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# PROBLEM 225 Working with Incomplete Data from the Income Statement and Schedule of

Cost of
Goods Manufactured [ LO4 , LO5 ]

Supply the missing data in the following cases. Each case is independent of the others. Replace each ? with the
1
Schedule of Cost of Goods Manufactured
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . \$4,500
Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?
Manufacturing overhead . . . . . . . . . . . . . . . . . . \$5,000
Total manufacturing costs . . . . . . . . . . . . . . . . . \$18,500
Beginning work in process inventory . . . . . . . . . \$2,500
Ending work in process inventory . . . . . . . . . . . ?
Cost of goods manufactured . . . . . . . . . . . . . . . \$18,000
Income Statement
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$30,000
Beginning finished goods inventory . . . . . . . . . . \$1,000
Cost of goods manufactured . . . . . . . . . . . . . . . \$18,000
Goods available for sale. . . . . . . . . . . . . . . . . . . ?
Ending finished goods inventory . . . . . . . . . . . . ?
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . \$17,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . \$13,000
Selling and administrative expenses . . . . . . . . . ?
Net operating income. . . . . . . . . . . . . . . . . . . . . \$4,000

\$6,000
\$3,000
\$4,000
?
?
\$1,000
\$14,000

\$5,000
\$7,000
?
\$20,000
\$3,000
\$4,000
?

\$3,000
\$4,000
\$9,000
?
?
\$3,000
?

\$21,000
\$2,500
\$14,000
?
\$1,500
?
?
\$3,500
?

\$36,000
?
?
?
\$4,000
\$18,500
\$17,500
?
\$5,000

\$40,000
\$2,000
\$17,500
?
\$3,500
?
?
?
\$9,000

## PROBLEM 516 High-Low Method; Cost of Goods Manufactured [ LO1 , LO3 ]

Amfac Company manufactures a single product. The company keeps careful records of manufacturing
activities from which the following information has been extracted:
Level of Activity
Number of units produced . . . . . . . . . . . . . . . .
Cost of goods manufactured . . . . . . . . . . . . . .
Work in process inventory, beginning . . . . . . .
Work in process inventory, ending . . . . . . . . . .
Direct materials cost per unit . . . . . . . . . . . . . .
Direct labor cost per unit . . . . . . . . . . . . . . . . .
Manufacturing overhead cost, total . . . . . . . . .

MarchLow
6,000
\$168,000
\$9,000
\$15,000
\$6
\$10
?

JuneHigh
9,000
\$257,000
\$32,000
\$21,000
\$6
\$10
?

The companys manufacturing overhead cost consists of both variable and fixed cost elements.
To have data available for planning, management wants to determine how much of the overhead
cost is variable with units produced and how much of it is fixed per month.
Required:

1. For both March and June, estimate the amount of manufacturing overhead cost added to production.
The company had no under applied or over applied overhead in either month. (Hint: A
useful way to proceed might be to construct a schedule of cost of goods manufactured.)
2. Using the high-low method, estimate a cost formula for manufacturing overhead. Express the
variable portion of the formula in terms of a variable rate per unit of product.
3. If 7,000 units are produced during a month, what would be the cost of goods manufactured?
(Assume that work in process inventories do not change and that there is no under applied or
over applied overhead cost for the month.)

PROBLEM 619 Basics of CVP Analysis [ LO1 , LO3 , LO4 , LO6 , LO8]
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for \$20 per unit. Variable
costs are \$8 per unit, and fixed costs total \$180,000 per year.
Required:

## Answer the following independent questions:

1. What is the products CM ratio?

## 2. Use the CM ratio to determine the break-even point in sales dollars.

3. Due to an increase in demand, the company estimates that sales will increase by \$75,000 during
the next year. By how much should net operating income increase (or net loss decrease)
assuming that fixed costs do not change?
4. Assume that the operating results for last year were:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$400,000
Variable expenses . . . . . . . . . . . . . . . . . . . 160,000
Contribution margin . . . . . . . . . . . . . . . . . . 240,000
Fixed expenses . . . . . . . . . . . . . . . . . . . . . 180,000
Net operating income . . . . . . . . . . . . . . . . \$ 60,000

