Solution - Acct 2220 Zeigler: Group Quiz #2 (Chp 6, 7) – Spring2015 (30 pts)
____1.For decision-making purposes, relevant costs are costs that:
a. were incurred in the past and cannot be avoided.
b. would be incurred in the future and differ among the alternatives.
c. do not differ between alternatives, but would be incurred in the future.
d.will be the same regardless of the decision ultimately made.
____2. Buchheim & Hoops, Inc. produces three products in a single facility. It is considering eliminating
one of theseproducts becauseof reported losses. Which of the following costs is least likely
relevant in makingthisdecision related to the product in question?
a.raw material costs (avoidable by eliminating the product = relevant)
b.packaging costs (avoidable by eliminating the product = relevant)
c.set-up costs (avoidable by eliminating the product = relevant)
d.facility-wide depreciation costs (Irrelevant as cost continues regardless, i.e. “Sunk”)
____ 3. Which of the following items represents“qualitative” information?
a. The cost of a new machine for operations.
b. Depreciation expense of an existing machine.
c. The precision tolerance ratings of two machines used in production.
d. The impact on employee morale when automating a portion of the production process.
____ 4. Vorst & Grozdanovski, Inc. plans to add a new item to its line of consumer product offerings. Twopossible products are under consideration. Each unit of Product X costs $14 to produce and has acontribution margin of $5, while each unit of Product Y costs twice as much and has a
contribution margin of $7. Whatis the “differential revenue” for this decision?
a. $ 8
b. $14
c. $16 Product Xsales price is $14+5CM=$19. Prod Ysales price is (2*$14cost)+7CM = $35
d. $18
e.$31
____ 5.Scacchi & Ross, Inc. operates a store that has four departments including atutoring department
that providesbeneficial servicesto discriminating students. If the tutoring department is closed,
the store manager will not be affected. If theentire store is closed, this manager will be laid-off.
Which of the following is the primary lesson to be learned from this example?
a.Certain sunk costs cannot be avoided.
b. Opportunity costs are always present.
c.The relevance of costs is context sensitive.
d.Qualitative information must beprecise andaccurate in order to be relevant.
____ 6. The cost that is avoided when a company eliminates a single item of a product or service is a:
a. batch-level cost.b. facility-level cost.c. product-level cost.d. unit-level cost.
____ 7. Select the incorrect statement concerning opportunity costs.
a. Opportunity costs are cumulative.
b. Opportunity costs are relevant costs.
c. Opportunity costs are future oriented.
d. Opportunity costs are not recorded in the accounting records.
____ 8. A major factor in evaluating a “Special Order” decision is:
a. the expected contribution margin for the order.
b. the possible effects on sales at regular prices to regular customers.
- the availability of capacity to produce the additional units.
- all of the above are major factors.
9. Falcon Company makes and sells a large single, fancy trophy often used to recognize academic excellence. Falcon has been approached by an outside supplier who has expressed interest in producing, packaging and shipping these trophies for Falcon. If Falcon accepts, the company would continue to sell the trophies using its own unique logo, advertising program and sales force/staff, but all production-related activities would be discontinued and all production-related buildings and equipment would be sold. 4 Points total.
9a. (3pts) Up to two grid “misses” acceptable for full credit:
Identify each cost/item below as to its relevancy to this outsourcing (i.e. Make vs. Buy) decision and indicate whether the cost is fixed or variable relative to the number of trophies currently manufactured and sold. Finally, which of the four cost hierarchy classifications would apply to each cost?
Outsourcing Decisionfor The Falcon Company: / Is the Cost/Item
Relevant to this
Decision?
(Yes or No) / Cost
Behavior?
(Fixed or Variable) / Cost
Hierarchy?
(Which of Four)
Cost of ESPN TV Commercials / NO / FIXED / * PRODUCT or
FACILITY-LEVEL
Labor Costs ($5 per unit) / YES / VAR / UNIT-LEVEL
Setup Costs: Specific engraving
of labels for each production run / YES / VARIABLE / BATCH-LEVEL
Shipping & Handling costs
(currently $0.50 per unit made) / YES / VAR / UNIT-LEVEL
Utility costs forthe mfg plant
(currently $0.40 per unit made) / YES / VAR / UNIT-LEVEL
Manufacturing plant manager’s salary / YES / FIXED / * PRODUCT or
FACILITY-LEVEL
Material Costs
($6 per unitproduced) / YES / VAR / UNIT-LEVEL
Sales Commissions for Falcon Sales force / NO / VARIABLE / UNIT-LEVEL
Depreciation on Manufacturing equipment / NO (Sunk) / FIXED / * PRODUCT or
FACILITY-LEVEL
Current fair market value of Manufacturing equipment / YES / XXX / XXX
Packaging Cost (currently $2 per
unitproduced) / Yes, if different.
