Connect - Managerial Accounting Exam (Ch 4-6)

Questions 1-3

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Sara’s Salsa Company produces its condiments in two types: Extra Fine for restaurant customers and Family Style for home use. Salsa is prepared in department 1 and packaged in department 2. The activities, overhead costs, and drivers associated with these two manufacturing processes and its production support activities follow.

Process	Activity	Overhead cost				Driver	Quantity
Department 1	Mixing		$	6,000		Machine hours	2,400
	Cooking			10,800		Machine hours	2,400
	Product testing			114,000		Batches	750
			$	130,800
Department 2	Machine calibration		$	325,000		Production runs	650
	Labeling			18,000		Cases of output	160,000
	Defects			6,000		Cases of output	160,000
			$	349,000
Support	Recipe formulation		$	84,000		Focus groups	50
	Heat, lights, and water			42,000		Machine hours	2,400
	Materials handling			80,000		Container types	10
			$	206,000

Additional production information about its two product lines follows.

	Extra Fine		Family Style
Units produced	35,000	cases	125,000	cases
Batches	350	batches	400	batches
Machine hours	1,000	MH	1,400	MH
Focus groups	34	groups	16	groups
Container types	4	containers	6	containers
Production runs	260	runs	390	runs

1.

Required:
1.	Using a plantwide overhead rate based on cases, compute the overhead cost that is assigned to each case of Extra Fine Salsa and each case of Family Style Salsa. (Round your intermediate calculations and final answers to 2 decimal places.)

	Plantwide overhead rate $4.29 per case

(130800+349000+206000) / (35000+125000)

2.	Using the plantwide overhead rate, determine the total cost per unit for the two products if the direct materials and direct labor cost is $7 per case of Extra Fine and $6 per case of Family Style. (Round your intermediate calculations and final answers to 2 decimal places.)

	Total cost per unit Extra Fine $11.29 unit Family Style $10.29 unit

4.29+7
4.29+6

3.1	Assume the market price of Extra Fine Salsa is $15 per case and the market price of Family Style Salsa is $10 per case, determine the gross profit per case for each product. (Round your intermediate calculations and final answers to 2 decimal places.)

	Extra Fine Profit $3.71 Family Style Loss $(0.29)

15-11.29
10-10.29

3.2	What might management conclude about the Family Style Salsa product line?
	Eliminate Family Style

2.

4.	Using ABC, compute the total cost per case for each product type if the direct labor and direct materials cost is $7 per case of Extra Fine and $6 per case of Family Style. (Round your intermediate calculations and final answers to 2 decimal places.)

Extra fine Family Style Activity Overhead Cost Activity Drivers Activity Rate Activity Drivers Overhead assigned Activity Drivers Overhead assigned Mixing and cooking $16,800 2,400 machine hours $7.00 per machine hours 1,000 $7,000 1,400 9,800 Production testing $114,000 750 batches $152.00 per batch 350 $53,200 400 60,800 Machine calibration $325,000 650 runs $500.00 per run 260 130,000 390 195,000 Labeling and Defects $24,000 160,000 cases $0.15 per case 35,000 5,250 125,000 18,750 Recipe formulation $84,000 50 groups $1,680.00 per group 34 57,120 16 26,880 Heat, light and water $42,000 2,400 machine hours $17.50 per machine hour 1,000 17,500 1,400 24,500 Materials handling $80,000 10 container types $8,000.00 per type 4 32,000 6 48,000 Total overhead costs assigned $302,070 Total overhead costs assigned $383,730 Total units produced 35,000 Total units produced 125,000 Overhead cost per unit $8.63 Overhead cost per unit $3.07 Extra fine Family Style Direct materials and direct labor $7 $6 Overhead 8.63 3.07 Total cost/case $15.63 $9.07

3.

5.	Assume if the market price is $15 per case of Extra Fine and $10 per case of Family Style, determine the gross profit per case for each product. (Round your intermediate calculations and final answers to 2 decimal places. Use parenthesis to indicate a loss. )

	Extra Fine Loss $(0.63) Family Style Profit $0.93

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Questions 4-8

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Astro Co. sold 19,500 units of its only product and incurred a $45,700 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2014’s activities, the production manager notes that variable costs can be reduced 50% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $145,000. The maximum output capacity of the company is 40,000 units per year.

ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31, 2013
Sales		$	721,500
Variable costs			577,200
Contribution margin			144,300
Fixed costs			190,000
Net loss		$	(45,700	)

4.

Required:
1.	Compute the break-even point in dollar sales for year 2013.

5.

2.	Compute the predicted break-even point in dollar sales for year 2014 assuming the machine is installed and there is no change in the unit sales price.

6.

3.	Prepare a forecasted contribution margin income statement for 2014 that shows the expected results with the machine installed. Assume that the unit sales price and the number of units sold will not change, and no income taxes will be due.

7.

4.	Compute the sales level required in both dollars and units to earn $105,000 of after-tax income in 2014 with the machine installed and no change in the unit sales price. Assume that the income tax rate is 30%.

8.

5.	Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume an income tax rate of 30%.

	ASTRO COMPANY Forecasted Contribution Margin Income Statement For Year Ended December 31, 2014 $ Per Unit $ Sales $37.00 $808,339 Variable costs $14.80 323,336 Contribution margin $22.20 485,003 Fixed costs 335,000 Income before taxes 150,003 Income taxes 45,001 Net income 105,002

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[The following information applies to the questions displayed below.]

Dowell Company produces a single product. Its income statement under absorption costing for its first two years of operation follow.

		2012		2013
Sales ($46 per unit)	$	1,058,000	$	1,978,000
Cost of goods sold ($31 per unit)		713,000		1,333,000
Gross margin		345,000		645,000
Selling and administrative expenses		285,250		320,250
Net income	$	59,750	$	324,750

  

Additional Information
a.	Sales and production data for these first two years follow.

  

	2012	2013
Units produced	33,000	33,000
Units sold	23,000	43,000

  

b.	Variable cost per unit and total fixed costs are unchanged during 2012 and 2013. The company's $31 per unit product cost consists of the following.

  

Direct materials	$	5
Direct labor		8
Variable overhead		8
Fixed overhead ($330,000/33,000 units)		10
Total product cost per unit	$	31

  

c.	Selling and administrative expenses consist of the following.

  

		2012		2013
Variable selling and administrative ($1.75 per unit)	$	40,250	$	75,250
Fixed selling and administrative		245,000		245,000
Total selling and administrative	$	285,250	$	320,250

9.

1.	Complete income statements for the company for each of its first two years under variable costing.

10.

2.	What are the differences between the absorption costing income and the variable costing income for these two years?