294 final 2

# Common fixed costs which include warehouse rent and

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Common fixed costs which include warehouse rent, and central office expenses should be analyzed (using ABM) for non-value added activities and costs. These non-value added activities should be minimized or eliminated. Question 4 (19 marks) Transfer Pricing and Responsibility Accounting a. Since top-management is responsible for investments (purchases of capital assets), and since Controls Division has external sales, the Controls Division should be designated as a profit centre . b. Since it take 3 hours to produce one unit [\$30 direct labour per unit / 10 per hour] and the overhead per unit is \$15, the overhead per direct labour hour must be \$5. 40% of this- \$2- is variable and 60% of this- \$5- is fixed. The Starter Division has excess capacity of 4,000 hours (20,000 - 16,000). Thus, it has enough idle capacity to produce the 1,000 starter motors (which requires 3000 hours) that the Motor Division needs. Thus, the cost to Johnson of making the starter motor is the variable cost of \$41 [\$5 for DM, \$30 for DL and \$6 for VOH (\$2 X 3 hours)]. The cost to buy the starter from the foreign supplier is \$65. Thus, Johnson is better off by 1,000 X 24 per unit (\$65 - \$41) = \$24,000 by NOT buying from the foreign supplier . c. Its pretax income will DECREASE by 1,000 x [75 (the current market price) - 41 (the variable cost)] = \$34,000 if the Starter Division buys from the foreign supplier. By reducing the price by

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12 \$10 to \$65, pretax income will only decrease by 1,000 x \$10 = \$10,000. Thus, the starter division is better off by \$24,000. (Since there is idle capacity any price over the variable cost of \$41 is better than losing the business.) d. i. Does the foreign supplier’s part match the Starter Division = s part in terms of quality . ii. What is the reputation of the foreign supplier. Is the foreign supplier reliable and dependable (re: on-time delivery, etc.). iii. Will the foreign supplier change the price or is the price subject to a long-term contract. (This is especially a concern since it is believed that the foreign supplier may be charging an artificially low price to A get into @ the market.) iv. What will be the effect of changes in the foreign currency (since the \$65 price is the translated price). e. 2,000 starters would require 6,000 hours (2,000 X 3 hours per unit). Thus, because there is only excess capacity of 4,000 hours there would be an opportunity cost involved. Specifically, sales of 667 units would be A lost @ (2,000 hours / 3 hours per unit). Minimum transfer price = \$41 variable cost + [667 (75 - 41)]/2,000] = \$41 + \$11.34 = \$52.34 . Question 5 (25 marks) Standard Costing and Flexible Budgets (Not required, but useful) Actual Flexible Static Sales-units 83,250 83,250 80,000 Sales Revenue \$4,620,375 \$4,287,375 \$4,120,000 Variable expenses Direct material 1,386,482 1,248,750 1,200,000 Direct labor 539,181 536,130 515,200 Contribution margin 2,694,712 2,502,495 2,404,800 Fixed expenses Machine depreciation 940,000 816,500 816,500 Supervisor salaries 368,600 341,000 341,000 S & A expenses 430,000 425,000 425,000 Net income \$956,112 \$919,995 \$822,300 i) material price variance = (\$1,386,482/4,247 - \$1,200,000/4,000) x 4,247 = (\$326.46/sheet - \$300.00/sheet) x 4,247 = \$112,382 U Material usage var. = (4,247 sheets - (4,000/80,000 x 83,250)) x \$300.00 = (4,247 sheets - 4,162.5 sheets) x \$300.00 = \$25,350 U ii) labor rate variance = (\$539,181/21,567 - 515,200/22,400) x 21,567 = (\$25/hr - \$23/hr) x 21,567 = \$43,134 U Labor efficiency var = (21,567 - (22,400/80,000 x 83,250)) x \$23 = \$40,089 F iii) Fixed OH budget var = (940,000 + 368,600) - (816,500 + 341,000) = \$151,100 U
13 iv) Sales price variance = \$4,620,375 - \$4,287,375 = \$333,000 F Selling Price Variance: (Actual Selling Price

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