Bertie's Burritos, a fast food enterprise, wants to understand his cost structure. He collected data, which appears below, to analyze costs using the high-low method. \[\begin{array} { | l | r | r | } \hline \text { Month } & \text { Volume } & \text { Total costs } \\ \hline \text { January } & 5,000 & \$ 2,700 \\ \hline \text { February } & 7,000 & \$ 3.700 \\ \hline \text { March } & 6,000 & \$ 3.400 \\ \hline \end{array}\] Which is true?

A) Estimated variable costs are 70 cents per burrito B) Fixed costs cannot be estimated C) Estimated fixed costs are $200 D) Total costs at volume of 8,000 are estimated at $4,200 E) c) and d) only A) Estimated variable costs are 70 cents per burrito B) Fixed costs cannot be estimated C) Estimated fixed costs are $200 D) Total costs at volume of 8,000 are estimated at $4,200 E) c) and d) only

A company sells three products as shown below: \[\begin{array} { | l | r | r | r | r | } \hline & \text { Product X} & \text { Product Y} & \text { Product Z} & \text { Total } \\ \hline \text { Units } & 60,000 & 140,000 & 50,000 & 250,000 \\ \hline \text { Sales } & \$ 90,000 & \$ 150,000 & \$ 60,000 & \$ 300,000 \\ \hline \text { Variable Costs } & \$ 63,000 & \$ 93,000 & \$ 19,000 & \$ 175,000 \\ \hline \begin{array} { l } \text { Contribution } \\ \text { Margin } \end{array} & & & & \$ 125,000 \\ \hline \text { Fixed Costs } & & & &\$100,000 \\ \hline \end{array}\] These three products all always sold in fixed proportions. In other words, Product X always accounts for 24% of total sales (60,000/250,000), Product Y always accounts for 56% of total sales (140,000/250,000), and Product Z always accounts for 20% of total sales (50,000/250,000). Required: a. How many units of each product need to be sold to break-even? b. How many units must of each product must be sold if the company wants to have a profit of $50,000?

a. Weighted Contribution Margin per Unit

A) must never be negative B) may be found in financial statements (annual report) C) reflect the benefit of the next best alternative D) are pecuniary in nature E) none of the above A) must never be negative B) may be found in financial statements (annual report) C) reflect the benefit of the next best alternative D) are pecuniary in nature E) none of the above

Francois French manufactures cheese, which he normally sells at €20/kg, on which sales commission of 5% is paid. Plant capacity is 7,500 kg/month. Income tax is levied at 30%. $\quad $$\quad $$\quad $$\quad $$\quad $$\text { Fixed costs } $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$ \text { Costs per kg. } $ $\begin{array}{|l|r|l|c|} \hline \text { Plant depreciation } & £8,000 & \text { Direct materials } & £4 \\ \hline \text { Other plant costs } & 15,000 & \text { Direct labor } & 2 \\ \hline \text { Corporate salaries } & 10,000 & \text { Var. factory } \mathrm{O} / \mathrm{H} & 3 \\ \hline \text { Advertising } & 3,000 & &\\ \hline \end{array}$ If sales are 5,000 kgs, which of the following is true?

A) Total contribution margin is €50,000 B) Ratio of total contribution margin to net income before taxes is 3.57 C) Taxes payable are €4,200 D) Operating leverage is 42% E) All of the above A) Total contribution margin is €50,000 B) Ratio of total contribution margin to net income before taxes is 3.57 C) Taxes payable are €4,200 D) Operating leverage is 42% E) All of the above

Fixed, Variable, and Average Costs Midstate University is trying to decide whether to allow 100 more students into the university. Tuition is $5,000 per year. The controller has determined the following schedule of costs to educate students: \[\begin{array} { | c | r | } \hline \text { Number of Students } & \text { Total Costs } \\ \hline 4,000 & \$ 30,000,000 \\ \hline 4,100 & 30,300,000 \\ \hline 4,200 & 30,600,000 \\ \hline 4,300 & 30,900,000 \\ \hline \end{array}\] The current enrollment is 4,200 students. The president of the university has calculated the cost per student in the following manner: $30,600,000/4,200 students = $7286 per student. The president was wondering why the university should accept more students if the tuition is only $5,000. Required: a. What is wrong with the president's calculation? b. What are the fixed and variable costs of operating the university?

