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Principles of Accounting, Volume 2: Managerial Accounting

Problem Set A

Principles of Accounting, Volume 2: Managerial AccountingProblem Set A
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PA 1.

LO 10.1Artisan Metalworks has a bottleneck in their production that occurs within the engraving department. Jamal Moore, the COO, is considering hiring an extra worker, whose salary will be $55,000 per year, to solve the problem. With this extra worker, the company could produce and sell 3,000 more units per year. Currently, the selling price per unit is $25 and the cost per unit is $7.85. Using the information provided, calculate the annual financial impact of hiring the extra worker.

Direct materials $3.50, Direct Labor $1.10, Variable overhead $0.45, Fixed overhead (primarily depreciation of equipment) $2.80 equals Total $7.85.
PA 2.

LO 10.1Syntech makes digital cameras for drones. Their basic digital camera uses $80 in variable costs and requires $1,500 per month in fixed costs. Syntech sells 100 cameras per month. If they process the camera further to enhance its functionality, it will require an additional $45 per unit of variable costs, plus an increase in fixed costs of $1,000 per month. The current price of the camera is $160. The marketing manager is positive that they can sell more and charge a higher price for the improved version. At what price level would the upgraded camera begin to improve operational earnings?

PA 3.

LO 10.2Marcotti Cupcakes bakes and sells a basic cupcake for $1.25. The cost of producing 600,000 cupcakes in the prior year was:

Revenues $750,000, Direct materials $330,000, Direct labor $66,000, Manufacturing overhead (fixed) $132,000, Manufacturing overhead (variable) $84,000.

At the start of the current year, Marcotti received a special order for 15,000 cupcakes to be sold for $1.10 per cupcake. To complete the order, the company must incur an additional $700 in total fixed costs to lease a special machine that will stamp the cupcakes with the customer’s logo. This order will not affect any of Marcotti’s other operations and it has excess capacity to fulfill the contract. Should the company accept the special order? (Show your work.)

PA 4.

LO 10.2Ken Owens Construction specializes in small additions and repairs. His normal charge is $400/day plus materials. Due to his physical condition, David, an elderly gentleman, needs a downstairs room converted to a bathroom. Ken has produced a bid for $5000 to complete the bathroom. He did not provide David with the details of the bid. However, they are shown here.

Ken’s Bid Detail Dollars: Direct materials $2,200; Direct labor $1,600; Variable overhead $200; Fixed overhead $600; Profit $400 equals $5,000.
  1. The town’s social services has asked Ken if he could reduce his bid to $4000. Should Ken accept the counter offer?
     Current Bid: Direct materials $2,200; Direct labor $1,600; Variable overhead $200; Fixed overhead $600; Profit $400 equals $5,000. New Bid: Direct materials $2,200; Direct labor $1,600; Variable overhead $200; Fixed overhead $?; Profit $? equals $4,000.
  2. How much would his income be reduced?
  3. If the town’s social services guaranteed him another job next month at his normal price, could he accept this job at $4000?
PA 5.

LO 10.3Boston Executive, Inc., produces executive limousines and currently manufactures the mini-bar inset at these costs:

Cost per unit: Variable costs: Direct material $950, Direct labor $650, Variable overhead $300 equals Total variable costs $1,900. Fixed costs: Depreciation of equipment $500, Depreciation of building $200, Supervisor salaries $300, Total fixed costs $1,000. Total cost $2,900.

The company received an offer from Elite Mini-Bars to produce the insets for $2,100 per unit and supply 1,000 mini-bars for the coming year’s estimated production. If the company accepts this offer and shuts down production of this part of the business, production workers and supervisors will be reassigned to other areas. Assume that for the short-term decision-making process demonstrated in this problem, the company’s total labor costs (direct labor and supervisor salaries) will remain the same if the bar inserts are purchased.

The specialized equipment cannot be used and has no market value. However, the space occupied by the mini-bar production can be used by a different production group that will lease it for $55,000 per year. Should the company make or buy the mini-bar insert?

PA 6.

LO 10.3Gent Designs requires three units of part A for every unit of A1 that it produces. Currently, part A is made by Gent, with these per-unit costs in a month when 4,000 units were produced:

Direct materials $4.00, Direct labor $1.50, Manufacturing overhead $1.30, Total cost $6.80.

Variable manufacturing overhead is applied at $1.00 per unit. The other $0.30 of overhead consists of allocated fixed costs. Gent will need 6,000 units of part A for the next year’s production.

Cory Corporation has offered to supply 6,000 units of part A at a price of $7.00 per unit. If Gent accepts the offer, all of the variable costs and $1,200 of the fixed costs will be avoided. Should Gent Designs accept the offer from Cory Corporation?

PA 7.

