... |5,000 |yards |

|  |Direct labor cost incurred (2,100 hours)................ |\$17,850 |  |

|  |Variable manufacturing overhead cost incurred... |\$10,080 |  |

The company records all variances at the earliest possible point in time. Variable manufacturing overhead costs are applied to products on the basis of direct labor hours.

The labor efficiency variance for the period is:

|[pic] |\$3,000 U |

|[pic] |\$2,550 U |

|[pic] |\$2,550 F |

|[pic] |\$3,000 F |

Standard hours = Standard hours per unit × Actual output

= 1.5 × 1,200 = 1,800

Labor efficiency variance = Standard rate × (Actual hours − Standard hours)

= \$10 × (2,100 − 1,800) = \$3,000 unfavorable

Mongelli Family Inn is a bed and breakfast establishment in a converted 100-year-old mansion. The Inn's guests appreciate its gourmet breakfasts and individually decorated rooms. The Inn's overhead budget for the most recent month appears below:

|  |Activity level................................. |90 guests |

|  |  |  |

|  |Variable overhead costs: |  |

|  |Supplies...................................... |\$   234 |

|  |Laundry...................................... |     315 |

|  |Fixed overhead costs: |  |

|  |Utilities....................................... |     220 |

|  |Salaries and wages..................... |  4,290 |

|  |Depreciation............................... |  2,680 |

|  |Total overhead cost....................... |\$7,739 |

The Inn's variable overhead costs are driven by the number of guests.

What would be the total budgeted overhead cost for a month if the activity level is 99 guests? Assume that the activity levels of 90 guests and 99 guests are within the same relevant range

|[pic] |\$7,793.90 |

|[pic] |\$61,541.00 |

|[pic] |\$8,512.90 |

|[pic] |\$7,739.00 |

| | | |

Budgeted number of guests: 90

| | |Cost Formula (per |Activity |

| | |guest) |(in guests): 99 |

| |Overhead Costs | | |

| |Variable overhead costs: | | |

| |Supplies (\$234 ÷ 90 guests) |\$2.60 |\$ 257.40 |

| |Laundry (\$315 ÷ 90 guests) |3.50 |   346.50 |

| |Total variable overhead cost |\$6.10 |   603.90 |

| |Fixed overhead costs: | | |

| |Utilities | |220.00 |

| |Salaries and wages | |4,290.00 |

| |Depreciation | | 2,680.00 |

| |Total fixed overhead cost | | 7,190.00 |

| |Total budgeted overhead cost | |\$7,793.90 |

Chmielewski Medical Clinic measures its activity in terms of patient-visits. Last month, the budgeted level of activity was 1,560 patient-visits and the actual level of activity was 1,530 patient-visits. The clinic's director budgets for variable overhead costs of \$1.10 per patient-visit and fixed overhead costs of \$19,900 per month. The actual variable overhead cost last month was \$1,400 and the actual fixed overhead cost was \$21,720. In the clinic's flexible budget performance report for last month, what would have been the variance for the total overhead cost?

|[pic] |\$33 F |

|[pic] |\$1,504 U |

|[pic] |\$1,537 U |

|[pic] |\$283 F |

| | | |

Budgeted number of patient-visits: 1,560

Actual number of patient-visits: 1,530

| | |Cost Formula (per|Actual Costs |Budget Based on |Variance |

| | |patient-visit) |Incurred for 1,530 |1,530 | |

| | | |patient-visits |patient-visits | |

| |Variable overhead costs |\$1.10 |\$1,400 |\$1,683 |\$    283 F |

| |Fixed overhead costs | |\$21,720 |\$19,900 | 1,820 U |

| | | | | |\$1,537 U |

Gandy Company has 5,000 obsolete desk lamps that are carried in inventory at a manufacturing cost of \$50,000. If the lamps are reworked for \$20,000, they could be sold for \$35,000. Alternatively, the lamps could be sold for \$8,000 for scrap. In a decision model analyzing these alternatives, the sunk cost would be:

|[pic] |\$8,000 |

|[pic] |\$15,000 |

|[pic] |\$20,000 |

|[pic] |\$50,000 |

| | | |

Rice Corporation currently operates two divisions which had operating results last year as follows:

|  |West |Troy |

|  |Division |Division |

|Sales..........................................................|\$600,000 | \$300,000 |

