Exam 3 - Practice Problems.pdf

2 reduction in professional labor hours by correcting

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2. Reduction in professional labor hours by: Correcting errors in drawings (7% x 8,000) 560 hours Value Added (1) Gray Area (2) Nonvalue- Added (3) Total (4) = 1+2+3 Doing calculations and preparing drawings 75% x \$400,000 Checking calculations and drawings \$300,000 \$300,000 4% x \$400,000 Correcting errors found in drawings \$16,000 \$ 16,000 7% x \$400,000 Making changes in response to requests \$28,000 \$ 28,000 6% x \$400,000 Correcting errors to meet code \$ 24,000 \$ 24,000 8% x \$400,000 \$32,000 \$ 32,000 Total professional labor costs Administrative and support costs at 40% (\$160,000/\$400,000) of professional \$324,000 \$16,000 \$60,000 \$400,000 Labor \$129,600 \$6,400 \$24,000 \$160,000 Travel \$ 18,000 \$ 18,000 Total \$471,600 \$22,400 \$84,000 \$578,000

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Exam 3 – Practice Problems Page 42 Correcting errors to conform to code (8% x 8,000) 640 hours Cost savings in professional labor ([560 hour + 640 hours] x \$50) \$60,000 Cost savings in variables administrative and support (40% x \$60,000) \$24,000 Total cost savings \$84,000 Current operating income in 2009 \$102,000 Add cost savings from eliminating error \$ 84,000 Operating income if errors eliminated \$186,000 3. If the 1,200 professional labors hours currently not billed to clients were billed to clients, Carasco' revenues would increase by 1,200 hours x \$100 = \$120,000 from \$680,000 to \$800,000. If costs remained unchanged, Carasco's operating income would be \$800,000 - \$578,000 = \$222,000.
Exam 3 – Practice Problems Page 43 PROBLEM: Snappy Tiles is a small distributor of marble tiles. Snappy identifies its three major activities and cost pools as ordering, receiving and storage, and shipping, and it reports the following details for 2006: Quantity of Cost per Unit of Activity Cost Driver Cost Driver Cost Driver 1. Placing and paying for orders of marble tiles Number of orders 500 \$50 per order 2. Receiving and storage Loads moved 4,000 \$30 per load 3. Shipping of marble tiles to retailers Number of shipments 1,500 \$40 per shipment For 2006, Snappy buys 250,000 marble tiles at an average cost of \$3 per tile and sells them to retailers at an average price of \$4 per tile. Assume Snappy has no fixed costs and no inventories. Required: 1. Calculate Snappy’s operating income for 2006. 2. For 2007, retailers are demanding a 5% discount off the 2006 price. Snappy’s suppliers are only willing to give a 4% discount. Snappy expects to sell the same quantity of marble tiles in 2007 as in 2006. If all other costs and cost-driver information remain the same, calculate Snappy’s operating income for 2007. 3. Suppose further that Snappy decides to make changes in its ordering and receiving-and-storing practices. By placing long-run orders with its key suppliers, Snappy expects to reduce the number of orders to 200 and the cost per order to \$25 per order. By redesigning the layout of the warehouse and reconfiguring the crates in which the marble tiles are moved, Snappy expects to reduce the number of loads moved to 3,125 and the cost per load moved to \$28. Will Snappy achieve its target operating income of \$0.30 per tile in 2007? Show your calculations.

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Exam 3 – Practice Problems Page 44 SOLUTION: 1. Snappy's operating income is as follows: Total for 250,000 tiles Per unit (1) = (1)/250,000 Revenues (\$4 x 250,000) \$1,000,000 \$4.00 Purchase cost of tiles (\$3 x 250,000) 750,000 3.00 Ordering costs ((\$50 x 500) 25,000 0.10 Receiving and storage (\$30 x 4,000) 120,000 0.48 Shipping (\$40 x 1,500) 60,000 0.24 Total costs \$955,000 \$3.82 Operating income \$45,000 \$0.18 2. Price to retailers is 95% of 2008 price = 0.95 x \$4 = \$3.80; cost per tile is 96% of 2008 cost = 0.96 x \$3 = \$2.88.
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