Current Costs in 2011 Expected Costs in 2012

Caselet No-1

Mobile Tech manufactures mobile modems. It manufactures its own mobile modem circuit boards (MMCB), an important part of the mobile modem. It reports the following cost information about the costs of making MMCBs in 2011and the expected costs in 2012:

Current costs in 2011 Expected costs in 2012

Variable manufacturing costs

Direct material cost per MMCB $180 $170

Direct manufacturing labor cost per MMCB 50 45

Variable manufacturing cost per batch for set-up,

Materials handling and quality control 1600 1500

Fixed manufacturing cost

Fixed manufacturing overhead costs that can be avoided

If MMCBs are made 320000 320000

Fixed manufacturing overhead costs of plant

Depreciation, insurance and administration that

Cannot be avoided even if MMCBs are not made 800000 800000

Mobile Tech manufactured 8000 NNCBs in 2011 in 40 batches of 200 each. In 2012, Mobile Tech anticipates needing 10000 MMCBs. The MMCBs would be produced in 80 batches of 125 each.

Cellparts Ltd has approached Mobile Tech about supplying MMCBs to Mobile Tech in 2012 at $300 per MMCB on whatever delivery schedule Mobile Tech wants.

Required:

Calculate the total expected manufacturing cost per unit of making MMCBs in 2012.
Suppose the capacity currently used to make MMCBs will become idle if Mobile Tech purchase MMBCBs from Cellparts. On the basis of financial considerations alone, should Mobile Tech make MMCBs or buy them form Cellparts? Show your calculations.
Now suppose that if Mobile Tech purchases MMCBs from Cellparts, its best alternative use of the capacity currently used for MMCBs is to make and sell special circuit boards (Cb3s) to Chan Ltd. Mobile Tech estimates the following incremental revenues and costs from CB3s:

Total expected incremental future revenues $2000000

Total expected incremental futures costs $2150000

On the basis of financial considerations alone, should Mobile Tech make MMCBs or buy them from Cellparts? Show your calculations.

Case let No. 2

Shahre Naw Ltd. is working at full production capacity producing 10000 units of a product, Football. Manufacturing cost per unit for Football is as follows:

Direct Materials$ 2

Direct manufacturing labor 3

Manufacturing overhead 5

Total manufacturing cost 10

Manufacturing overhead cost per unit is based on variable cost per unit of $2 and fixed costs of $ 30000 (at full capacity of 10000 units). Marketing cost per unit, all variable is $ 4 and the selling price is $ 20.

A customer, Mazar Sports Ltd. has asked Share Naw Ltd. to produce 2000 units of Volleyballs, a modification of Football. Volleyballs would require the same manufacturing processes as Football. Mazar Sports Ltd has offered to pay Shahre Naw Ltd $ 15 for a unit of Volleyball plus half of the marketing cost per unit.

Required:

What is the opportunity cost of Shahre Naw Ltd of producing the 2000 Volleyballs?

Zabul Sports Ltd has offered to produce 2000 units of Football for Shahre Naw Ltd so that it may accept Mazar Sports Ltd offer. That is, if Share Naw Ltd accepts Zabul Ltd offer, Shahre Naw Ltd would manufacture 8000 units of Football and 2000 units of Volleyballs and purchase 2000 units of Football from Zabul Lt. Zabul Ltd would charge Share Naw Ltd $ 14 per unit to manufacture Footballs. On the basis of financial considerations alone, should Shahre Naw Ltd accept Zabul Ltd’s offer? Show you calculations.

Suppose Shahre Naw Ltd had been working at less than full capacity, producing 8000 units of Football at the time the Mazar Sports Ltd offer was made. Calculate the minimum price Shahre Naw Ltd should accept for Volleyballs under these conditions. (Ignore the previous $15 selling price)

Caselet No. 3

Make versus Buy, Activity-Based Costing, Opportunity Costs.

