Diego Company manufactures one product that is sold for $80 per unit in two geographic regions— the East and West regions. The following information pertains to the company’s first year of operations in which it produced 40,000 units and sold 35,000 units. Variable costs per unit: Manufacturing: Direct materials ...................................................................$24 Direct labor …………………………………….................................$14 Variable manufacturing overhead ……………………..............$2 Variable selling and administrative ....................................$4 Fixed costs per year: Fixed manufacturing overhead ……………................$800,000 Fixed selling and administrative expense…….........$496,000 The company sold 25,000 units in the East region and 10,000 units in the West region. It determined that $250,000 of its fixed selling and administrative expense is traceable to the West region, $150,000 is traceable to the East region, and the remaining $96,000 is a common fixed expense. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product. Required: Answer each question independently based on the original data unless instructed otherwise. You do not need to prepare a segmented income statement until question 13. 1. What is the unit product cost under variable costing? 2. What is the unit product cost under absorption costing? 3. What is the company’s total contribution margin under variable costing? 4. What is the company’s net operating income under variable costing? 5. What is the company’s total gross margin under absorption costing? 6. What is the company’s net operating income under absorption costing? 7. What is the amount of the difference between the variable costing and absorption costing net operating incomes? What is the cause of this difference? 8. What is the company’s break-even point in unit sales? Is it above or below the actual unit sales? Compare the break-even point in unit sales to your answer for question 6 and comment. 9. If the sales volumes in the East and West regions had been reversed, what would be the company’s overall break-even point in unit sales? 10. What would have been the company’s variable costing net operating income if it had produced and sold 35,000 units? You do not need to perform any calculations to answer this question. 11. What would have been the company’s absorption costing net operating income if it had produced and sold 35,000 units? You do not need to perform any calculations to answer this question. 12. If the company produces 5,000 fewer units than it sells in its second year of operations, will absorption costing net operating income be higher or lower than variable costing net operating income in Year 2? Why? No calculations are necessary. 13. Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions. 14. Diego is considering eliminating the West region because an internally generated report suggests the region’s total gross margin in the first year of operations was $50,000 less than its traceable fixed selling and administrative expenses. Diego believes that if it drops the West region, the East region’s sales will grow by 5% in Year 2. Using the contribution approach for analyzing segment profitability and assuming all else remains constant in Year 2, what would be the profit impact of dropping the West region in Year 2? 15. Assume the West region invests $30,000 in a new advertising campaign in Year 2 that increases its unit sales by 20%. If all else remains constant, what would be the profit impact of pursuing the advertising campaign?
> Kelly Company manufactures and sells one product. The following information pertains to each of the company’s first two years of operations: Variable cost per unit: Direct materials .....................................................................$1
> Refer to the data for Pavolik Company in Exercise 14–4. Data given in Exercise 14–4: The following changes took place last year in Pavolik Company’s balance sheet accounts: Long-term investments tha
> Shimano Company has an opportunity to manufacture and sell one of two new products for a five year period. The company’s tax rate is 30% and its after-tax cost of capital is 14%. The cost and revenue estimates for each product are as fo
> Rosman Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study, Rosman estimated the following costs and revenues for the project: Cost of new equipment needed ………………………………………. $420,000 Sale of
> Lander Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study, Lander estimated the following costs and revenues for the project: Cost of equipment needed ……………………………………………….. $250,000 Working
> Winthrop Company has an opportunity to manufacture and sell a new product for a five-year period. To pursue this opportunity, the company would need to purchase a piece of equipment for $130,000. The equipment would have a useful life of five years and z
> Gaston Company is considering a capital budgeting project that would require a $2,000,000 investment in equipment with a useful life of five years and no salvage value. The company’s tax rate is 30% and its after-tax cost of capital is
> Aldean Company wants to use absorption cost-plus pricing to set the selling price on a new product. The company plans to invest $200,000 in operating assets to produce and sell 16,000 units. Its required return on investment (ROI) in its operating assets
> Wilderness Products, Inc., has designed a self-inflating sleeping pad for use by backpackers and campers. The following information is available about the new product: a. An investment of $1,350,000 will be necessary to carry inventories and accounts rec
> The postal service of St. Vincent, an island in the West Indies, obtains a significant portion of its revenues from sales of special souvenir sheets to stamp collectors. The postal service purchases the souvenir sheets from a supplier for $0.80 each. St.