a. The president of the university has c

Exam 2: The Nature of Costs

Measer Enterprises produces energy-efficient light bulbs and operates in a highly competitive market in which the bulbs are sold for $4.50 each. Because of the nature of the production technology, the firm can produce only between 10,000 and 13,000 units per month, in fixed increments of 1,000 units. Measer has the following cost structure: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\text { Production and Cost Data }$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\text { Units Produced }$ 10,000 11,000 12,000 13,000 Factory cost. variable \ 37.000 \ 40.800 \ 44.600 \ 48.400 Factory cost, fixed 9.000 9.000 9.000 9.000 Selling cost, variable 6.000 6.600 7.400 8.200 Administration, fixed 6.000 6.000 6.000 6.000 Total \ 58.000 \ 62.400 \ 67.000 \ 71.600 Average unit cost \ 5.80 \ 5.67 \ 5.58 \ 5.51 Required: At what output level should the firm operate?

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Question 1

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"Beware of unit costs." If you focus solely on the unit cost numbers in the problem, you are likely to be misled.
In the long run, the firm should shut down because it cannot cover fixed costs. However, if the firm has already incurred or is liable for fixed factory and administration costs, then it should continue to operate if it can cover variable costs. Notice the assumption regarding timing. Fixed costs are assumed to have been incurred whereas variable costs are assumed not to have been incurred yet. Given these assumptions, the loss-minimizing rate of output is 11 million units: $\begin{array}{l}\text { Rate of Production and Sale (000's units) }\\\begin{array} { | l | r | r | r | r | } \hline & 10,000 & 11,000 & 12,000 & 13,000 \\\hline \begin{array} { l } \text { Sales (@ } \\\$ 4.50 / \text { unit }\end{array} & \$ 45,000 & \$ 49,500 & \$ 54,000 & \$ 58,500 \\\hline \text { Total Costs } & \underline { 58,000 } & \underline { 62,400 } & \underline { 67,000 } & \underline { 71,600 } \\\hline \text { Profit (Loss) } & ( \$ 13,000 ) & ( \$ 12,900 ) & \langle \$ 13,000 ) & ( \$ 13,100 ) \\\hline\end{array}\end{array}$ Notice, minimizing average unit costs is not the basis for choosing output levels. Average unit costs are minimized at 13 million units.
An alternative way to solve the problem is to calculate contribution margin, as below: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\text { OUTPUT LEVELS }$
$\begin{array} { | l | r | r | r | r | } \hline & 10,000 & 11,000 & 12,000 & 13,000 \\\hline \text { Variable Cost } & \$ 43,000 & \$ 47,400 & \$ 52,000 & \$ 56,600 \\\hline \begin{array} { l } \text { Average Variable } \\\text { Cost/unit }\end{array} & \$ 4.30 & \$ 4.31 & \$ 4.33 & \$ 4.35 \\\hline \begin{array} { l } \text { Contribution } \\\text { margin/unit }\end{array} & \$ .20 & \$ .19 & \$ .17 & \$ .15 \\\hline \begin{array} { l } \text { Contribution margin } \\\text { units } \times \text { output } \\\text { level) }\end{array} & \$ 2,000 & \$ 2,090 & \$ 2,040 & \$ 1,950 \\\hline\end{array}$ The preceding table indicates that maximizing contribution margin (not contribution margin per unit) also gives the right answer. At 11 million units, $2,090 is being generated towards covering fixed costs.
Minimizing average variable cost gives the wrong answer.

