2-26 An employee of Olentangy Foundry, Inc.

worked a normal 40-hour shift, but four hours

were idle due to a small fire in the plant. The employee earns $16 per hour?

Required:

1. Calculate the employee’s total compensation for the week.

2. How much of this compensation is a direct-labor cost? How much is overhead?

-------------------------------------------------

2-30 acility that specializes in replacing mufflers on compact cars. The following table shows
the costs incurred during a month when 700 mufflers were replaced

Required: Fill in the missing amounts, labeled ( a ) through ( o ), in the table.

-------------------------------------

2-32 A hotel pays the phone company $200 per month plus $.15 for each call made. During
January 7,000 calls were made. In February 8,000 calls were made.

Required:

1. Calculate the hotel’s phone bills for January and February.

2. Calculate the cost per phone call in January and in February.

3. Separate the January phone bill into its fixed and variable components.

4. What is the marginal cost of one additional phone call in January?

5. What was the average cost of a phone call in January?

-------------------------------------------------

2-34 Suppose you paid $75 for a ticket to see your university’s football team compete in a
bowl game. Someone offered to buy your ticket for $100, but you decided to go to the
game.

Required:

1. What did it really cost you to see the game?

2. What type of cost is this?

---------------------------------------------

2-40 Indicate for each of the following costs whether it is a product cost or a period cost.

1. Cost of grapes purchased by a winery.

2. Depreciation on pizza ovens in a pizza restaurant.

3. Cost of plant manager’s salary in a computer production facility.

4. Wages of security personnel in a department store.

5. Cost of utilities in a manufacturing facility.

6. Wages of aircraft mechanics employed by an airline.

7. Wages of drill-press operators in a manufacturing plant.

8. Cost of food in a microwavable dinner.

9. Cost incurred by a department store chain to transport merchandise to its stores.

-----------------------------------------

2-50 Nantucket Tee manufactures T-shirts and decorates them with custom designs for retail
sale on the premises. Several costs incurred by the company are listed below. For each cost,
indicate which of the following classifications best describe the cost. More than one
classification may apply to the same cost item.

Cost Classifications

a. Variable

b. Fixed

c. Period

d. Product

e. Administrative

f. Selling

g. Manufacturing

h. Research and development

i. Direct material

j. Direct labor

k. Manufacturing overhead

Cost Items

1. Wages of T-shirt designers and painters.

2. Salaries of sales personnel.

3. Depreciation on sewing machines.

4. Rent on the building. Part of the building’s first floor is used to make and paint T-shirts.
Part of it is used for the retail sales shop. The second floor is used for administrative offices
and storage of raw material and finished goods.

5. Cost of daily advertisements in local media

. 6. Salaries of designers who experiment with new fabrics, paints, and T-shirt designs.

7. Cost of hiring a pilot to fly along the beach pulling a banner advertising the shop.

8. Salary of the owner’s secretary.

9. Cost of repairing the gas furnace.

10. Cost of health insurance for the production employees.

11. Cost of fabric used in T-shirts.

12. Wages of shirtmakers.

13. Cost of new sign in front of retail T-shirt shop.

14. Wages of the employee who repairs the firm’s sewing machines.

15. Cost of electricity used in the sewing department

----------------------------------

6-25 Brazilia Bus Tours has incurred the following bus maintenance costs during the recent
tourist season. (The real is Brazil’s national monetary unit. On the day this exercise was
written, the real was equivalent in value to .5092 U.S. dollar.)

Required:

1. Use the high-low method to estimate the variable cost per tour mile traveled and the
fixed cost per month.

2. Develop a formula to express the cost behavior exhibited by the company’s maintenance
cost.

3. Predict the level of maintenance cost that would be incurred during a month when 34,000
tour miles are driven. (Remember to express your answer in terms of the real. )

4. Build a spreadsheet: Construct an Excel spreadsheet to solve all of the preceding

requirements. Show how the solution will change if the following information changes: in
March there were 32,000 miles traveled and the cost was 20,000 real.
------------------------------------------------------------

7-27 Rosario C ompany, 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 1,000 p, 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: Answer requirements (1) through (4) independently.

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? Explain.