> Valmont Company has developed a new industrial piece of equipment called the XP–200. The company is considering two methods of establishing a selling price for the XP–200—absorption cost-plus pricing and value-based pricing. Valmont’s cost accounting sys
> Lyons Company manufactures and sells one product. The following information pertains to the company’s first year of operations: Variable cost per unit: Direct materials ......................................................................$13 Fixed cost
> Northport Company manufactures numerous products, one of which is called Sea Breeze Skin Cleanser. The company has provided the following data regarding this product: Unit sales (a) .......................................................................
> McDermott Company has developed a new industrial component called IC–75. The company is excited about IC–75 because it offers superior performance relative to the comparable component sold by McDermott’s primary competitor. The competing part sells for $
> Maria Lorenzi owns an ice cream stand that she operates during the summer months in West Yellowstone, Montana. She is unsure how to price her ice cream cones and has experimented with two prices in successive weeks during the busy August season. The numb
> The managers of Midwest Whitetails magazine (a magazine dedicated to deer hunters) want to establish a price for customers wishing to place a full-page advertisement in their magazine for one month. To help with the price setting decision, the managers i
> Messina Company wants to use absorption cost-plus pricing to establish the selling price for a new product. The company plans to invest $650,000 in operating assets that provide the capacity to make 30,000 units. Its required return on investment (ROI) i
> National Restaurant Supply, Inc., sells restaurant equipment and supplies throughout most of the United States. Management is considering adding a machine that makes sorbet to its line of ice cream making machines. Management will negotiate the purchase
> Currington Company wants to use absorption cost-plus pricing to set the selling price on a newly remodeled product. The company plans to invest $150,000 in operating assets to produce and sell 12,000 units. Its required return on investment (ROI) in its
> Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety of electrical items, including an X52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitti
> Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated based on their own division’s return on investment (ROI). Assume the following information relative to the two divisions: Managers are f
> Stavos Company’s Screen Division manufactures a standard screen for high-definition televisions (HDTVs). The cost per screen is: Variable cost per screen………â€&brvba
> Norwall Company’s budgeted variable manufacturing overhead cost is $3.00 per machine-hour and its budgeted fixed manufacturing overhead is $300,000 per month. The following information is available for a recent month: a. The denominator activity of 60,00
> Hrubec Products, Inc., operates a Pulp Division that manufactures wood pulp for use in the production of various paper goods. Revenue and costs associated with a ton of pulp follow: Hrubec Products has just acquired a small company that manufactures pap
> In each of the cases below, assume Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits
> Division A manufactures electronic circuit boards. The boards can be sold either to Division B of the same company or to outside customers. Last year, the following activity occurred in Division A: Selling price per circuit board …………………………………………………..$1
> What does a manufacturing cycle efficiency (MCE) of less than 1 mean? How would you interpret an MCE of 0.40?
> Why is it a good idea to create a “Budgeting Assumptions” tab when creating a master budget in Microsoft Excel?
> What are the two stages of allocation in activity-based costing?
> If the units produced equals the units sold, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why?
> Why aren’t transactions involving accounts payable considered to be financing activities?
> Should a company allocate its common fixed costs to business segments when computing the break-even point for those segments? Why?
> What general guidelines can you provide for interpreting the statement of cash flows?
> Sunk costs are easy to spot—they’re the fixed costs associated with a decision.” Do you agree? Explain.
