QUESTION BANK FOR MA 1.

CHAPTER 1: COST AND COST CLASSIFICATION

I. Indicate whether each of the statements is T or F
1. Raw materials consist of basis natural resources, such as crude oil
2. A supervisor’s salary would be considered direct labor
3. Nonmanufacturing costs consist of selling costs and administrative costs
4. All selling and administrative costs are period costs
5. The term product cost and manufacturing cost are synonymous.
6. The cost of goods manufactured is an expense in a manufacturing company
7. A cost such as factory depreciation may be on the balance sheet as an asset
if goods are uncompleted or unsold at the end of a period
8. Total variable cost will change in the level of activity
9. A fix cost is constant per unit of product
10. Manufacturing overhead is an indirect cost with respect to units of product
11. Sunk costs can be either variable or fix
12. Property taxes and insurance on the factory building are examples of
manufacturing overhead
II. Choose the best answer for each following question.
1. If the activity level increases, one would expect the fixed cost per unit to
a. Increase
b. Decrease
c. Remain unchanged
d. None of them
2. Which of following cost costs would not be a period cost?
a. In direct material
b. Advertising
c. Administrative salaries
d. Shipping cost
e. Sales commission
3. The term used to describe the cost of goods transferred from work in process
inventory to finished goods inventory is
a. Cost of goods sold
b. Raw material
c. Period cost
d. Cost of goods manufactured
4. Manufacturing cost is synonymous with all of the following term except
a. Product cost
 b. Inventorial cost
c. Period cost
5. If the activity level drops by 5% one expect the variable costs
a. To increase per unit of product
b. To drops in total by 5%
c. To remain constant in total
d. To decrease per unit of product
6. All of the following are considered to be product costs for financial reporting
except:
a. Indirect material
b. Advertising
c. Rent on factory space
d. Idle time
7. A business has ascertained that its total costs (TC) can be estimated for any
level of product (P) and sales (S) according to the following equation
TC= 5xP + 1000 + 2xS +500
If the production level was 500 unit and sales were 400 units, what would be the
company’s fixed costs?
a. 1,500
b. 4,800
c. 3,500
d. 3,300
8. Which of following cost are fixed per unit, but change in total, as production
level change?
a. Fixed cost
b. Variable cost
c. direct cost
d. stepped variable cost
9. A hospital has total cost of 1milion for 2016. During 2017, 200,000 actions
were treated and doctors were paid 500,000
What is the most appropriate cost per patient for the hospital to use:
a. 0.2
b. 2.5
c. 5
d. 7.5
10. The annual salary paid to a business’s financial accountant would be best
description as:
a. A variable administrative cost
b. A fixed production cost
c. A part of prime cost
d. A fixed administrative cost
11. A company’s telephone bill consists of two parts:
- a charge of 40 per month for line rental
- a charge of 0.01 per minute of call time.
Which of the following equations describes the total annual telephone cost, C if
the company uses T minutes of call time in year?
a. C= 400 + 0.01
b. C= 40 + 0.01
c. C= 480 + 0.12T
d. C= 40 + 0.01T/12
12. Select the cost classification that is the best description each of the following:
Labor paid per hour worked
a. Fixed
b. Variable
c. Semi- variable
Rent of a factory
d. Fixed
e. Variable
f. Semi- variable
Salary plus profit- related pay
g. Fixed
h. Variable
i. Semi- variable
13. Which of the following would be classified as indirect costs for food product
manufacturer?
(I): Food label on a tin of beans
(II): Maintenance materials used to repair production machinery
(III). Cleaner’s wages in the factory
A. (I) only
B. (II) and (III) only
C. All of them
D. None of them
14. Which of the following statements about a direct cost are correct?
(i) a direct cost can be traced in full to the produce or department that is being cost
(ii) a cost that is a direct cost of cost object might be an indirect cost of a diffirent
cost object
(iii) a direct cost might also be referred to as an overhead cost
(iv) expenditure on direct costs will probably vary every period
a. (i) and (ii) only
b. (i) and (iii) only
c. (i), (ii) and (iv) only
d. All of them
15. Which of the statements is true?
a. Total direct costs are always greater than total indirect costs
b. Indirect costs are alternatively called overheads
c. Fixed cost per unit is the same at all levels of production
d. A direct cost will always be a variable cost.
16. A factory making toys uses a particular machine on each production line. Each
machine costs $1,000 per month to hire. Each production line can make up to 100
toys per month.
Which of the following best describes the cost of hiring the machines?
a. A step cost
b. A variable cost
c. A fixed cost
d. A semi –variable cost

