1.

Precision Lens Company manufactures sophisticated lenses and mirrors used in large optical
telescopes. The company is now preparing its annual profit plan. As part of its analysis of the
profitability of individual products, the controller estimates the amount of overhead that should be
allocated to the individual product lines from the following information.

Mirrors Lenses
Units
30 30
produced
Material
moves
per 4 16
product
line
Direct-
labor
250 250
hours
per unit

The total budgeted material-handling cost is $90,000.

Required:
1. Under a costing system that allocates overhead on the basis of direct-labor hours, the material-
handling costs allocated to one mirror would be what amount?

2. Under a
costing
system
that
allocates
overhead
on the
basis of
direct-
labor
hours,
the
material-
handling
costs
allocated
to one
lens
would be
what
amount?

3. Under activity-based costing (ABC), the material-handling costs allocated to one mirror would be what
amount? The cost driver for the material-handling activity is the number of material moves.
4. Under
activity-
based
costing
(ABC),
the
material-
handling
costs
allocated
to one
lens
would be
what
amount?
The cost
driver for
the
material-
handling
activity
is the
number
of
material
moves.

Explanation:
1.
Material-handling cost per mirror:

$90,000
× 250 = $1,500
[(30)(250) + (30)(250)]*

*The total number of direct-labor hours.

An alternative calculation, since both types of product use the same amount of the cost driver, is the
following:

$90,000
= $1,500
60*

*The total number of units (of both types) produced.

2.
Material-handling cost per lens:

$90,000
× 250 = $1,500
[(30)(250) + (30)(250)]*
*The total number of direct-labor hours.

3.
Material-handling cost per mirror:

$90,000
× 4†
(4 + 16)*
= $600
30

*The total number of material moves.

†The number of material moves for the mirror product line.

4.
Material-handling cost per lens:

$90,000
× 16*
(4 + 16)
= $2,400
30

*The number of material moves for the lens product line.

2. Write a cost formula to express the cost behavior of the firm’s production costs. (Use the
formula Y = a+ bX, where Y denotes production cost and X denotes quantity of sausage
produced.) (Round coefficient of X to 2 decimal places.)
Production cost per month =

2.
value:
5.00 points

Brazilia Bus Tours has incurred the following bus maintenance costs during the recent tourist season.
(Thereal is Brazil’s national monetary unit. On the day this exercise was written, the real was equivalent
in value to .5092 U.S. dollar.)

Miles Traveled Maintenance

Month by Tour Buses Cost
November 12,750 17,100 real
December 15,900 17,400
January 19,050 17,550
February 22,500 18,000
March 30,000 18,750
April 12,000 16,500
 1.
value:
5.00 points

University Pizza delivers pizzas to the dormitories and apartments near a major state university. The
company’s annual fixed expenses are $54,000. The sales price of a pizza is $10, and it costs the
company $6 to make and deliver each pizza. (In the following requirements, ignore income taxes.)

Required:
1. Using the contribution-margin approach, compute the company’s break-even point in units (pizzas).

2. What is the contribution-margin ratio? (Round your answer to 1 decimal place.)

3. Compute the break-even sales revenue. Use the contribution-margin ratio in your calculation.
4. How many pizzas must the company sell to earn a target net profit of $60,000? Use the equation
method.

3.
value:
5.00 points

Rosario Company, which is located in Buenos Aires, Argentina, manufactures a component used in farm
machinery. The firm’s fixed costs are 2,000,000 p per year. The variable cost of each component is
1,000p, and the components are sold for 1,500 p each. The company sold 7,000 components during the
prior year. (p denotes the peso, Argentina’s national currency. Several countries use the peso as their
monetary unit. On the day this exercise was written, Argentina’s peso was worth .192 U.S. dollars. In the
following requirements, ignore income taxes.)

Required:
1. Compute the break-even point in units.

2. What will the new break-even point be if fixed costs increase by 5 percent?

3. What was the company’s net income for the prior year?

4. The sales manager believes that a reduction in the sales price to 1,400 p will result in orders for 1,000
more components each year. What will the break-even point be if the price is changed?

5. Should the price change discussed in requirement (4) be made?

4.
value:
5.00 points

Pacific Rim Publications, Inc., specializes in reference books that keep abreast of political and economic
issues in the Pacific Rim countries. The results of the company’s operations during the prior year are
given in the following table. All units produced during the year were sold. (Ignore income taxes.)

Sales revenue $1,000,000

Manufacturing costs:
Fixed 250,000
Variable 500,000
Selling costs:
Fixed 25,000
Variable 50,000
Administrative costs:
Fixed 60,000
Variable 15,000

Required:
1-a. Prepare a traditional income statement for the company.
1-b. Prepare a contribution income statement for the company.
 2. What is the firm’s operating leverage for the sales volume generated during the prior year? (Round
your answer to 2 decimal places.)

3. Suppose sales revenue increases by 12 percent. What will be the percentage increase in net
income?(Do not round intermediate calculations and round your final answer to 1 decimal
place.)

4. Which income statement would an operating manager use to answer part (3)?

Traditional income statement

Contribution income statement

1.
value:
5.00 points

Dolphin Company manufactures two-person sailboats with a variable cost of $1,000. The sailboats sell
for $1,750 each. Budgeted fixed manufacturing overhead for the most recent year was $11,000,000.
Planned and actual production for the year were the same.

Required:
State whether income is higher under variable or absorption costing and the amount of the difference in
reported opearting income under the two methods. Treat each condition as an independent case.

1. Production 22,000 units

Sales 25,000 units
2. Production 10,600 units
Sales 10,600 units
3. Production 11,000 units
Sales 9,800 units
2.
value:
5.00 points

Dolphin Company manufactures two-person sailboats with a variable cost of $1,000. The sailboats sell
for $1,750 each. Budgeted fixed manufacturing overhead for the most recent year was $11,000,000.
Planned and actual production for the year were the same.

Required:
2. Calculate Dolphin Company’s break-even point in units. (Round your answer to the nearest whole
number.)

3.
value:
5.00 points

Altoona Valve Company’s planned production for the year just ended was 20,000 units. This production
level was achieved, and 21,000 units were sold. Other data follow:

Direct material used $300,000

Direct labor incurred 150,000
Fixed manufacturing overhead 210,000
Variable manufacturing overhead 100,000
Fixed selling and administrative expenses 175,000
Variable selling and administrative expenses 52,500
Finished-goods inventory, January 1 2,000 units

The cost per unit remained the same in the current year as in the previous year. There were no work-in-
process inventories at the beginning or end of the year.

Required:
1. What would be Altoona Valve Company’s finished-goods inventory cost on December 31 under the
variable-costing method? (Do not round your intermediate calculations.)

2-a. Which costing method, absorption or variable costing, would show a higher operating income for the
year?

Absorption costing

Variable costing
2-b.By what amount? (Do not round your intermediate calculations.)\
Calculate the difference in reported income

4.
value:
5.00 points

Sea Star Company manufactures diving masks with a variable cost of $12.50. The masks sell for $17.00.
Budgeted fixed manufacturing overhead for the most recent year was $396,000. Actual production was
equal to planned production.

Required:
State whether operating income is higher under variable or absorption costing and the amount of the
difference in reported operating income under the two methods. Treat each condition as an independent
case.

1. Production 110,000 units

Sales 107,000 units
2. Production 88,000 units
Sales 93,000 units
3. Production 80,100 units
Sales 80,100 units