## a. Compute the degree of operating leverage at the current level of sales.

b. The president expects sales to increase by 20% next year. By what percentage should net
operating income increase?
5. Refer to the original data. Assume that the company sold 18,000 units last year. The sales
manager is convinced that a 10% reduction in the selling price, combined with a \$30,000 increase
in advertising, would cause annual sales in units to increase by one-third. Prepare two
contribution format income statements, one showing the results of last years operations and
one showing the results of operations if these changes are made. Would you recommend that
the company do as the sales manager suggests?
6. Refer to the original data. Assume again that the company sold 18,000 units last year. The president
does not want to change the selling price. Instead, he wants to increase the sales commission
by \$1 per unit. He thinks that this move, combined with some increase in advertising, would
increase annual sales by 25%. By how much could advertising be increased with profits remaining
unchanged? Do not prepare an income statement; use the incremental analysis approach.

PROBLEM 621 Basic CVP Analysis; Graphing [ LO1 , LO2 , LO4 , LO6 ]
The Fashion Shoe Company operates a chain of womens shoe shops around the country. The
shops carry many styles of shoes that are all sold at the same price. Sales personnel in the shops are
paid a substantial commission on each pair of shoes sold (in addition to a small basic salary) in
order to encourage them to be aggressive in their sales efforts.
The following worksheet contains cost and revenue data for Shop 48 and is typical of the
companys many outlets:

Required:

1. Calculate the annual break-even point in dollar sales and in unit sales for Shop 48.
2. Prepare a CVP graph showing cost and revenue data for Shop 48 from zero shoes up to 17,000
pairs of shoes sold each year. Clearly indicate the break-even point on the graph.
3. If 12,000 pairs of shoes are sold in a year, what would be Shop 48s net operating income or
loss?
4. The company is considering paying the store manager of Shop 48 an incentive commission of
75 cents per pair of shoes (in addition to the salespersons commission). If this change is
made, what will be the new break-even point in dollar sales and in unit sales?
5. Refer to the original data. As an alternative to (4) above, the company is considering paying
the store manager 50 cents commission on each pair of shoes sold in excess of the break-even
point. If this change is made, what will be the shops net operating income or loss if 15,000
pairs of shoes are sold?
6. Refer to the original data. The company is considering eliminating sales commissions entirely
in its shops and increasing fixed salaries by \$31,500 annually. If this change is made, what
will be the new break-even point in dollar sales and in unit sales for Shop 48? Would you
recommend that the change be made? Explain.

## PROBLEM 915 Production and Direct Materials Budgets [LO3, LO4]

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South
East Asia. Three cubic centimeters (cc) of solvent H300 are required to manufacture each unit of
Supermix, one of the companys products. The company is now planning raw materials needs for
the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales
moving smoothly, the company has the following inventory requirements:
a. The finished goods inventory on hand at the end of each month must be equal to 3,000 units of
Supermix plus 20% of the next months sales. The finished goods inventory on June 30 is
budgeted to be 10,000 units.
b. The raw materials inventory on hand at the end of each month must be equal to one-half of the
following months production needs for raw materials. The raw materials inventory on June
30 is budgeted to be 54,000 cc of solvent H300.
c. The company maintains no work in process inventories.
A sales budget for Supermix for the last six months of the year follows.
Budgeted Sales
in Units
July . . . . . . . . . . . . . . 35,000
August . . . . . . . . . . . . 40,000
September . . . . . . . . 50,000
October . . . . . . . . . . . 30,000
November . . . . . . . . . 20,000
December . . . . . . . . . 10,000
Required:

1. Prepare a production budget for Supermix for the months July, August, September, and
October.
2. Examine the production budget that you prepared in (1) above. Why will the company produce
more units than it sells in July and August, and fewer units than it sells in September and
October?
3. Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for
July, August, and September, and for the quarter in total.