Exotic Roses, owned by Margarita Rameriz, provides a variety of rare rose bushes to local nurseries that sell Rameriz's roses to the end consumer (landscapers and retail customers). Rameriz grows the roses from cuttings that she has specifically cultivated for their unusual characteristics (color, size, heartiness, and resistance to disease). Margarita's roses are in great demand as evidenced by the wholesale price she charges nurseries, $15 per potted plant. Exotic Roses has the following cost structure (variable costs are per potted plant): Fixed Costs per Year Variable Costs Plant materials \ 0.50 Pot 0.30 Labor \ 8,000 0.70 Utilities 9.000 Rent 7.500 Other costs 2.500 Required: a. How many potted rose plants must Exotic Roses sell each year to break even? b. If Rameriz wants to make profits of $10,000 before taxes per year, how many potted rose plants must be sold? c. If Rameriz wants to make profits of $10,000 after taxes per year, how many potted rose plants must be sold assuming a 35 percent income tax rate?

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Question 2

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a. Fixed costs total $27,000 per year and variable costs are $1.50 per plant. The break-even number of potted roses is found by solving the following equation for Q:
Profits = $15 Q - $1.50 Q - $27,000 = 0
Or Q = $27,000/($15 - $1.50) = $27,000/$13.50 = 2,000 plants
b. To make $10,000 of profits before taxes per year, solve the following equation for Q:
Profits = $15 Q - $1.50 Q - $27,000 = $10,000
Or Q = $37,000/($15 - $1.50) = $37,000/$13.50 = 2,740.74 plants
c. To make $10,000 of profits AFTER taxes per year, solve the following equation for Q:
Profits = [$15 Q - $1.50 Q - $27,000] × (1 - 0.35) = $10,000
= [$15 Q - $1.50 Q - $27,000] = $10,000/0.65 = $15,384.62
Or, Q = $42,384.62/$13.50 = 3,139.60 plants

"Price gouging" or increased opportunity cost? After the Iraqi invasion of Kuwait in August 1990, the world price of crude oil doubled to more than $30 per barrel in anticipation of reduced supply. Immediately, the oil companies raised the retail price on refined oil products even though these products were produced from oil purchased at the earlier, lower prices. The media charged the oil companies with profiteering and price gouging, and politicians promised immediate investigations. Required: Critically evaluate the charge that the oil companies profited from the Iraqi invasion. What advice would you offer the oil companies?

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Question 3

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The opportunity cost of the oil in process was higher after the invasion and thus the oil companies were justified in raising prices as quickly as they did. For example, suppose the oil company had one barrel of oil purchased at $15. This barrel was refined and processed for another $5 of cost and then the refined products from the barrel sold for $21. Replacing that barrel requires the oil company to pay another $15 per barrel on top of the $15 per barrel it is already paying. Therefore, in order to replace the old barrel, the prices of the refined products must be raised as soon as the crude oil price rises.
However, accounting treats the realized holding gain on the old oil as an accounting profit, not as an opportunity cost. Therefore, the income statement of oil companies with large stocks of in-process crude will show accounting profits, unless they can somehow defer these profits. Switching to income-decreasing accounting methods and writing off obsolete equipment will help the oil companies avoid the political embarrassment of reporting the holding gains. In January 1990, the large oil companies received significant adverse media publicity when they reported large increases in fourth-quarter profits.
It is useful having discussed this problem to ask the following question: What happens to oil companies in the reverse situation when a large, unexpected price drop occurs? Suppose the oil company purchased old barrels for $15 and sold the refined products for $21. New barrels now can be purchased for $10. The company would like to keep selling refined products at $21, but competition from other oil companies will push the price of refined products down. Depending on how quickly the price of refined products fall, the oil companies will report smaller (maybe even negative) accounting earnings as their inventory of $15 oil gets refined and sold, but at lower prices.

Hardley sells mamburgers. He faces fixed costs of $18,000 per month and variable production and marketing costs of $2 per mamburger. Market research has developed the following demand schedule. Which price/volume combination should Yardley choose?