Afghan Ltd produces bicycles. This year’s expected production is 10000 units. Currently, Afghan Ltd makes the chains for its bicycles. Afghan Ltd’s management accountant reports the following costs for making the 10000 bicycles chains:

Cost per unit:Costs for 10000 units

Direct Materials: 4.000 40000

Direct Manufacturing labour: 2.00 20000

Variable mfg. Overhead (Power and utilities): 1.50 15000

Inspection, set-up, materials handling: 2000

Machine rent: 3000

Allocated fixed costs of plant administration, taxes and insurance: 30000

Total costs: 110000

Afghan Ltd has received an offer from an outside vendor to supply any number of chains Afghan Ltd requires at 8.20 per chain. The following additional information is available:

Inspection, set-up and materials-handling costs vary with the number of batches in which the chains are produced. Afghan Ltd produces chains in batch sized of 1000 units. Afghan Ltd will produce the 10000 units in 10 batches.
Afghan Ltd rents the machine used to make the chains. If Afghan Ltd buys all of its chains from the outside vendor, it does not need to pay rent on this machine.

Required

Assume that if Afghan Ltd purchases the chains from the outside vendor the facility where the chains are currently made will remain idle,. On the basis of financial considerations alone, should Afghan Ltd accept the outside vendor’s offer tat the anticipated production (and sales) volume of 10000 units? Show your calculations.
For this question, assume that if the chains are purchase outside, the facilities where the chains are currently made will b e used to upgrade the bicycles by adding mud flaps and reflectors. As a consequence, the selling price of bicycles will be raised by 20. The variable cost per unit of the upgrade would be 18, and additional tooling cost of 16000 would be incurred. On the basis of financial consideration, alone, should Afghan Ltd make or buy the chains, assuming that 10000 units are produced (and sold)? Show your calculations.

The sales manager at Afghan Ltd is concerned that the estimate of 10000 units may be high and believes that only 6200 units will be sold. Production will be cut back, freeing up work space. This space can be used to add the mud flaps and reflectors whether Afghan Ltd buys the chains or makes them in-house. At this lower output; Afghan Ltd will produce the chains in 8 batches of 775 units each. On the basis of financial considerations alone, should Afghan td purchase the chains form the outside vendor? Show your calculations.

Case let No. 4

Department no.2 of Kabul Corporation has reported the following production data for January 2014.

Transferred in from Department 155000 litters

Transferred out to Department 339500 litters

Units in Process at end of December (with 1/3 labor and FOH)10500 litters

All materials were put into process in Department 1.

The Cost data are as followed:

Unit cost for units transferred in from Department 1 1.80

Labor cost in Department 227520

Applied factory overhead15480

Required: Cost of Production Report for Department 2 for January 2014.

Case let No. 5

B & M Ltd Company uses a process cost system. The costs of department 2 for the month were as

follows:

Cost from the preceding dept.20000

Cost added by the department:2

Materials21816

Labour07776

Factory overhead04104

33696

The following information were obtained from the department’s quantity schedule:

Units received5000

Units transferred out4000

Units in process1000

In the in process units only 320 units are completed as for as material, labour and factory overhead is concerned.

Required:Prepare the process cost sheet of department 2.

Case let No. 6

The controller of Best Corporation has predicted the following costs at various levels of Juice output.

Juice Output (0.75-Liter Bottles)

10000 Bottles 15000 Bottles20000 Bottles

Variable production costs……$ 35000 $52500 $ 70000

Fixed production costs……… 100000 100000 100000

Variable selling and adm. costs…2000 3000 4000

Fixed selling and adm. costs… .40000 40000 40000

Total………………………….177000 195500 214000

The company’s marketing manager has predicted the following prices for the firm’s fine juices at various levels of sales.

Juice sales

10000 Bottles15000 Bottles 20000 Bottles

Sales price per 0.75-liter bottle………….$ 18 $ 15 $12

Required:

Calculate the unit costs of juice production and sales at each level of output. At what level of output is the unit cost minimized?
Calculate the company’s profit at each level of production. Assume that the company will sell all of its output. At what production level is profit maximized?
Which of the three output levels is best for the company?
Why does the unit cost of juice decrease as the output level increases? Why might sales price per bottle decline as sales volume increases?