> Stahl Company is conducting a time-driven activity-based costing study in its Shipping Department. To aid the study, the company provided the following data regarding its Shipping Department and the customers served by the department: Required: 1. Usin
> Refer to the data in Exercises 7A–1 and 7A–2. Now assume that Saratoga Company would like to answer the following “what if” question using its time-driven activity-based costing syst
> Sako Company’s Audio Division produces a speaker that is used by manufacturers of various audio products. Sales and cost data on the speaker follow: Selling price per unit on the intermediate market ……………………………….$60 Variable costs per unit……………………………………
> Refer to the data in Exercise 7A–1. In addition, assume that Saratoga Company provided the following activity data for all jobs produced during the year: Data given in Exercise 7A–1: Saratoga Company manufactures job
> Saratoga Company manufactures jobs to customer specifications. The company is conducting a time-driven activity-based costing study in its Purchasing Department to better understand how Purchasing Department labor costs are consumed by individual jobs. T
> Markus Company’s common stock sold for $2.75 per share at the end of this year. The company paid a common stock dividend of $0.55 per share this year. It also provided the following data excerpts from this year’s finan
> Ravenna Company is a merchandiser that uses the indirect method to prepare the operating activities section of its statement of cash flows. Its balance sheet for this year is as follows: During the year, Ravenna paid a $6,000 cash dividend and it sold a
> Cardinal Company is considering a five-year project that would require a $2,975,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 14%. The project would provide net operati
> Cane Company manufactures two products called Alpha and Beta that sell for $120 and $80, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 100,000 units of each product
> Westerville Company reported the following results from last year’s operations: Sales .................................................................$1,000,000 Variable expenses ................................................300,000 Contribution marg
> Preble Company manufactures one product. Its variable manufacturing overhead is applied to production based on direct labor-hours and its standard cost card per unit is as follows: The planning budget for March was based on producing and selling 25,000
> Adger Corporation is a service company that measures its output based on the number of customers served. The company provided the following fixed and variable cost estimates that it uses for budgeting purposes and the actual results for May as shown belo
> Morganton Company makes one product and it provided the following information to help prepare the master budget: a. The budgeted selling price per unit is $70. Budgeted unit sales for June, July, August, and September are 8,400, 10,000, 12,000, and 13,00
> Bowen Company manufactures one product, it does not maintain any beginning or ending inventories, and its uses a standard cost system. Its predetermined overhead rate includes $1,000,000 of fixed overhead in the numerator and 50,000 direct labor-hours in
> Hickory Company manufactures two products—14,000 units of Product Y and 6,000 units of Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) sys
> Refer to Exhibit 13–8. Is the return on this investment proposal exactly 14%, more than 14%, or less than 14%? Explain. Exhibit 13–8: A D. F G Year Now 2 3 4. $ (60,000) $ (100,000) 3 Purchase of equipment 4 Invest
> If a product is generating a loss, then it should be discontinued.” Do you agree? Explain.
> Why is the form of activity-based costing described in this chapter unacceptable for external financial reports?
> How is it possible for a fixed cost that is traceable to a segment to become a common fixed cost if the segment is divided into further segments?
> Why aren’t common fixed costs allocated to segments under the contribution approach?
> Explain how the contribution margin differs from the segment margin.
> Distinguish between a traceable fixed cost and a common fixed cost. Give several examples of each.
> If the units produced exceed the units sold, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why?
> Swain Company manufactures one product, it does not maintain any beginning or ending inventories, and its uses a standard cost system. The company’s beginning balance in Retained Earnings is $70,000.It sells one product for $165 per uni
> What assumption is implicitly made about cost behavior when actual results are directly compared to a static planning budget? Why is this assumption questionable?
> Refer to the financial statements and other data in Problem 15–18. Assume Paul Sabin has asked you to assess his company’s profitability and stock market performance. Financial statements and other data in Problem 15&
> Pecunious Products, Inc.’s financial results for the past three years are summarized below: Your boss has asked you to review these results and then answer the following questions: a. Is it becoming easier for the company to pay its bi
> A comparative balance sheet for Lomax Company containing data for the last two years is as Follows: The following additional information is available about the company’s activities during this year: a. The company declared and paid a c
> Mary Walker, president of Rusco Company, considers $14,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $8,000 in cash was available at the end of this year. Since the company reported a large
> A comparative balance sheet and an income statement for Burgess Company are given below: Burgess Company Income Statement (dollars in millions) Sales .....................................................................$3,600 Cost of goods sold ........
> Yoric Company listed the net changes in its balance sheet accounts for the past year as follows: The following additional information is available about last year’s activities: a. Net income for the year was $?. b. The company sold equ
> Joyner Company’s income statement for Year 2 follows: Sales ......................................................................$900,000 Cost of goods sold ...................................................500,000 Gross margin .....
> Brock.Company.is.a.merchandiser.that.prepared.the.statement.of.cash.flows.and.income.statement.provided.below: Brock. Company Income .Statement Sales................................................................................................$5,200 C
> Saxon Products, Inc., is investigating the purchase of a robot for use on the company’s assembly line. Selected data relating to the robot are provided below: Cost of the robot ………………………….…………………………………………………. $1,600,000 Installation and software . ……………
> Forsyth Company manufactures one product, it does not maintain any beginning or ending inventories, and its uses a standard cost system. During the year, the company produced and sold 10,000 units at a price of $135 per unit Its standard cost per unit p
> In five years, Kent Duncan will retire. He is exploring the possibility of opening a self-service car wash. The car wash could be managed in the free time he has available from his regular occupation, and it could be closed easily when he retires. After
> The Elberta Fruit Farm of Ontario always has hired transient workers to pick its annual cherry crop. Janessa Wright, the farm manager, just received information on a cherry picking machine that is being purchased by many fruit farms. The machine is a mot
> Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has e
> I’m not sure we should lay out $250,000 for that automated welding machine,” said Jim Alder, president of the Superior Equipment Company. “That’s a lot of money, and it would cost us $80,000 for software and installation, and another $36,000 per year jus
> Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 15%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed ……
> Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 20% each of the last three years. Casey is considering a capital bu
> Toxaway Company is a merchandiser that segments its business into two divisions—Commercial and Residential. The company’s accounting intern was asked to prepare segmented income statements that the companyâ€
> During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows The company’s $18 unit product cost is computed as follows: Direct materials ......................