--------------------------------------------------------

7-30 A contribution income statement for the La Jolla Inn is shown below. ( Ignore income
taxes.)

Revenue ......................................................................................... $1,500,000

Less: Variable Expenses ............................................................................. 900,000

Contribution margin ............................................................................. $ 600,000

Less: Fixed expenses ........................................................................... 450,000

Net Income ............................................................. $ 150,000

Required:

1. Show the hotel’s cost structure by indicating the percentage of the hotel’s revenue
represented by each item on the income statement.

2. Suppose the hotel’s revenue declines by 20 percent. Use the contribution-margin

percentage to calculate the resulting decrease in net income.

3. What is the hotel’s operating leverage factor when revenue is $1,500,000?

4. Use the operating leverage factor to calculate the increase in net income resulting from a
25 percent increase in sales revenue.

--------------------------------------
7-33 we're Grid Engineering Associates, Inc., which provides consulting services to
commercial electric utilities. The consulting firm’s contribution margin ratio is 25 percent,
and its annual fixed expenses are $200,000. The firm’s income-tax rate is 40 percent.

Required:

1. Calculate the firm’s break-even volume of service revenue.

2. How much before-tax income must the firm earn to make an after-tax net income of
$120,000?

3. What level of revenue for consulting services must the firm generate to earn an after-tax
net income of $120,000?

4. Suppose the firm’s income-tax rate declines to 35 percent. What will happen to the break-
even level of consulting service revenue?

--------------------------------

7-35 Surreal Sound, Inc., manufactures and sells compact disks. Price and cost data are as
follows:

Selling price per unit (package of two CDs) .................................................. $ 25.00

Variable costs per unit:

Direct material ................................................................................................... $ 8.20

Direct labor ............................................................................................ 4.00

Manufacturing overhead ....................................................................................... 6.00

Selling expenses ........................................................................ 1.60

Total variable costs per unit .............................................................................. $ 19.80

Annual fixed costs:

Manufacturing overhead ......................................................................... $ 288,000

Selling and administrative ............................................................................... 414,000

Total fixed costs .......................................................................................... $ 702,000

Forecasted annual sales volume (140,000 units) .................................................... $3,500,000

In the following requirements, ignore income taxes.

Required:

1. What is Surreal Sound’s break-even point in units?

2. What is the company’s break-even point in sales dollars?

3. How many units would Surreal Sound have to sell in order to earn $390,000?

4. What is the firm’s margin of safety?

5. Management estimates that direct-labor costs will increase by 10 percent next year. How
many units will the company have to sell next year to reach its break-even point?
6. If the company’s direct-labor costs do increase by 10 percent, what selling price per unit
of product must it charge to maintain the same contribution-margin ratio?

-------------------------------------------------------------

7-40 Phoenix-based CompTronics manufactures audio speakers for desktop computers. T he

following data relate to the period just ended when the company produced and sold 42,000
speaker sets:

Sales .............................................................................................................. $4,032,000

Variable costs .......................................................................................................... 1,008,000
Fixed costs .................................................................................................. 2,736,000
Management is considering relocating its manufacturing facilities to northern Mexico to
reduce costs. Variable costs are expected to average $21.60 per set; annual fixed costs are
anticipated to be $2,380,800. (In the following requirements, ignore income taxes.)

Required:

1. Calculate the company’s current income and determine the level of dollar sales needed to
double that figure, assuming that manufacturing operations remain in the United States.

2. Determine the break-even point in speaker sets if operations are shifted to Mexico.

3. Assume that management desires to achieve the Mexican break-even point; however,
operations will remain in the United States.

a. If variable costs remain constant, what must management do to fixed costs? By how
much must fixed costs change?

b. If fixed costs remain constant, what must management do to the variable cost per unit?
By how much must unit variable cost change?

4. Determine the impact (increase, decrease, or no effect) of the following operating

changes.

a. Effect of an increase in direct material costs on the break-even point.

b. Effect of an increase in fixed administrative costs on the unit contribution margin.

c. Effect of an increase in the unit contribution margin on net income.

d. Effect of a decrease in the number of units sold on the break-even point.

-------------------------------------------