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Question 4

You are evaluating ways to expand an optometry practice and its earnings capacity. Optometrists perform eye exams, prescribe corrective lenses (eyeglasses and contact lenses), and sell corrective lenses. One way to expand the practice is to hire an additional optometrist. The annual cost of the optometrist, including salary, benefits, and payroll taxes, is $63,000. You estimate that this individual can conduct two exams per hour at an average price to the patient of $45 per exam. The new optometrist will work 40-hour weeks for 48 weeks per year. However, because of scheduling conflicts, patient no-shows, training, and other downtime, the new optometrist will not be able to conduct, bill, and collect 100 percent of his or her available examination time. From past experience, you know that each eye exam drives additional product sales. Each exam will lead to either an eyeglass sale with a net profit (revenue less cost of sales) of $90 (not including the exam fee) or a contact lens sale with net profits of $65 (not including the exam fee). On average, 60 percent of the exams lead to eyeglass sales, 20 percent lead to contact lens sales, and 20 percent of the exams lead to no further sales. Besides the salary of the optometrist, additional costs to support the new optometrist include: Office occupancy costs \ 1,200/ year Leased equipment \ 330/ year Office staff \ 23,000/ year Required: In terms of the percentage of available time, what is the minimum level of examinations the new optometrist must perform to recover all the incremental costs of being hired?

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Question 5

Bertie's Burritos, a fast food enterprise, wants to understand his cost structure. He collected data, which appears below, to analyze costs using the high-low method. Month Volume Total costs January 5,000 \ 2,700 February 7,000 \ 3.700 March 6,000 \ 3.400 Which is true?

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Question 6

A company sells three products as shown below: Product X Product Y Product Z Total Units 60,000 140,000 50,000 250,000 Sales \ 90,000 \ 150,000 \ 60,000 \ 300,000 Variable Costs \ 63,000 \ 93,000 \ 19,000 \ 175,000 Contribution Margin \ 125,000 Fixed Costs \1 00,000 These three products all always sold in fixed proportions. In other words, Product X always accounts for 24% of total sales (60,000/250,000), Product Y always accounts for 56% of total sales (140,000/250,000), and Product Z always accounts for 20% of total sales (50,000/250,000). Required: a. How many units of each product need to be sold to break-even? b. How many units must of each product must be sold if the company wants to have a profit of $50,000?

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Question 7

The Itagi Computer Company from Japan is looking to build a factory for making Wi-Fi routers in the United States. The company is concerned about the safety and well-being of its employees and wants to locate in a community with good schools. The company also wants the factory to be profitable and is looking for subsidies from potential communities. Encouraging new business to create jobs for citizens is important for communities, especially communities with high unemployment. Wellville has not been very well since the shoe factory left town. The city officials have been working on a deal with Itagi to get the company to locate in Wellville. Itagi officials have identified a 20 acre undeveloped site. The city has tentatively agreed to buy the site for $50,000 for Itagi and not require any payment of property taxes on the factory by Itagi for the first five years of operation. The property tax deal will save Itagi $3,000,000 in taxes over the five years. This deal was leaked to the local newspaper. The headlines the next day were: "Wellville Gives Away $3,000,000 + to Japanese Company". Required: a. Do the headlines accurately describe the deal with Itagi? b. What are the relevant costs and benefits to the citizens of Wellville of making this deal?

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Question 8

Easy Go Company manufactures a line of electric garden tools that are sold in general hardware stores. The company's controller, Amy Tait, has just received the sales forecast for the coming year for Easy Go's three products: weeders, hedge clippers, and leaf blowers. Easy Go has experienced considerable variations in sales volumes and variable costs over the past two years, and Harlow believes the forecast should be carefully evaluated from a cost-volume-profit viewpoint. The preliminary budget information for the next year is presented below. Weeders Hedge clippers Leaf Blowers Unit sales 50,000 50,000 100,000 Unit selling price \ 28.00 \ 36.00 \ 48.00 Variable manufacturing cost per unit 13.00 12.00 25.00 Variable selling cost per unit 5.00 4.00 6.00 For the next year, Easy Go's fixed factory overhead is budgeted at $2 million, and the company's fixed selling and administrative expenses are forecast to be $600,000. Easy Go has a tax rate of 40 percent. Required: a. Determine Easy Go Co.'s budgeted net income for next year. b. Assuming that the sales mix remains as budgeted, determine how many units of each product Easy Go must sell in order to break even next year. c. Determine the total dollar sales Easy Go must sell next year in order to earn an after-tax net income of $450,000. d. After preparing the original estimates, Easy Go determines that its variable manufacturing cost of leaf blowers will increase 20 percent and the variable selling cost of hedge clippers can be expected to increase $1 per unit. However, Easy Go has decided not to change the selling price of either product. In addition, Easy Go learns that its leaf blower is perceived as the best value on the market, and it can expect to sell three times as many leaf blowers as any other product. Under these circumstances, determine how many units of each product Easy Go will have to sell to break even in next year. e. Explain the limitations of cost-volume-profit analysis that Amy Tait should consider when evaluating Easy Go's next year's budget.

