Practice Problems

Question 1: Cost-Volume-Profit Cost-Volume-Profit Analysis

Marbles Corporation has a maximum capacity of 200,000 units per year. Variable manufacturing costs (with respect to units manufactured) are $11.50 per unit. unit. Fixed manufacturing overhead is $875,000 per year. Variable marketing, distribution, customer customer service and administrative costs (with respect to units sold) are $1.90 per unit, and fixed marketing, distribution, distribution, customer service and administrative administrative costs are $115,000 per year. The current selling selling price is $21 per unit. Marbles has no beginning or ending ending inventory. The company’s tax rate is 32%.

How many units must be sold to earn a target operating income of $360,000 per year?

6 points for this part of the question Many ways to present this information – I’ll stick with the formula we ultimately ended up with in the slides: FC + Target operating income  ___________  _____ ____________ ___________ ________ ___

=

875m + 115m + 360m ____________ ______ ___________ ______ _

CM per unit

21 – 11.5 – 1.90

= 177,631.58 units  Also, it was wa s kind of o f tricky to throw t hrow in non-manu n on-manufacturing facturing costs. However, if you stepped ste pped back b ack and thought about the concept of the break-even point, and if we did not cover all of our costs (i.e., exclude them from from our analysis), then you would would not truly be breaking even. The same could be said about reaching a particular level of profit. Finally, the target information is “operating income” – this number is reported before taxes (i.e., is not “net income”). income”). Therefore, no adjustment for taxes taxes is necessary.

What is the breakeven point in (a) units sold and (b) sales d ollars? 6 points for this part of the question. In class, we talked about the propensity for students to mess this one up a bit (i.e., it is a common mistake to watch out for). for). Specifically, Specifically, given that the question is asking for a “breakeven” point (in units and sales $), that implies that profit is zero. If profit is zero, then tax expense must be zero. So, taxes do not play a role in this this problem. We’ve considered them . . . and, they do not apply here. So, same formula as above, with “0” replacing the target operating income: ( 875m + 115m ) / (21 – 11.5 – 1.90) = 130,263.16 units 130,263.16 units x $21 per unit = $2,735,526.32 in total revenue dollars

Question 3: Overhead and Related Issues

 Assume a standard costing system in the following.

The following total costs are budgeted for a pure manufacturing firm: Direct materials Direct labor Indirect labor – paid hourly Rent

$100,000 $120,000 $106,000 $129,000

The company has deemed machine hours to be a good estimator of overhead.

In a perfect world, the company would use 1.6 machine hours for every output-unit  produced. Other information: Budgeted output for the year is 8,900 units  Actual output for the year is 9,000 units  Actual number of machine hours used is 8,750 hours Other information:  As of June 30th, the company actually used 6,950 machine hours to produce 4,750 units.

Required:

What is the predetermined overhead rate?

_________________

Compute the applied overhead as of June 30th. _________________

Required:

What is the predetermined overhead rate?

_________________

Budgeted overhead / (SI x SQ) = P/D OH Rate (106,000 + 129,000) / (1.6 x 8,900) = $ 16.5028 per MH 5 points

Compute the applied overhead as of June 30th. _________________  Applied OH = P/D OH Rate x SI x AQ = $16.5028 per MH x 1.6 MH/unit x 4,750 units = $125,421.28 5 points

Question 4: Relevant Costs

McDermott and Petra are currently manufacturing their own brand of playing cards. Given their connections at the major casinos, McDermott and Petra expect to have ample demand for the product in the years to come. The manufacturing process consists of the printing of the design on specialized paper (rank and suit), the cutting of the specialized paper into individual cards, the specialized gloss applied to the cards, and the sorting of the cards into their respective order. The cards are then packaged in cardboard boxes (also manufactured by McDermott and Petra and wrapped in purchased plastic. Recently, they received an offer from Worm Incorporated. Worm offered to sell the cardboard boxes used in the packaging directly to McDermott and Petra for $1.69 per box. Boxes would be received, and the only remaining step required of McDermott and Petra would be to place the manufactured cards in the box and wrap the boxes in plastic. The following represent costs of the complete process of manufacturing and packaging a deck of cards: Specialized paper for cards $ 1.04 Gloss used as coating 1.00 Cost of electricity used to power machines used in sorting and cutting .46 Plastic used in wrapping the deck .12 Cardboard 1.32 Rent allocated to space used for box mftg .24 Rent allocated to space used for plastic wrapping .22 Cost of electricity used to power machines used in cutting and folding cardboard .19 Based on the information given above, should McDermott and Petra accept Worm's offer regarding the boxes? Support your answer with calculations and a brief reasoning statement.

There were a variety of ways to solve this problem. I gave full credit as long as you treated the cost information appropriately. The only costs that are associated with making the cardboard boxes were the cardboard itself ($1.32), the rent allocated to the space used for manufacturing boxes ($.24), and the electricity for machines used to cut and fold the cardboard. Given that the cost of the rent was described as “allocated,” the appropriate approach was to treat this information as “irrelevant” (i.e., regardless of choice to make or b uy, company will incur the rent cost). If you did not treat the cost as “allocated” (as described), I took off 2 points. So, the only thing to compare is the cost to buy ($1.69) and the (relevant) cost to make ($1.32 + $.19 = $1.51), which suggests that the McDermott and Petra should continue to make the cardboard boxes.

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