Exam 1 - Practice Problems.pdf

Fixed manufacturing cost is allocated at a rate of

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Fixed manufacturing cost is allocated at a rate of $1.00 per machine hour . Per unit: Product A Product B Selling price $4.00 $3.00 Variable manufacturing cost $2.00 $1.50 Fixed manufacturing cost $0.75 $0.20 Variable selling cost $1.00 $1.00 The sales manager has had a $160,000 increase in the budget allotment for advertising and wants to apply the money to the most profitable product. The products are not substitutes for one another in the eyes of the company’s customers. Morehead has only 100,000 machine hours that can be made available to produce additional units of products A and B. If the potential increase in sales units for either product that results from the advertising is far in excess of this production capacity, which product should be advertised and what is the estimated increase in total contribution margin? (A) Product A should be produced, yielding a contribution margin of $75,000 (B) Product A should be produced, yielding a contribution margin of $133,333 (C) Product B should be produced, yielding a contribution margin of $187,500 (D) Product B should be produced, yielding a contribution margin of $250,000 (E) None of the above 4. Clay Co. has considerable excess manufacturing capacity. The accounting system indicates that the following manufacturing costs would be applied to a special order the company is considering accepting: Fixed costs $21,000 Variable costs $33,000 The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-house design will be done. Instead, the order will require the use of external designers costing $7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job? (A) $36,700 (B) $40,750 (C) $54,000 (D) $58,050 (E) None of the above
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Page 14 Accounting 102, Practice Problems - Exam 1 Solution: 1. Breakeven revenue = Fixed costs/CM ratio = (.25 x $2,000,000)/(1 – 0.70) = $1,666,667 (b) 2. The contribution margin for a “bundle” of three units of A and one unit of B is (3 x $2) + (1 x $1) = $7. The breakeven point in “bundles” is $280,000/$7 = 40,000 bundles. Since there is one unit of B in each bundle, the revenue for B at the breakeven point = 40,000 x $6 = $240,000 (b). 3. Morehead has a capacity constraint, so the amount of time each product spends on the machine is needed. Since fixed manufacturing costs are allocated at a rate of $1 per machine hour, the amount of time A spends on the machine is ¾ hour ($0.75/$1.00) and B spends 1/5 hour ($0.20.$1.00). The contribution margin per hour for A is ($4 - $2 - $1)/0.75 = $1.33 per hour, and for B is ($3 - $1.50 - $1)/0.20 = $2.50 per hour, so the company should advertise and produce B. With 100,00 machine hours available, the contribution margin is $2.50 x 100,000 = $250,000. The correct answer is d. 4. Because there is excess capacity, the fixed costs are irrelevant and there are no opportunity costs. The relevant incremental costs are $33,000 variable manufacturing costs + $7,750 for external designers = $40,750 (b).
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