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Question 9

Pamela in Bamplona makes bull-repellent scent according to a traditional Spanish recipe, which normally sells at €9 (Euros) per unit. Normal production volume is 10,000 ounces per month. Average cost is €5 per ounce, of which €2 is direct material and €1 is variable conversion cost. This product is seasonal. After July, demand for this product drops to 6,000 ounces monthly. In November, Umberto offers to buy 1,500 ounces for €6,000. If Pamela accepts the order, she must design a special label for Umberto at a cost of €500. Each label will cost 25 cents to make and apply. Pamela should:

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Question 10

Which of the following can be an opportunity cost?

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Question 11

Break-even and Cost-Volume-Profit with Taxes DisKing Company sells used DVDs on line. The projected after-tax net income for the current year is $120,000 based on a sales volume of 200,000 DVDs. DisKing has been selling the disks at $16 each. The variable costs consist of the $10 unit purchase price of the disks and a handling cost of $2 per disk. DisKing's annual fixed costs are $600,000 and DisKing is subject to a 40 percent income tax rate. Required: a. Calculate DisKing Company's break-even point for the current year in number of DVDs. b. Calculate the increased after-tax income for the current year if projected unit sales volume increase 10 percent. c. Management expects that the price DisKing pays for used DVDs to increase 30 percent next year. If the unit selling price remains at $16, calculate the volume of sales in dollars that DisKing Company must achieve in the coming year to maintain the same after-tax net income as projected for the current year.

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Question 12

With the possibility of the US Congress relaxing timber cutting restrictions, a local lumber company is considering an expansion of its facilities. The company believes it can sell lumber for $0.18/board foot. A board foot is a measure of lumber. The tax rate for the company is 30 percent. The company has the following two opportunities: • Build Factory A with annual fixed costs of $20 million and variable costs of $0.10/board foot. This factory has an annual capacity of 500 million board feet. • Build Factory B with annual fixed costs of $10 million and variable costs of $0.12/board foot. This factory has an annual capacity of 300 million board feet. Required: a. What is the break-even point in board feet for Factory A? b. If the company wants to generate an after tax profit of $2 million with Factory B, how many board feet would the company have to process and sell? c. If demand for lumber is uncertain, which factory is riskier? d. At what level of board feet would the after-tax profit of the two factories be the same?

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Question 13

Opportunity Costs:

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Question 14

Spring Company manufactures hard drives for computer manufacturers. At the beginning of this year Spring began shipping a much-improved hard drive, Model W899. The W899 was an immediate success and accounted for $5 million in revenues for Spring this year. While the W899 was in the development stage, Spring planned to price it at $130. In preliminary discussions with customers about the W899 design, no resistance was detected to suggestions that the price might be $130. The $130 price was considerably higher than the estimated variable cost of $70 per unit to produce the W899, and it would provide Spring with ample profits. Shortly before setting the price of the W899, Spring discovered that a competitor had a product very similar to the W899 and was no more than 60 days behind Spring's own schedule. No information could be obtained on the competitor's planned price, although it had a reputation for aggressive pricing. Worried about the competitor, and unsure of the market size, Spring lowered the price of the W899 to $100. It maintained the price although, to Spring's surprise, the competitor announced a price of $130 for its product. After reviewing the current year's sales of the W899, Spring's management concluded that unit sales would have been the same if the product had been marketed at the original price of $130 each. Management has predicted that next year's sales of the W899 would be either 85,000 units at $100 each or 60,000 units at $130 each. Spring has decided to raise the price of the disk drive to $130 effective immediately. Having supported the higher price from the beginning, Sharon Haley, Spring's marketing director, believes that the opportunity cost of selling the W899 for $100 should be reflected in the company's internal records and reports. In support of her recommendation, Haley explained that the company has booked these types of costs on other occasions when purchase discounts not taken for early payment have been recorded. Required: a. Define opportunitycost and explain why opportunity costs are not usually recorded. b. What is the current year's opportunity cost? c. Explain the impact of Spring Company's selection of the $130 selling price for the W899 on next year's operating income. Support your answer with appropriate calculations.