LO 10.4Trifecta Distributors has decided to discontinue manufacturing its X Plus model. Currently, the company has 4,600 partially completed X Plus models on hand. The government has put a recall on a particular part in the X Plus model, so each base model must now be reworked to accommodate the style of the new part. The company has spent $110 per unit to manufacture these X Plus models to their current state. Reworking each X Plus model will cost $20 for materials and $20 for direct labor. In addition, $7 of variable overhead and $32 of allocated fixed overhead (relating primarily to depreciation of plant and equipment) will be allocated per unit. If Trifecta completes the X Plus models, it can sell them for $160 per unit. On the other hand, another manufacturer is interested in purchasing the partially completed units for $104 each and converting them into Z Plus models. Prepare a differential analysis per unit to determine if Trifecta should complete the X Plus models or sell them in their current state.

PA 8.

LO 10.4Extreme Sports sells logo sports merchandise. The company is contemplating whether or not to continue its custom embroidery service. All of the company’s direct fixed costs can be avoided if a segment is dropped. This information is available for the segments.

Custom Embroidery and Logo Apparel, respectively: Sales $60,000, $250,000 less Variable costs $30,000, $110,000 equals Contribution margin $30,000, $140,000 less direct fixed costs $22,000, $40,000 and Allocated common fixed costs $12,000, $50,000 equals Net income $(4,000), $50,000.
  1. What will be the impact on net income if the embroidery segment is dropped?
  2. Assume that if the embroidery segment is dropped, apparel sales will increase 10%. What is the impact on the contribution margin and net income solely for the apparel?
  3. Identify one cost that is not relevant in this analysis.
PA 9.

LO 10.4Hong Publishing has purchased Lang Publishing. After reviewing titles from both companies, a decision must be made to determine what titles must be dropped. The following information is available to make the decision.

Title X, Title Y, and Title Z, respectively: Sales $100,000, $150,000, $200,000 less Variable cost $50,000, $75,000, $100,000 equals Contribution margin $50,000, $70,000, $100,000 less direct fixed cost $20,000, $30,000, $40,000 and Allocated common fixed cost $10,000, $15,000, $20,000 equals Net income $20,000), $30,000, $40,000.
  1. What is the total income if all titles were produced?
  2. If Title X was dropped, what would be the effect on Net Income?
  3. How much did Title X Contribute to Fixed Costs?
  4. Determine the cost and the amount that will remain even if Title X is dropped?
  5. Which costs and amount will be eliminated if Title X is dropped?
PA 10.

LO 10.5Calcion Industries produces two joint products, Y and Z. Prior to the split-off point, the company incurred costs of $36,000. Product Y weighs 25 pounds and product Z weighs 75 pounds. Product Y sells for $150 per pound and product Z sells for $125 per pound. Based on a physical measure of output, allocate joint costs to products Y and Z.

PA 11.

LO 10.5Quality Clothing, Inc., produces skorts and jumper uniforms for school children. In the process of cutting out the cloth pieces for each product, a certain amount of scrap cloth is produced. Quality has been selling this cloth scrap to Jorge’s Scrap Warehouse for $3.25 per pound. Last year, the company sold 40,000 lb. of scrap, which would be enough to make 10,000 teddy bears that the management of Quality is now interested in producing. Their processes would need some reprogramming, particularly in the cutting and stitching processes, but it would require no additional worker training. However, new packaging would be needed. The total variable cost to produce the teddy bears $3.85. Fixed costs would increase by $95,000 per year for the lease of the packaging equipment and Quality estimates it could produce and sell 10,000 teddy bears per year. Finished teddy bears could be sold for $18.00 each. Should Quality continue to sell the scrap cloth or should Quality process the scrap into teddy bears to sell?

PA 12.

LO 10.6At Gems in the Rough, a jewelry company, the engraving department is a bottleneck. The company is considering hiring an extra worker, whose salary will be $56,000 per year, to ease the problem. Using the extra worker, the company will be able to engrave 8,000 more units per year. The selling price per unit is $16. The cost per unit currently is $11.85 as shown:

Direct material $4.50. Direct labor $2.10. Variable overhead $1.45. Fixed overhead (primarily depreciation of equipment) $3.80. Equals a total of $11.85.

What is the annual financial impact of hiring the extra worker for the bottleneck process?

PA 13.

LO 10.6Sports Specialists makes baseballs and softballs in a three-step process. Unfortunately, the sewing machine process has been identified as a bottleneck. Each softball has a contribution margin of $6.00 and each baseball has a contribution margin of $2.00. The sewing machine can make 10 softballs or 25 baseballs in one hour.

  1. If demand for both products is unlimited and the sewing machine capacity cannot be expanded, which product should be produced?
  2. If demand for each ball is limited to 6,000 balls and there are 800 hours available on the machine, how many of each product should be produced?
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