III. Exercises
E1. Classify each of the following costs as either period costs or product costs. Also
indicate whether the cost is fixed or variable with respect to changes in the amount
of output produced or sold.
Period cost Product cost Variable cost Fixed cost
Rent on sale office
Direct material
Sales commission
Rent on factory
building
Headquarters
secretarial salaries
Assembly line
workers
Product advertising
Cherries in a cannery
Top management
salaries
Lubricants for
machines
Shipping cost via
express service
Executive training
program
Factory supervisory
salaries

E2. ITY is a company produces and sells a single product (ABC). Data concerning
the product follow:
- variable cost per unit: 17,500
- Total fixed cost: 720,000,000
- Price per unit: 36,000
- Sales units: 48,000
The company gets a new order that requires 5,000 units. Data concerning the order
following:
- Variable cost per unit: 18,500
- Adding 50,000,000 of fixed cost
- Remain the price unit
Require
1. Compute the manufacturing costs and result of producing and selling 48,000
units
2. Compute the costs for the added units
3. Compute the following costs:
- Cost per unit basing on plan/budget
- Cost per added unit

Ex3: The costs of operating the maintenance department of a computer

manufacturer, Crayon Ltd for the last 5 months have been as follows:
Month Production Volume (units) Cost ($)
1 4,000 15,200
2 5,000 17,000
3 6,500 19,400
4 8,000 21,800
5 5,500 18,200
Require:
1. Determine the equation to predict the cost using the high – low method?
2. Calculate the costs that should be expected in month 6 when output is
expected to be 7,200 units?
 3. Determine the equation to predict the cost using the least – square regression
method?