Caselet No-7

Mr. Rahman is a successful Afghanistan’s orchard man who has formed his own company to produce and package applesauce. Apples can be stored for several months in cold storage, so applesauce production is relatively uniform throughout the year. The recently hired controller for the firm is about to apply the high-low method in estimating the company’s energy cost behaviour. The following costs were incurred during the past 12 moths:

Month Pints of Applesauce Produced Energy Cost ($)

January3500023400

February2100022100

March2200022000

April2400022450

May3000022900

June3200023350

July4000028000

August3000022800

September3000023000

October2800022700

November4100024100

December3900024950

Required:

Use the high-low method to estimate the company’s energy cost behavior and express it in equation form.

Predict the energy cost for a month in which 26000 pints of applesauce are produced.

Case let-8

Maiwand Travels & Tours has incurred the following bus maintenance costs during the recent tourist season.

Month Miles Travelled Cost

By Tour Buses

November 850011400 Afs.

December1060011600

January1270011700

February1500012000

March2000012500

April800011000

Required:

Use the high-low method to estimate the variable cost per tour mile travelled and the fixed cost per month.
Develop a formula to express the cost behavior exhibited by the company’s maintenance cost.
Predict the level of maintenance cost that would be incurred during a month when 22000 tour miles and driven.
Build a spreadsheet: Construct an Excel spreadsheet to solve all the preceding requirements. Show how the solution will change if the following information changes: in March there were 21000 miles travelled and the cost was 12430 Afs.

Case let No. 9

Disk City, Inc. is a retailer for digital video disks. The projected net income for the current year is 200000 based on a sales volume of 200000 video disks. Disk City has been selling the disks for 16 each. The variable costs consist of the 10 unit purchase price of the disks and a handling cost of 2 per disk. Disk City’s annual fixed costs are 600000.

Management is planning for the coming year, when it expects that the unit purchase price of the video disks will increase 30 percent.

Required:

Calculate Disk city’s break-even point for the current year in number of video disks.
What will be the company’s net income for the current year if there is a 10 percent increase in projected unit sales volume?
What volume of sales must Disk City achieve in the coming year to maintain the same net income as projected for the current year if the unit selling price remains at 16?
In order to cover a 30 percent increase in the disk’s purchase price for the coming year and still maintain the current contribution margin ratio, what selling price per disk must Disk City establish for the coming year?
Build a spreadsheet: Construct an Excel spreadsheet to solve requirements 1, 2, 3, above. Show how the solution will change if the following information changes: the selling price is 17 and the annual fixed costs are 640000?

Caselet No-10

CPC Company produced and sold 60000 backpacks ruing the year just ended at an average price of 20 per unit. Variable manufacturing costs were 8 per unit and variable marketing cost were 4 per unit sold. Fixed costs amounted to 180000 for manufacturing and 72000 for marketing. There was no year end work in process inventory.

Required:

Compute the CPC Company’s break even point in sales dollars for the year.
Compute the number of sales units required to earn a net income of 180000 during the year.
The Company’s variable manufacturing costs are expected to increase by 10 percent in the coming year. Compute the firm’s break even point in sales dollars for the coming year.
If the company’s variable manufacturing cost do increase by 10 percent, compute the selling price that would yield the same contribution margin ratio in the coming year.

Caselet No-11

Silver Screen, Inc. owns and operates a nationwide chain of movie theatres. The 500 properties in the company vary from low-volume, small-town, single-screen theatres to high-volume, urban multi-screen theatres. The firm’s management is considering installing popcorn machines, which would allow the theatres to sell freshly popped corn rather than pre-popped corn. This new feature would be advertised to increase patronage at the company’s theatres. The fresh popcorn will be sold for 1.75 per tub. The annual rental costs and the operating costs vary with the size of the popcorn machines. The machine capacities and costs are shown below:

Popper Model

Economy RegularSuper

Annual capacity…. 45000 tubs90000 tubs 140000 tubs

Costs:

Annual machine rental 80001100020000

Popcorn cost per tub .13 .13 .13

Other cost per tub 1.22 1.14 1.05

Cost of each tub .08 .08 .08

Required:

Calculate each theatre’s break even sales volume (measured in tubs of popcorn) for each model of popcorn popper.