PROBLEM 917 Schedules of Expected Cash Collections and Disbursements [LO2, LO4,
LO8]

You have been asked to prepare a December cash budget for Ashton Company, a distributor of
exercise equipment. The following information is available about the companys operations:
a. The cash balance on December 1 is \$40,000.
b. Actual sales for October and November and expected sales for December are as follows:
October
Cash sales . . . . . . . . . . . . . \$65,000
Sales on account . . . . . . . . \$400,000

\$70,000
\$525,000

November
December
\$83,000
\$600,000

Sales on account are collected over a three-month period as follows: 20% collected in the
month of sale, 60% collected in the month following sale, and 18% collected in the second
month following sale. The remaining 2% is uncollectible.
c. Purchases of inventory will total \$280,000 for December. Thirty percent of a months inventory

purchases are paid during the month of purchase. The accounts payable remaining from
Novembers inventory purchases total \$161,000, all of which will be paid in December.
d. Selling and administrative expenses are budgeted at \$430,000 for December. Of this amount,
\$50,000 is for depreciation.
e. A new Web server for the Marketing Department costing \$76,000 will be purchased for cash
during December, and dividends totaling \$9,000 will be paid during the month.
f. The company maintains a minimum cash balance of \$20,000. An open line of credit is available
from the companys bank to bolster the cash position as needed.
Required:

## 1. Prepare a schedule of expected cash collections for December.

2. Prepare a schedule of expected cash disbursements for merchandise purchases for December.
3. Prepare a cash budget for December. Indicate in the financing section any borrowing that will be
needed during the month. Assume that any interest will not be paid until the following month.

PROBLEM 1019 Critique a Report; Prepare a Performance Report [LO1, LO4, LO6]
TipTop Flight School offers f ying lessons at a small municipal airport. The schools owner and
manager has been attempting to evaluate performance and control costs using a variance report that
compares the planning budget to actual results. A recent variance report appears below:

After several months of using such variance reports, the owner has become frustrated. For example,
she is quite conf dent that instructor wages were very tightly controlled in July, but the report
shows an unfavorable variance.
The planning budget was developed using the following formulas, where q is the number of
lessons sold:

Required:

1. Should the owner feel frustrated with the variance reports? Explain.
2. Prepare a flexible budget performance report for the school for July.

## PROBLEM 1114 Comprehensive Variance Analysis [LO2, LO3, LO4]

Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. The plant has
been experiencing problems as shown by its June contribution format income statement below:

Janet Dunn, who has just been appointed general manager of the Westwood Plant, has been given
instructions to get things under control. Upon reviewing the plants income statement, Ms. Dunn
has concluded that the major problem lies in the variable cost of goods sold. She has been provided
with the following standard cost per swimming pool:

During June the plant produced 15,000 pools and incurred the following costs:
a. Purchased 60,000 pounds of materials at a cost of \$1.95 per pound.
b. Used 49,200 pounds of materials in production. (Finished goods and work in process inventories
are insignifi cant and can be ignored.)
c. Worked 11,800 direct labor-hours at a cost of \$7.00 per hour.
d. Incurred variable manufacturing overhead cost totaling \$18,290 for the month. A total of
5,900 machine-hours was recorded.
It is the companys policy to close all variances to cost of goods sold on a monthly basis.
Required:

## 1. Compute the following variances for June:

a. Direct materials price and quantity variances.
b. Direct labor rate and effi ciency variances.
c. Variable overhead rate and effi ciency variances.
2. Summarize the variances that you computed in (1) above by showing the net overall favorable
or unfavorable variance for the month. What impact did this fi gure have on the companys income
statement? Show computations.
3. Pick out the two most signifi cant variances that you computed in (1) above. Explain to
Ms. Dunn possible causes of these variances.