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Question 15

Francois French manufactures cheese, which he normally sells at €20/kg, on which sales commission of 5% is paid. Plant capacity is 7,500 kg/month. Income tax is levied at 30%. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\text { Fixed costs }$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\text { Costs per kg. }$ Plant depreciation £8,000 Direct materials £4 Other plant costs 15,000 Direct labor 2 Corporate salaries 10,000 Var. factory / 3 Advertising 3,000 If sales are 5,000 kgs, which of the following is true?

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Question 16

Davos Inc. makes fiberglass ski-boards in Switzerland. Identify the correct matching of terms.

(Multiple Choice)

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Question 17

The Mojave Water Agency (MWA) sets water policy and water rates for a desert area that faces a severe water shortage. It has 200,000 customers who are charged $100 per month for the first 20,000 cubic feet (cu.ft) and 1 cent per cu.ft thereafter. The average customer bill is $200 per month. It costs the agency ¼ cent per cu.ft to monitor and bill for usage. The MWA wants to cut costs by replacing metered billing with a flat fee which would be added to each property owner's real estate tax bill. Which is true?

(Multiple Choice)

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Question 18

Fixed, Variable, and Average Costs Midstate University is trying to decide whether to allow 100 more students into the university. Tuition is $5,000 per year. The controller has determined the following schedule of costs to educate students: Number of Students Total Costs 4,000 \ 30,000,000 4,100 30,300,000 4,200 30,600,000 4,300 30,900,000 The current enrollment is 4,200 students. The president of the university has calculated the cost per student in the following manner: $30,600,000/4,200 students = $7286 per student. The president was wondering why the university should accept more students if the tuition is only $5,000. Required: a. What is wrong with the president's calculation? b. What are the fixed and variable costs of operating the university?

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Question 19

John invested $12,000 in the stock of Hyper Cyber Eight years later, Hyper Cyber's shares reached $125,000, but John held onto the shares in the belief that their price would double in the next five years. Unfortunately, Hyper Cyber did not double. Rather the market value of John's shares today is $4,000. If the shares were sold and the proceeds invested in another investment, they would likely earn 5% per annum. Which of the following terms and values is correct?

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Question 20

Showing 1 - 20 of 32

Hardley sells mamburgers. He faces fixed costs of $18,000 per month and variable production and marketing costs of $2 per mamburger. Market research has developed the following demand schedule. Which price/volume combination should Yardley choose?

Bertie's Burritos, a fast food enterprise, wants to understand his cost structure. He collected data, which appears below, to analyze costs using the high-low method. Month Volume Total costs January 5,000 \ 2,700 February 7,000 \ 3.700 March 6,000 \ 3.400 Which is true?

Which of the following can be an opportunity cost?

Opportunity Costs:

Davos Inc. makes fiberglass ski-boards in Switzerland. Identify the correct matching of terms.

Introduction

Opportunity Cost of Capital and Capital Budgeting

Organizational Architecture

Responsibility Accounting and Transfer Pricing

Budgeting

Cost Allocation: Theory

Cost Allocation: Practices

Absorption Cost System

Criticisms of Absorption Cost Systems: Incentives to Overproduce

Criticisms of Absorption Cost Systems: Inaccurate Product Costs

Standard Costs: Direct Labor and Materials

Overhead and Marketing Variances

Management Accounting in a Changing Environment

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