|Variable costs............................................ |  310,000 |   200,000 |

|Contribution margin.................................. |  290,000 |   100,000 |

|Traceable fixed costs................................. |  110,000 |     70,000 |

|Allocated common corporate costs........... |    90,000 |     45,000 |

|Net operating income (loss)....................... |\$  90,000 |(\$ 15,000) |

Since the Troy Division also sustained an operating loss in the prior year, Rice's president is considering the elimination of this division. Troy Division's traceable fixed costs could be avoided if the division were eliminated. The total common corporate costs would be unaffected by the decision. If the Troy Division had been eliminated at the beginning of last year, Rice Corporation's operating income for last year would have been:

|[pic] |\$15,000 higher |

|[pic] |\$30,000 lower |

|[pic] |\$45,000 lower |

|[pic] |\$60,000 higher |

| | | |

Troy Division:

| |Contribution margin |\$100,000 |

| |Less: traceable fixed costs | 70,000 |

| |Segment margin of Troy Division |\$ 30,000 |

Rice Corporation’s operating income would have been \$30,000 less without the segment margin contributed by the Troy Division.

The following information relates to next year's projected operating results of the Children's Division of Grunge Clothing Corporation:

|  |Contribution margin........... |\$200,000 |

|  |Fixed expenses................... |       500,000 |

|  |Net operating loss.............. |(\$300,000) |

If Children's Division is dropped, half of the fixed costs above can be eliminated. What will be the effect on Grunge's profit next year if Children's Division is dropped instead of being kept?

|[pic] |\$50,000 increase |

|[pic] |\$250,000 increase |

|[pic] |\$250,000 decrease |

|[pic] |\$550,000 increase |

| | | |

| | |Keep the Division |Drop the Division |Difference |

| |Contribution margin |\$200,000  |\$           0  |(\$200,000) |

| |Fixed expenses | 500,000  | 250,000  | 250,000  |

| |Net operating income (loss) |(\$300,000) |(\$250,000) |(\$ 50,000) |

Net operating income would increase by \$50,000 if the Children’s Division were dropped. Therefore, the division should be dropped.

Supler Company produces a part used in the manufacture of one of its products. The unit product cost is \$18, computed as follows:                                                                                                                                                                                                                                                                Direct materials………………………………..  \$8

Direct labor…………………………………….    4

Unit product cost……………………………… \$18

An outside supplier has offered to provide the annual requirement of 4,000 of the parts for only \$14 each. It is estimated that 60 percent of the fixed overhead cost above could be eliminated if the parts are purchased from the outside supplier. Based on these data, the per-unit dollar advantage or disadvantage of purchasing from the outside supplier would be:

| | | |

Relevant cost per unit:

| |Direct materials |\$ 8 |

| |Direct labor |4 |

| |Variable manufacturing overhead |1 |

| |Fixed manufacturing overhead (\$5 × 0.60) |    3 |

| |Relevant manufacturing cost |\$16 |

| |Relevant manufacturing cost savings |\$16 |

| |Less: cost from outside supplier | 14 |

| |Net advantage |\$ 2 |

Landor Appliance Company makes and sells electric fans. Each fan regularly sells for \$42. The following cost data per fan is based on a full capacity of 150,000 fans produced each period.

|  |Direct materials............................................................... |\$8 |

|  |Direct labor..................................................................... |\$9 |

| |(70% variable and 30% unavoidable fixed)................ | |

A special order has been received by Landor for a sale of     25,000 fans to an overseas customer. The only selling costs that would be incurred on this order would be \$4 per fan for shipping. Landor is now selling 120,000 fans through regular channels each period. What should Landor use as a minimum selling price per fan in negotiating a price for this special order?