E4: Fill the blanks

Work shop 1 Work shop 2 Work shop 3
Sales 75,000
Raw material inventory beginning 15,000 19,500
Raw material purchase 34,500 19,500 3,750
Raw material inventory ending 12,000 ? 750
Direct material cost ? 30,000 3,000
Direct labor cost 30,000 37,500 9,000
Overhead cost 15,000 12,000 ?
Manufacturing cost 82,500 ? 18,000
Units of Beginning work in ? 12,000 12,000
process (units partially complete)
Units of ending work in process 7,500 10,500 ?
(units still incomplete)
Total cost of completed units 82,500 ? 28,500
Units of beginning Finished ? 9,000 2,250
goods
Units of ending Finished goods 37,500 ? 750
Cost of goods sold 60,000 82,500 ?
Net come (gross profit) ? 13,500 ?
Selling and administrative costs 12,000 ? 7,500
Net profit ? (6,000) 1,500
 Chapter 2, 3: Job costing and process costing
EX1: Hogle Corporation is a manufacturer that uses job-order costing. On
January 1, the company’s inventory balances were as follows:
Raw materials. . . . . . . . . . . . . . . . . . . . . . . $20,000
Work in process. . . . . . . . . . . . . . . . . . . . . $15,000
Finished goods . . . . . . . . . . . . . . . . . . . . . $30,000
The company applies overhead cost to jobs on the basis of machine-hours worked.
For the current year, the company’s predetermined overhead rate was based on a
cost formula that estimated $450,000 of total manufacturing overhead for an
estimated activity level of 75,000 machine hours. The following transactions were
recorded for the year:
a. Raw materials were purchased on account, $410,000.
b. Raw materials were used in production, $380,000 ($360,000 direct materials and
$20,000 indirect materials).
c. The following costs were accrued for employee services: direct labor, $75,000;
indirect labor, $110,000; sales commissions, $90,000; and administrative salaries,
$200,000.
d. Sales travel costs (on account) were $17,000.
e. Utility costs (on account) in the factory were $43,000.
f. Advertising costs (on account) were $180,000.
g. Depreciation was recorded for the year, $350,000 (80% relates to factory assets,
and 20% relates to selling and administrative assets).
h. Insurance expired during the year, $10,000 (70% relates to factory operations,
and the remaining 30% relates to selling and administrative activities).
i. Manufacturing overhead was applied to production. Due to greater than expected
demand for its products, the company worked 80,000 machine-hours on all jobs
during the year.
j. Jobs costing $900,000 to manufacture according to their job cost sheets were
completed during the year.
k. Jobs were sold on account to customers during the year for a total of $1,500,000.
The jobs cost $870,000 to manufacture according to their job cost sheets.
Required:
1. Prepare journal entries to record the preceding transactions.
2. Is Manufacturing Overhead under- applied or over- applied for the year?
Prepare a journal entry to close any balance in the Manufacturing Overhead
account to Cost of Goods Sold. Do not allocate the balance between Work in
Process, Finished Goods, and Cost of Goods Sold.
3. Prepare an income statement for the year.
E2: Builder Products Inc manufactures a caulking compound that goes
through three processing stages prior to completion. Information on work in
the first department, Cooking, is given below for May:
Production Data
1. Unit in process, May 1: 10,000. The beginning WIP was 100% complete with
respect to materials and 80% complete with respect to processing.
2. Units started into production during May: 100,000
3. Units completed and transferred out: 95,000
4. Units in process, May 31:????. The ending WIP was 60% complete with respect
to materials and 20% complete with respect to processing.
Cost Data: ($)
- WIP, May 1: Material Cost: 1,500; Labor cost 1,800; Overhead cost 5,400.
- Cost added during May: Material Cost: 154,500; Labor cost 22,700; Overhead
cost 68,100.
Required: Prepare a production report for the Cooking Department for May
based on 2 methods.
E3: Sunrise Ltd makes blended tropical fruit drinks in two stages. Fruit juice
are extracted from fresh fruit and then blended in the Blending Department.
The following information pertains to the operations of the Blending
Department for June:
 Percent Complete
Units Materials Conversion
1.WIP, beginning 20,000 100% 75%
2. Started into production 180,000
3. Completed and transferred out 160,000
4. WIP, ending 40,000 100% 25%
5. WIP, beginning $25,200 $24,800
6. Cost added during June $334,800 $238,700
Required: Prepare a production report for the Blending Department for June,
using 2 methods.
EX4: Jarvene Corporation uses the FIFO method in its process costing system.
The following data are for the most recent month of operations in one of the
company’s processing departments:
Units in beginning inventory . . . . . . . . . . . . . . . . . . 400
Units started into production . . . . . . . . . . . . . . . . . . 3,000
Units in ending inventory . . . . . . . . . . . . . . . . . . . . . 300
Units transferred to the next department . . . . . . . 3,100
Materials Conversion
Percentage completion of beginning inventory . . . . . . . 80% 40%
Percentage completion of ending inventory . . . . . . . . . 70% 60%
The cost of beginning inventory according to the company’s costing system was
$11,040 of which $8,120 was for materials and the remainder was for conversion
cost. The costs added during the month amounted to $132,730. The costs per
equivalent unit for the month were:
Materials
Conversion
Cost per equivalent unit . . . . . . . . . . . . . . . . . . . . . . . . . . $25.40 $18.20
Required:
1. Compute the total cost per equivalent unit for the month.
2. Compute the equivalent units of material and conversion in the ending inventory.
3. Compute the equivalent units of material and conversion that were required to
complete the beginning inventory.
4. Compute the number of units started and completed during the month.
5. Compute the cost of ending work in process inventory for materials, conversion,
and in total for the month.
6. Compute the cost of the units transferred to the next department for materials,
conversion, and in total for the month.
E5: High Desert Pottery makes a variety of pottery products that it sells to
retailers such as Home Depot. The company uses a job order costing system in
which predetermined overhead rates are used to apply manufacturing
overhead cost to jobs. The predetermined overhead rate in the Molding
Department is based on machined hours, and the rate in the Painting
Department is based on direct labor cost. At the beginning of the year, the
company’s management made the following estimates:
Department
Molding Painting
Direct labor hour 12,000 60,000
Machine hours 70,000 8,000
Direct material cost ($) 510,000 650,000
Direct labor cost ($) 130,000 420,000
Manufacturing Overhead ($) 602,000 735,000
Job 205 was started on August 1st and completed on August 10. The company’s
cost records show the following information concerning the job:
Department
Molding Painting
Direct labor hour 30 85
Machine hours 110 20
material placed into production($) 470 332
Direct labor cost ($) 290 680
Required:
1. Compute the predetermined overhead rate used during the year in the
Molding Dep. Compute the rate used in the Painting Department?
2. Compute the total overhead cost applied to Job 205?
3. What would be the cost recorded for job 205? If the job contained 50 units,
what would be the unit product cost? Make a job cost sheet for 205?
4. At the end of the year, the records of High Desert Pottery works revealed the
following actual cost and operating data for all jobs worked on during the
year:
Department
Molding Painting
Direct labor hour 10,000 62,000
Machine hours 65,000 9,000
