|1. (15 points) Circle the correct answer.
1A. (5 points) Total production costs in prior periods were as follows:
Production in units per month
Cost x $23,700 $52,680 $86,490 $178,260
The cost driver is the number of units produced. The company has no step costs. What is the average cost per unit at a production level of 8,000 units for Cost x?
a. $ 5.98
b. $ 5.85
c. $ 7.90
d. $ 4.83
e. none of the above
1B. (5 points) The following information is available for November:
Total actual fixed manufacturing overhead $180,000
Total actual fixed selling and administration costs $200,000
Total actual variable manufacturing costs $120,000
Total actual variable selling and administration costs $120,000
Actual units produced 30,000 units
Budgeted production 30,000 units
Units sold 25,000 units
Selling price $40 per unit
What is the accounting breakeven sales in units using actual direct costing (where accounting breakeven refers to the sales volume that yields reported accounting profits of zero)?
a. 5,625 units
b. 5,769 units
c. 11,875 units
d. 12,180 units
e. None of the above
1C. (5 points) Action Products sells Product A at a selling price of $21 per unit. Action’s cost per unit based on full capacity of 200,000 units is as follows:
Direct materials $4
Direct labor $5
Direct material and direct labor costs are all variable. Total overhead costs include $800,000 in fixed overhead with the remainder being variable.
A special order offering to buy 20,000 units was received from an overseas distributor. The only marketing costs that would be incurred on this order would be $3 per unit for shipping. Action has sufficient existing capacity to manufacture the additional units. In negotiating a price for the special order, Action should consider that the minimum selling price per unit needed to maximize short-term profits to be:
e. $ 9
2. (25 points)
Larsen Corporation’s reported R&D expense, reported net income before and after R&D expense, and reported net operating assets for the years 2005 through 20010 are as follows (all figures are in $ millions). All the figures reported in the table below are per GAAP.
Year Net Income Before R&D Expense R&D Expense Net Income After R&D Expense Net Operating Assets at the End of the Year
2005 280 120 160 1,020
2006 300 90 210 1,040
2007 330 110 220 1,050
2008 300 85 215 1,060
2009 270 75 195 1,080
2010 275 80 195 1,100
Larsen currently uses Residual Income to measure performance but is considering implementing EVA in the year 2010 for the first time. Larsen has decided that it only needs to adjust for R&D expenditures to calculate EVA. Assume that the R&D expenditures (shown above) were made at the beginning of the respective years and that R&D has a useful life of 3 years. Larsen’s cost of capital is 10% per year. Assume that the Residual Income and EVA capital charges are based on the invested capital at the end of the year. Assume that Larsen does not have any liabilities (i.e., all assets are financed with equity). Ignore the effect of taxes.
Required: Calculate Larsen’s Residual Income for 2010. (10 Points)
Required: Calculate Larsen’s EVA for 2010. (15 Points)
3. (25 points)
The following data for the telephone company pertain to the actual production of 450 rolls of telephone wire during June. Unfortunately, many costing records were lost in a wind storm. Only the following information is available:
Direct materials (All material purchased was used)
Standard cost per roll: ? pounds at $4.00 per pound
Total actual cost: ? pounds costing $9,600
Flexible budget: $9,000
Direct materials price variance: ?
Direct materials efficiency variance: $80 unfavorable
Standard cost per roll: 3 hours per roll at $8.00 per hour
Actual cost per hour: $8.25
Total actual cost: ?
Direct labor price variance: ?
Direct labor efficiency variance: $400 unfavorable
Variable overhead (allocated on the basis of direct material pounds)
Total actual cost: $45,400
Master or static budget variance: $5,400 unfavorable
Standard variable overhead rate: $20 per direct material pound
3a) Compute the standard direct material cost per roll. (5 Points)
3b) Compute the total actual pounds of direct material used during June. (5 Points)
3c) Compute the direct materials price variance. Label your answer as favorable or unfavorable. (5 Points)
3d) Compute the total actual direct labor costs during June. (5 Points)
3e) Compute the expected output (or budgeted number of rolls produced) during June. (5 Points)
4. (25 points)
Go Faster Products is bringing out a new electronic device for speeding up computer processing. The device requires an electric switch not used by the current line of products. The purchasing manager has gotten a bid of $30 per switch from Zippy Electronics for any number of switches that the firm would need.
Go Faster Products’ production manager believes the firm could make the switch internally. However, additional space and machinery would be required if the firm were to make the switches. The firm currently leases, for $28,000 per year, space that could be used to make the switches. Unfortunately, the space is now being used to store vital materials, and thus the firm would have to lease additional space in an adjacent building to store the materials. That space, which is suitable for storage but not for making the switches, could be rented for $42,000 per year. The equipment needed to produce the switches could be rented for $35,000 per year.
In addition to the space and equipment costs discussed above, the treasurer of the firm has also determined that the following unit costs will be incurred to produce the expected demand of 14,000 units per year:
Direct Labor 10.00
Other Overhead 7.00
The treasurer has also determined that Other Overhead costs will be: $86,000 at a volume level of 10,000 units, $101,000 at a volume level of 15,000 units, and $116,000 at a volume level of 20,000 units. The company has no step costs.
All fixed costs in the Other Overhead category represent currently incurred fixed costs that would be allocated to production of the switches.
4a) Go Faster Products will require 14,000 switches this year. Should Go Faster Products buy these switches from Zippy or make them internally? (show your computations) (12 points)
4b) Regardless of your analysis in part (a), assume that Go Faster Products has decided to make the switches internally. One-year contracts have been signed for the additional space and for the equipment, and these contracts cannot be canceled. Assume that Zippy Electronics now comes back with a counter offer for providing the switches. What is the highest price that Zippy Electronics can charge and still induce Go Faster Products to buy the switches rather than produce them internally? (13 points)
5. (25 points)
A firm has two divisions: an UP division and a DOWN division that operate with autonomy. The UP division manufactures two different products, one of which is transferred to the DOWN division within the same company, and the other product is sold externally. The external market price for the latter product is $120 per unit. The transfer price for the internally transferred product is based on its full cost in the UP division plus a mark-up of 20% over its full cost.
The current total indirect manufacturing costs in the UP division are $120,000, consisting of $40,000 variable overhead and $80,000 fixed overhead. The firm allocates all overhead costs to the products based on the