|[pic] |\$28 |

|[pic] |\$27 |

|[pic] |\$31 |

|[pic] |\$24 |

| | | |

|Direct materials |\$ 8 |

|Direct labor |9 |

|Variable manufacturing overhead (\$10 × 0.70) |7 |

|Variable selling cost |    4 |

|Minimum selling price |\$28 |

If the net present value of a project is zero based on a discount rate of 16%, then the internal rate of return is:

|[pic] |equal to 16%. |

|[pic] |less than 16%. |

|[pic] |greater than 16%. |

|[pic] |cannot be determined from this data. |

| | | |

Ignore income taxes in this problem.) Given the following data:

|  |Cost of equipment............. |\$55,750 |

|  |Annual cash inflows.......... |\$10,000 |

|  |Internal rate of return......... |16% |

The life of the equipment must be

|[pic] |it is impossible to determine from the data given |

|[pic] |15 years |

|[pic] |12.5 years |

|[pic] |5.75 years |

| | | |

The internal rate of return factor is 5.575, or \$55,750 ÷ \$10,000. In the table for the Present Value of an Annuity of \$1 in Arrears, the factor of 5.575 can be found in the 16% column in the 15th row; 15 then represents the life of the equipment.

(Ignore income taxes in this problem.) Nevus Tattoo Parlor is considering a capital budgeting project. This project will initially require a \$25,000 investment in equipment and a \$3,000 working capital investment. The useful life of this project is 5 years with an expected salvage value of zero on the equipment. The working capital will be released at the end of the 5 years. The new system is expected to generate net cash inflows of \$9,000 per year in each of the 5 years. Nevus' discount rate is 14%. The net present value of this project is closest to:

|[pic] |\$(3,088) |

|[pic] |\$3,383 |

|[pic] |\$4,454 |

|[pic] |\$5,897 |

| | | |

| |Year(s) |Amount |14% Factor |PV |

|Initial investment |Now |(\$25,000) |1.000 |(\$25,000) |

|Working capital needed |Now |(\$3,000) |1.000 |( 3,000) |

|Annual cost savings |1-5 |\$9,000 |3.433 |30,897 |

|Working capital released |5 |\$3,000 |0.519 | 1,557 |

|Net present value | | | |\$ 4,454 |

(Ignore income taxes in this problem.) Dowlen, Inc., is considering the purchase of a machine that would cost \$150,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of \$23,000. The machine would reduce labor and other costs by \$36,000 per year. Additional working capital of \$6,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 12% on all investment projects. The net present value of the proposed project is closest to:

|[pic] |\$9,657 |

|[pic] |-\$2,004 |

|[pic] |\$6,699 |

|[pic] |\$13,223 |

| | | |

| |Year(s) |Amount |12% Factor |PV |

|Initial investment |Now |(\$150,000) |1.000 |(\$150,000) |

|Working capital needed |Now |(\$6,000) |1.000 |(6,000) |

|Annual cost savings |1-6 |\$36,000 |4.111 |147,996 |

|Working capital released |6 |\$6,000 |0.507 |3,042 |

|Salvage value |6 |\$23,000 |0.507 | 11,661 |

|Net present value | | | |\$ 6,699 |

(Ignore income taxes in this problem.) Golab Roofing is considering the purchase of a crane that would cost \$69,846, would have a useful life of 6 years, and would have no salvage value. The use of the crane would result in labor savings of \$21,000 per year. The internal rate of return on the investment in the crane is closest to:

|[pic] |18% |

|[pic] |20% |

|[pic] |19% |

|[pic] |17% |

| | | |

Factor of the internal rate of return

= Investment required ÷ Net annual cash inflow = \$69,846 ÷ \$21,000 = 3.326

The factor of 3.326 for 6 years represents an internal rate of return of 20%.

(Ignore income taxes in this problem.) Slomkowski Corporation is contemplating purchasing equipment that would increase sales revenues by \$298,000 per year and cash operating expenses by \$143,000 per year. The equipment would cost \$712,000 and have a 8 year life with no salvage value. The annual depreciation would be \$89,000. The simple rate of return on the investment is closest to:

|[pic] |9.3% |

|[pic] |21.8% |

|[pic] |22.1% |

|[pic] |12.5% |

The simple rate of return is computed as follows:

| |Cost of machine, net of salvage value (a) |\$712,000 |

| |Useful life (b) |8 years |

| |Annual depreciation (a) ÷ (b) |\$89,000 |

| | | |

| |Annual incremental revenue (\$298,000 − \$143,000) |\$155,000 |

| |Less annual depreciation |    89,000 |

| |Annual incremental net operating income |\$  66,000 |

Simple rate of return = Annual incremental net operating income ÷ Initial investment = \$66,000 ÷ \$712,000 = 9.3%

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