> You have just been hired by FAB Corporation, the manufacturer of a revolutionary new garage door opening device. The president has asked that you review the company’s costing system and “do what you can to help us get
> Morton Company’s budgeted variable manufacturing overhead is $4 50 per direct labor-hour and its budgeted fixed manufacturing overhead is $270,000 per year. The company manufactures a single product whose standard direct labor-hours per
> Ray Company provided the following excerpts from its Production Department’s flexible budget performance report: Required: Complete the Production Department’s Flexible Budget Performance Report by filling in all the
> Deacon Company is a merchandising company that is preparing a budget for the three-month period ended June 30.The following information is available: Deacon Company Balance Sheet March 31 Assets Cash......................................................
> Refer to the data for Garden Sales, Inc., in Problem 8–24. The company’s president is interested in knowing how reducing inventory levels and collecting accounts receivable sooner will impact the cash budget. He revise
> Springfield Corporation operates on a calendar-year basis. It begins the annual budgeting process in late August, when the president establishes targets for total sales dollars and net operating income before taxes for the next year. The sales target is
> Refer to the data for Minden Company. The company is considering making the following changes to the assumptions underlying its master budget: 1.Sales are budgeted for $220,000 for May. 2.Each month’s credit sales are collected 60% in the month of sale a
> Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption costing income statement for the most recent period is shown: Hi-Tek Manufacturing Inc. Income Statement Sales ……&hel
> Toxaway Company is a merchandiser that segments its business into two divisions—Commercial and Residential. The company’s accounting intern was asked to prepare segmented income statements that the companyâ€
> During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows The company’s $18 unit product cost is computed as follows: Direct materials ......................
> Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations: Variable costs per unit: Manufacturing: Direct materials ......................................................
> Refer to the financial statements for Castile Products, Inc., in Exercise 15–8. Assets at the beginning of the year totaled $280,000, and the stockholders’ equity totaled $161,600. Data given in Exercise 15–8: The financial statements for Castile Produc
> Lasser Company plans to produce 10,000 units next period at a denominator activity of 30,000 direct labor-hours. The direct labor wage rate is $12 per hour. The company’s standards allow 2.5 yards of direct materials for each unit of pr
> Below are several transactions that took place in Seneca Company last year: a. Paid suppliers for inventory purchases. b. Bought equipment for cash. c. Paid cash to repurchase its own stock. d. Collected cash from customers. e. Paid wages to employees. f
> The following changes took place last year in Pavolik Company’s balance sheet accounts: Long-term investments that cost the company $6 were sold during the year for $16 and land that cost $15 was sold for $9. In addition, the company
> Below are certain events that took place at Hazzard, Inc., last year: a. Collected cash from customers. b. Paid cash to repurchase its own stock. c. Borrowed money from a creditor. d. Paid suppliers for inventory purchases. e. Repaid the principal amount
> Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $137,320, including freight and installation. Henrie’s estimated the new machine would increase the company’s cash inflows, n
> A piece of labor-saving equipment has just come onto the market that Mitsui Electronics, Ltd., could use to reduce costs in one of its plants in Japan. Relevant data relating to the equipment follow: Purchase cost of the equipment…………………………………….. $432,00
> The Cambro Foundation, a nonprofit organization, is planning to invest $104,950 in a project that will last for three years. The project will produce net cash inflows as follows: Year 1 …………………………………………………………….$30,000 Year 2……………………………………………………………..$40,
> Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 20% each of the last three years. Derrick is considering a capi
> Lukow Products is investigating the purchase of a piece of automated equipment that will save $400,000 each year in direct labor and inventory carrying costs. This equipment costs $2,500,000 and is expected to have a 15-year useful life with no salvage v
> Wendell’s Donut Shoppe is investigating the purchase of a new $18,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $3,800 per year. In addition, the n
> The management of Kunkel Company is considering the purchase of a $27,000 machine that would reduce operating costs by $7,000 per year. At the end of the machine’s five-year useful life, it will have zero salvage value. The company’s required rate of ret