Direct material cost ($) 430,000 680,000
Direct labor cost ($) 108,000 436,000
Manufacturing Overhead ($) 570,000 750,000
What was the amount of underapplied or overapplied overhead in each department
at the end of the year?
Ex 6: Ginato Products operates a job order costing system and applies
overhead cost to jobs on the basis of direct materials used in production (not
on the basis of raw materials purchased). In computing a predetermined
overhead rate at the beginning of the year, the company’s estimates were:
manufacturing overhead cost $800,000; direct materials to be used in
production $500,000. The company has provided the following data: ($)
Beginning Ending
Raw materials 20,000 80,000
Work in process 150,000 70,000
Finished Goods 260,000 400,000
The following actual costs were incurred during the year: ($)
Purchase of raw materials (all direct) 510,000
Direct labor cost 90,000
Manufacturing Overhead:
Indirect labor 170,000
Property Taxes 48,000
Depreciation of equipment 260,000
Maintenance 95,000
Insurance 7,000
Rent, building 180,000
Required:
1. Compute the predetermined overhead rate for the year
2. Compute the amount of underapplied or overapplied overhead for the year?
3. Prepare a schedule of cost of goods manufactured for the year?
4. Compute the cost of goods sold for the year (do not include any under-
applied or over-applied overhead in your cost of goods sold figure)
Ex 7: Osborn Manufacturing uses a predetermined overhead rate of $18.20 per
direct labor-hour. This predetermined rate was based on a cost formula that
estimates $218,400 of total manufacturing overhead for an estimated activity
level of 12,000 direct labor-hours. The company actually incurred $215,000 of
manufacturing overhead and 11,500 direct labor hours during the period.
Required:
1. Determine the amount of underapplied or overapplied manufacturing overhead
for the period.
2. Assume that the company’s underapplied or overapplied overhead is closed to
Cost of Goods Sold. Would the journal entry to dispose of the under applied or over
applied overhead increase or decrease the company’s gross margin? By how much?
Ex 8: The following cost data relate to the manufacturing activities of Chang
Company during the just completed year:
Manufacturing overhead costs incurred:
Indirect materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000
Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $130,000
Property taxes, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,000
Utilities, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$70,000
Depreciation, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$240,000
Insurance, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000
Total actual manufacturing overhead costs incurred . . . . . . . . . . . . . . . $473,000
Other costs incurred:
Purchases of raw materials (both direct and indirect). . . . . . . . . . . . . . . . . . $400,000
Direct labor cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,000
Inventories:
Raw materials, beginning. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,000
Raw materials, ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$30,000
Work in process, beginning. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$40,000
Work in process, ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,000
The company uses a predetermined overhead rate of $25 per machine-hour to apply
overhead cost to jobs. A total of 19,400 machine-hours were used during the year.
Required:
1. Compute the amount of under applied or over applied overhead cost for the year.
2. Prepare a schedule of cost of goods manufactured for the year.
 Chapter 5: CVP relationship analysis
EX 1: TLK Ltd. manufactures small size fans to be used in load shedding areas.
Each fan has a rechargeable battery and a built in charging circuit. TLK sells a fan
for $120. The annual sale is 30,000 fans. Variable and fixed cost data is given
below:
Variable expenses $84 per fan
Fixed expenses $900,000 per year
Required:
1. Prepare contribution margin income statement and compute the degree of
operating leverage.
2. Next year the sales are expected to increase by 7,500 fans. Compute
(a) the expected percentage increase in net operating income
(b) expected increase in net operating income
(c) expected total net operating income for the next year. (You don’t need
to prepare an income statement, use the degree of operating leverage for
your answers).
EX 2: Following is the contribution margin income statement of a single product
company:
Total Per unit
Sales $1,200,000 $80
Less variable expenses $840,000 $56
———– ——-
Contribution margin 360,000 $24
Less fixed expenses 300,000 ——-
———–
Net operating income $60,000
———–
Required:
1. Calculate break-even point in units and dollars.
2.What is the contribution margin at break-even point?
3.Compute the number of units to be sold to earn a profit of $36,000.
4.Compute the margin of safety using original data.
5.Compute CM ratio. Compute the expected increase in monthly net operating if
sales increase by $160,000 and fixed expenses do not change.
EX3: Voltar Company manufactures and sells a specialized cordless telephone for
high electromagnetic radiation environments. The company’s contribution format
income statement for the most recent year is given below:
Total Per Unit Percent of Sales
Sales (20,000 units) . . . . . . . . . . . $1,200,000 $60 100%
Variable expenses. . . . . . . . . . . . . 900,000 45 ?%
Contribution margin . . . . . . . . . . . 300,000 $15 ?%
Fixed expenses . . . . . . . . . . . . . . . 240,000
Net operating income. . . . . . . . . . $ 60,000
Management is anxious to increase the company’s profit and has asked for an
analysis of a number of items.
Required:
1. Compute the company’s CM ratio and variable expense ratio.
2. Compute the company’s break-even point in both unit sales and dollar sales. Use
the equation method.
3. Assume that sales increase by $400,000 next year. If cost behavior patterns
remain unchanged, by how much will the company’s net operating income
increase? Use the CM ratio to compute your answer.
4. Refer to the original data. Assume that next year management wants the company
to earn a profit of at least $90,000. How many units will have to be sold to earn this
target profit?
5. Refer to the original data. Compute the company’s margin of safety in both dollar
and percentage form
6. a. Compute the company’s degree of operating leverage at the present level of
sales.
b. Assume that through a more intense effort by the sales staff, the company’s
sales increase by 8% next year. By what percentage would you expect net operating
income to increase? Use the degree of operating leverage to obtain your answer.
c. Verify your answer to (b) by preparing a new contribution format income
statement showing an 8% increase in sales.
7. Refer to the original data. In an effort to increase sales and profits, management
is considering the use of a higher-quality speaker. The higher-quality speaker would
increase variable costs by $3 per unit, but management could eliminate one quality
inspector who is paid a salary of $30,000 per year. The sales manager estimates that
the higher-quality speaker would increase annual sales by at least 20%.
a. Assuming that changes are made as described above, prepare a projected
contribution format income statement for next year. Show data on a total, per unit,
and percentage basis.
b. Compute the company’s new break-even point in both unit sales and dollar sales.
Use the formula method.
c. Would you recommend that the changes be made?
EX 4: PQR company sells two products. The total fixed expenses of the company
are 1,197,000. The monthly data of PQR is as follows:

Products
Product A Product B Total
Sales $1,400,000 $600,000 $2,000,000
Contribution margin ratio 60% 70% ?
Required:
1. Prepare contribution margin income statement for the company.
2. Calculate break-even point in dollars.
EX 5: Aladin company manufactures small battery that is used in clocks, toys and
some other electronic devices. The last month’s income statement of Aladin is given
below:
Total Per unit
Sales (30,000 batteries) $300,000 $10
Less variable expenses $180,000 $6
———- —-
Contribution margin $120,000 $4
Fixed expenses $100,000 —-
———-
Net operating income $20,000
———-
Required:
Prepare Aladin’s new income statement under each of the following conditions:
1. The sales volume increases by 15%.
2. The selling price decreases by 20% per unit, and the sales volume increases
by 30%.
3. The selling price increases by 50% per unit, fixed expenses increase by
 $20,000 and the sales volume decreases by 5%. Variable expenses increase
by 20% per unit, the selling price increases by 12%, and the sales volume
decreases by 10%.
EX 6: The NORAN company sells two products; product X and product Y. The
information about sales price, variable expenses per unit and total fixed expenses is
given below:
Product X Product Y
Sales price $50 per unit $100 per unit
Variable expenses $30 per unit $40 per unit
The total monthly fixed expenses of the company are $270,000.
The company wants to generate a sales revenue of $1,000,000 in the next month. To
obtain this goal the company has the following options:
(i). Sell 6,000 units of product X and 7,000 units of product Y.
(ii). Sell 14,000 units of product X and 3,000 units of product Y.
Required:
1. Prepare contribution margin income statement and calculate break-even
point if NORAN decides to select option (i).
2. Prepare contribution margin income statement and calculate break-even
point if NORAN decides to select option (ii).
3. Whichever is the better option, (i) or (ii)?
4. Explain the reason of change in break-even point in dollars (if any).
EX 7: Jump, Inc. is a footwear company which has three main products: one for
cricket players, one for football players and one for tennis players. Following table
shows the sales price, variable cost per unit and units sold of each product:
Cricket Foot Ball Tennis
Price per unit $80 $100 $150
Variable cost per unit $40 $75 $95
Units sold 200,000 50,000 5,000
Required:
1. Calculate the separate contribution margin ratio for each product and the
weighted-average contribution margin ratio of the company as a whole.
2. If the company’s fixed costs are $2,200,000 per annum, calculate the
breakeven distribution of products.
EX8 : Following information is related to sales mix of product A, B and C.
 Product A B C
Sales Price per Unit $15 $21 $36
Variable Cost per Unit $9 $14 $19
Sales Mix Percentage 20% 20% 60%
Total Fixed Cost $40,000
Required:

1. Calculate the break-even point in units and in dollars.

2. Prepare contribution margin income statement

EX 9: Mr Zoo is planning to set up a mini Zoo in Howick.

The following relates to different pricing plans of visiting the zoo and costs of
running the zoo.
Pricing Plan 1 - $30 per person (a special pack will be included)
Pricing Plan 2 - $25 per visitor (the special pack not to be included)
Variable Costs per visitor
Special Pack - $8
Zoo Consumables - $7
Zoo Expenses - $2
Total Fixed Costs - $200,000
REQUIRED: Study the information above then answer the following questions.
(a) Using the CVP formula, calculate the number of units (and its dollar amount)
for achieving
i. Breakeven
ii. A profit of $30,000 for both plans.
(b) Calculate the Contribution Margin ratio for both plans.
(c) Describe the meaning of Contribution Margin ratio.
(d) Explain the relationship between Contribution Margin ratio and Number of
Breakeven units.
(e) Explain why it is important to calculate Margin of Safety.
(f) State TWO examples of fixed cost in relation to the zoo.
(g) Define Relevant Range.
(h) Draw a CVP graph and identify the following on the graph (CVP graph
template will be provided):
i. Breakeven Point
ii. Profit Zone
iii. Loss Zone
EX10: Lucido Products markets two computer games: Claimjumper and Makeover.
A contribution format income statement for a recent month for the two games
appears below:

Claimjumper Makeover Total

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 70,000 100,000

Variable expenses. . . . . . . . . . . . . . . . 20,000 50,000 70,000

Contribution margin . . . . . . . . . . . . . . 10,000 20,000 30,000

Fixed expenses . . . . . . . . . . . . . . . . . . 24,000

Net operating income. . . . . . . . . . . . . 6,000

Required:

1. What is the overall contribution margin (CM) ratio for the company?

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

3. Verify the overall break-even point for the company by constructing a

contribution format income statement showing the appropriate levels of sales
for the two products.
 CHAPTER 9
9.1. Troy Engines, Ltd., manufactures a variety of engines for use in heavy
equipment. The company has always produced all of the necessary parts for its
engines, including all of the carburetors. An outside supplier has offered to sell one
type of carburetor to Troy Engines, Ltd., for a cost of $35 per unit. To evaluate this
offer, Troy Engines, Ltd., has gathered the following information relating to its own
cost of producing the carburetor internally:

Per Unit

15,000 Units per Year

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14 $210,000

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 150,000

Variable manufacturing overhead . . . . . . . . . . . . . . . . . . . 3 45,000

Fixed manufacturing overhead, traceable . . . . . . . . . . . . 6* 90,000

Fixed manufacturing overhead, allocated . . . . . . . . . . . . 9 135,000

Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $42 $630,000

*One-third supervisory salaries; two-thirds depreciation of special equipment (no

resale value).

Required:

1. Assuming the company has no alternative use for the facilities that are now being
used to produce the carburetors, what would be the financial advantage
(disadvantage) of buying 15,000 carburetors from the outside supplier?

2. Should the outside supplier’s offer be accepted?

3. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the
freed capacity to launch a new product. The segment margin of the new product
would be $150,000 per year. Given this new assumption, what would be financial
advantage (disadvantage) of buying 15,000 carburetors from the outside supplier?

4. Given the new assumption in requirement 3, should the outside supplier’s offer
be accepted?
9.2. Kristen Lu purchased a used automobile for $8,000 at the beginning of last year
and incurred the following operating costs:

Depreciation ($8,000 ÷ 5 years) . . . . . . . . . $1,600

Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,200

Garage rent . . . . . . . . . . . . . . . . . . . . . . . . . . . $360

Automobile tax and license . . . . . . . . . . . . . $40

Variable operating cost . . . . . . . . . . . . . . . . . $0.14 per mile

The variable operating cost consists of gasoline, oil, tires, maintenance, and repairs.
Kristen estimates that, at her current rate of usage, the car will have zero resale
value in five years, so the annual straight-line depreciation is $1,600. The car is kept
in a garage for a monthly fee.

Required:

1. Kristen drove the car 10,000 miles last year. Compute the average cost per mile
of owning and operating the car.

2. Kristen is unsure about whether she should use her own car or rent a car to go on
an extended cross-country trip for two weeks during spring break. What costs above
are relevant in this decision? Explain.

3. Kristen is thinking about buying an expensive sports car to replace the car she
bought last year. She would drive the same number of miles regardless of which car
she owns and would rent the same parking space. The sports car’s variable
operating costs would be roughly the same as the variable operating costs of her old
car. However, her insurance and automobile tax and license costs would go up.
What costs are relevant in estimating the incremental cost of owning the more
expensive car? Explain.

9.3. Thalassines Kataskeves, S.A., of Greece makes marine equipment. The

company has been experiencing losses on its bilge pump product line for several
years. The most recent quarterly contribution format income statement for the bilge
pump product line follows:

Thalassines Kataskeves, S.A.

Income Statement—Bilge Pump

 For the Quarter Ended March 31

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $850,000

Variable expenses:

Variable manufacturing expenses . . . . . . . . . . . . . . $330,000

Sales commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000

Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000

Total variable expenses . . . . . . . . . . . . . . . . . . . . . . . . . 390,000

Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460,000

Fixed expenses:

Advertising (for the bilge pump product line) . . . . 270,000

Depreciation of equipment (no resale value) . . . . 80,000

General factory overhead . . . . . . . . . . . . . . . . . . . . . 105,000*

Salary of product-line manager . . . . . . . . . . . . . . . . 32,000

Insurance on inventories . . . . . . . . . . . . . . . . . . . . . . 8,000

Purchasing department . . . . . . . . . . . . . . . . . . . . . . . 45,000†

Total fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .540,000

Net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (80,000)

*Common costs allocated on the basis of machine-hours.