Calculate the volume at which he Economy Popper and the Regular Popper earn the same profit or loss in each movie theatre.

Case let No-12

Jupiter Game Company sold 25000 games @ $ 25 each. Total costs amounted to $ 525000, of which 150000 were fixed cost.

In an attempt to improve its product, the company is considering replacing a component part that has a cost of $ 2.50 with a new and better part costing $ 4.50 per unit in the coming year. A new machine also would be needed to increase plant capacity. The machine would cost $ 18000 with a useful life of six years and no salvage value. The company uses straight line depreciation on all plant assets.

Required:

What was Jupiter’s break even point in number of units?
How many units of product would the company have had to sell to earn $140000?
If management holds the sales price constant and makes the suggested changes, how many units of product must be sold in the coming year to break even?
If the firm holds the sales price constant and makes the suggested changes how may units of product will company have to sell to make the same net income as last year?
If Jupiter wishes to maintain the same contribution margin ratio, what selling price per unit of product must it charge next year to cover the increase direct material cost?

Caselet No-13

Condensed monthly income data for Watan Book Store are presented in the following table for May-2014.

Mall Store Downtown Store Total

Sales 80000 120000 200000

Less: Variable expenses 32000 84000 116000

Contribution Margin 48000 36000 84000

Less: Fixed Costs 20000 40000 60000

Operating income 28000 (4000) 24000

Additional Information:

Management estimates that closing the downtown store would result in a 10 percent decrease in mall store sales, while closing the mall store would not affect downtowns store sales.
One-fourth of each store’s fixed expenses would continuethrough June 30, 2014, if either store were closed.
The operating results for May 2014 are representative of all months.

Required:

Calculate the increase or decrease in the company’s monthly operating income during 2014 if the downtown store is closed.
The management of the company is considering a promotional campaign at the downtown store that would not affect the mall store. Annual promotional expenses at the downtown store would be increased by 60000 in order to increase downtown store sales by 10 percent. What would be the effect of this promotional campaign on the company’s monthly operating income during 2014?
One-half of the downtown store’s dollar sales are from items sold at their variable cost to attract customers to the store. The management is considering the deletion of these items, a move that would reduce the downtown store’s direct fixed expenses by 15 percent and result in the loss of 20 percent of the remaining downtown stores’ sales volume. This change would not affect the mall store. What would be the effect on Watan’s monthly operating income if the items sold at their variable cost are eliminated?
Construct an excel spreadsheet to solve all of the preceding requirements. Show how the solution will change if the following information changes: the downtown store‘s sales amounted to 126000 and its variable expenses were 86000.

Caselet No-14

Empire Chemical Company produces three products using three different continuous processes. The products are Alpha, Beta and Delta. Projected sales in gallons for the three products for the year 2013 & 2014 are as follows:

20132014

Alpha 6000065000

Beta4000035000

Delta2500030000

Inventories are planned for each product so that the projected finished goods inventory at the beginning of each year is equal to 8 percent of that year’s projected sales.
Because of the continuous nature of Empire’s processes, work in process inventory for each of the products remains constant throughout the year.
The raw material requirements of the three products are shown in the following chart.

Raw MaterialUnitsUnit PriceAlpha Beta Delta

Apounds8.000.2 0.4 -

Bpounds6.000.4 - 0.5

Cgallons5.001.0 0.7 0.5

Dgallons10.00 - 0.3 0.5

Raw material inventories are planned so that each raw material’s projected inventory at the beginning of a year is equal to 10 percent of the previous year’s usage of that raw material.

The conversion requirements in hours per gallon for the three products are Alpha: 0.07 hour, Beta 0.10 hour and Delta 0.16 hour. The conversion cost of 20$ per hour is considered 100 percent variable.

Required:

Determine Empire Chemical Company’s production budget (in gallons) for the three products for 2013.
Determine the conversion cost budget for 2013.
Assuming the 2012 usage of Raw Material ‘C’ is 100000 gallons; determine the company’s raw material purchases budget (in dollars) for C in 2013.

Caselet No-15