No, if $2 remains. / VAR / UNIT-LEVEL
Hourly Wages of plantsecurity
guards (no prod = not needed) / YES / VAR / * PRODUCT or
FACILITY-LEVEL
* NOTE: Because Falcon only produces one product, many costs could be considered either Product or Facility level (i.e. both accepted here).
9b. (1 pt)Assuming Falcon is interested on a quantitative basis, list and discusstwo specific qualitativeconsiderations that management should address prior to finalizing their decision to outsource production.
- Potential supplier cost increases
- Supplier reputation, reliability and quality issues
- Supplier timeliness and shipping performance
- Falcon’s loss of control over production capabilities
- Falcon’s reduction of workforce and morale issues
- Falcon’s future plans for product offerings
- Other?
10)Clock Builder, Inc. makes grandfather clock kits that it sells to hobbyists who assemble and finish the clocks. The costs of a clock kit are: $300 for unit-level materials, $200 for unit-level labor, and $275 for an allocation of facility-level overhead. The normal selling price is $995. The Clock Builder has received a special order offer for 800 clock kits at a price of $700 each. The company has the capacity to make 4,000 of the kits, and its current volume is 2,900 kits. Where applicable, assume a 40% income tax rate.
(4 pts total)
a) Should Clock Builder accept thisSpecial Orderon a quantitative basis? Show your work for credit.
The special order contributes $160,000 to income; based on this information, it should be accepted.
b) Quantitatively, what would be the minimum selling price required (i.e. to cover all relevant costs associated with this order) for each clock to justify accepting this special order of 800 clocks?
Unit level materials: $300
Unit level labor:$200
Minimum (floor) selling price: $500 (i.e. relevant/incremental cost of one kit)
c) Considering relevant information, and use of the equation method, what per unit price would be required to earn a total after-tax profit of $60,000 on this special order of 800 clocks?
800sp – (500VC * 800) = 60,000 / (1 - .40)
800sp – 400,000 = 100,000
800sp = 500,000
SP = $625 per clock (minimum price for each)
See CM Template PROOF posted
d) IF the company is currently operating at full capacity (i.e. making and selling 4,000 clocks), what would be the minimum selling price required to fulfill this special order in order to maintain the current level of profitability? Discuss your answer. Note: No calculations are needed to answer this question.
$995 per clock would be the minimum selling price to maintain current profitability. Why would we quantitatively want to sell for anything less if we are operating at full capacity?
_____ 11. (3 pts) Miceli & MielcarekIndustries, Inc. currently outsources an electrical switch that is a component in one of its gaming products. The switches cost $15 each. During a planning meeting, the company is considering making the switches internally at the following projected annual production costs:
Management expects an annual need for 13,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $2,000per month. If the company decides to make the switch, overall relevant costs will be (you must show all of your work for credit):
A) $20,500 less than if the switches are purchased. Thus, make the switch internally.
B) $500 less than if the switches are purchased. Thus, make the switch internally.
C) $19,500 more than if the switches are purchased. Thus, continue to buy the switch externally.
D) $39,500 more than if the switches are purchased. Thus, continue to buy the switch externally.
E) $59,500 more than if the switches are purchased. Thus, continue to buy the switch externally.
- Relevant (avoidable) Cost to Buy = 13,000 units * $15 = $195,000
- Relevant (avoidable) Cost to Make: $((3+2+1)*13,000)+(25,000*3)+37,500+(2,000/mo*12OC)=$214,000; simplifying: $78,000 + 75,000 total setup costs + 37,500 salaries + 24,000 Opp Cost = $214,500.
Thus, the difference between the alternatives is $19,000 in favor of continuing to buy.
Unitized, this equates to $16.50 per switch (i.e. $214,500 / 13,000 units = about $1.50 more to make).
Note #1: The allocated facility-level costs are irrelevant as they occur regardless of the decision (i.e. there is no difference between the alternatives).
Note #2: You *could* treat the $24,000 (foregone rental income) opportunity cost as a reduction of the purchase price of the switches (i.e. $195,000-24,000=$171,000), but the $19,500 difference in favor of buying the switch would remain the same (new cost to make would be $190,500…i.e. 214,500-24,000).
Note #3: Finally, this quantitative analysis could be “overridden” by mgmt due to some qualitative rationale for continuing to let someone else take the responsibility for providing the switch.
12. Reichley & Hudson Valve Company produces a mechanical valve used in water systems. Three years ago the company introduced an electronic version of the valve. Sales of the mechanical model have steadily declined, and the company will report a loss on the product this year as follows:
If production of the mechanical valve is discontinued, product-level costs will be eliminated, but facility level and corporate costs would not be affected.