†Common costs allocated on the basis of sales dollars.

Discontinuing the bilge pump product line would not affect sales of other product
lines and would have no effect on the company’s total general factory overhead or
total Purchasing Department expenses.

What is the financial advantage (disadvantage) of discontinuing the bilge pump

product line?
 CHAPTER 10: CAPITAL BUDGETING DECISIONS

E1: Swan Inc. A jewelry wholesaler, has $100,000 to invest. The company is
trying to decide between two alternative uses of the funds. The alternative are:

Project A Project B
Cost of equipment required $100,000
Working capital investment required $100,000
Annual cash inflows $21,000 $16,000
Salvage value of equipment in 6 years $8,000
Life of the project (years) 6 6
The working capital needed for project B will be released at the end of 6 years for
investment elsewhere, discount rate is 14%.

Required: Which investment alternative (if either) would you recommend that the
company accept? Show all computations using the NPV method for each project?

E2: A piece of laborsaving equipment has just come onto the market that Mitsui
Company could use to reduce costs in one of its plan. Relevant data relating to the
equipment follow:

- Purchase cost of the equipment : $432,000

- Annual cost saving that will be provided by the equipment: $90,000
- Life of the equipment: 12 years
Required:

1. Compute the payback period for the equipment. If the company requires a
payback period of four years or less, would the equipment be purchased?
2. Compute the IRR on the equipment?
3. Compute the NPV on the equipment?
The company uses straight – line depreciation based on the equipment’s useful
life, discount rate is 14%.

E3: Serv U Best, a company that supplies temporary workers for restaurant
and other service industries, has $35,000 to invest. Management is trying to
decide between 2 alternatives uses for the funds as follows:

Project X Project Y
Investment required $35,000 $35,000
Annual cash inflows $9,000 $16,000
Single cash inflow at the end of 10 $150,000
years
Life of the project (years) 10 10
The company uses discount rate is 18%.

Required: Which alternative would you recommend that the company accept? Show
all computations using the NPV method for each project?

E4: The management of Kunkel Ltd is considering the purchase of a $40,000

machine that would reduce operating costs by $7,000 per year. At the end of the
machine’s eight – year useful life, it will have zero scrap value. The company
required rate of return is 12% on all investment projects.

Required:

1. Determine the NPV of the investment?

2. Compute the IRR and consult to the manager to accept project or not? Give
the reason?
E5: Cocoa Ltd has a small truck that it uses for intracity deliveries. The truck is
worn out and must be either overhauled or replaced with a new truck. The
company has assembled the following information: (Figured in: $)

Present truck New truck

Purchase cost new 21,000 30,000
Remaining book value 11,500
Overhaul needed now 7,000
Annual cash operating saving costs 10,000 6,500
Salvage value now 9,000
Salvage value – eight years from 1,000 4,000
now
If the company keeps and overhauls its present delivery truck, then the truck will be
useable for eight more years. If a new truck is purchased, it will be used for 8 years,
after which it will be traded in on another truck. The new truck would be diesel –
operated, resulting in a substaintial reduction in annual operating costs as shown
above. The company uses straight – line depreciation based on the equipment’s
useful life, discount rate is 16%.

Required: Should the company keep the old truck or purchase a new one by using
NVP method?
 EX 6: Windhoek Mines, Ltd, of Namibia, is contemplating the purchase of
equipment to exploit a mineral deposit on land to which the company has mineral
rights. An engineering and cost analysis has been made, and it is expected that the
following cash flows would be associated with opening and operating a mine in the
area:

Cost of new equipment and timbers . . . . . . . . . . . . . . . . . . . $275,000

Working capital required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000

Annual net cash receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,000*

Cost to construct new roads each year in three years . . . . . . . . . . . . . $45,000

Salvage value of equipment in four years . . . . . . . . . . . . . . $65,000

*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.

The mineral deposit would be exhausted after four years of mining. At that point,
the

working capital would be released for reinvestment elsewhere. The company’s

required rate of return is 20%, income tax is 20%

Required: What is the PP, the net present value of the proposed mining project?
Should the project be accepted?