Required (3 pts total):
1) Prepare a quantitative analysis that indicates whether the valve should be discontinued. Clearly indicate your recommendation to keep, or not to keep, the product line on a quantitative basis (2 pt).
The relevant revenues and costs are as follows:
2) Exclusive of your quantitative analysis above, list twoqualitative factors that should be considered in this decision (1 pt).
Qualitative factors include
1) The possibility that employees will be disrupted (i.e., moved or discharged) and rumors about the company's financial condition may surface.
2) If the company discontinued production of this valve, sales of other products might decrease.
3) Other potential products that could be produced instead of this valve.
4) Other?
Chapter 7 material:
_____ 13. Kato & Diehl,Inc. recently heard about the great benefits of budgeting and the management team is ready to formalize the process within the company. The starting pointin preparing a Master Budget should be:
a. the Sales Forecast. It all starts with a prediction of Customer Demand (i.e. Sales Forecast)
b. the Cash Budget.
c. the General and Administrative Budget.
d. the Purchases Budget.
_____ 14. With regards to financial statements, “Pro Forma” means:
a. budgeted.
b. prepared in advance.
c. the financial condition or position that can be expected if planning assumptions prove correct.
d. all of the above.
_____ 15. Which of the following will occur if X Co.'s May sales are lower than its budgeted sales for that month?
a. X's actual inventory at the end of May will be higher than originally budgeted.
b. X’s actual Cost of Goods Sold (COGS) would be higher in May than originally budgeted.
c. X's actual June purchases will need to be higher than originally budgeted.
d. All of the above could occur.
Use the following for Question #16 only:
Sperry & Cole, Inc. expects to begin operating on January 1. The company's Master Budget contained the following Operating Expense (i.e. S,G&A) Budget:
_____ 16. Sales commissions are paid in cash in the month following the month in which the expense is recognized. All other expense items requiring cash payment are paid in the month in which they are recognized. The amount of cash to be paid for operating (S,G&A) expenses during the month of January is:
a. $25,900 (20000+1400+3600+900)
b. $26,800
c. $38,800
d. None of the above
_____ 17.Rivera & Willis, Inc. budgeted for sales of 25,000 units for February and 30,000 for March. The Company always plans for ending monthly inventory equal to one-half of the following month's sales needs. Inventory on February 1st was as desired. Budgeted purchases for February should be:
a.11,000 units.
b.26,000 units.
c.27,500 units. Needs: 25,000 + 15,000 – (what we have of 12,500 Beg Bal)= 27,500
d.32,500 units.
e. None of the above.
Note: For questions 18-20, all computational work must be shown.
_____ 18.Nines & Schwieterman Company projected sales to be $260,000 in June, $270,000 in July and $300,000 in August. The company expects to collect 20% of a month's sales in the month of sale, 60% in the month following the sale, and 18% in the second month following the sale. The remaining amounts are expected to be uncollectible. Cash collections in August would be:
a.$60,000.
b $254,600.
c.$266,200.
d.$277,000.
e. None of the above. The correct answer is: ______
(June 260*.18 + July 270*.60 + August 300*.20 = $268,800)
_____ 19. Dombrowski & Maclennan, Inc. has projected sales to be $260,000 in June, $270,000 in July and $300,000 in August. The company expects to collect 30% of a month's sales in the month of sale, 60% in the month following the sale, and 10% in the second month following the sale. The budgeted Accounts Receivable balance on August 31st at close of business would be:
a.$96,000.
b.$210,000.
c.$237,000. (June, $0 + July, 270*.1 + Aug, 300*.7)
d.$264,000.
e. $300,000
_____ 20.Zeigler,Inc. is in the process of preparing a Purchases Budget for the upcoming April-Junequarter. The company has forecasted sales revenue as follows:
March / $72,000April / $93,000
May / $102,000
June / $123,000
Cost of goods sold is expected to be 60% of sales. The company would like to have ending inventory each month equal to 10% of the following month's predicted cost of sales. Given these requirements, the total amount of purchases required for Aprilwould be:
a. $ 5,580
b. $ 9,000
c. $ 55,800
d. $ 56,340
e. $ 61,920
What do we “Need”:
April Sales $93,000 * .60 COGS = $55,800
Plus, Desired End Inventory = 102,000*.60*.10 = $6,120
Total Needs = $61,920
LESS: What do we “Have”: Beg April Inventory: $93,000*.60*.10 on-hand = $5,580
= as such, April Purchases of $56,340is required to meet plan.
Good Examination #2 review material – see me or our GA team with your questions.
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