...predetermined fixed overhead rate: Predetermined fixed overhead rate | = | | | | | | = | = $2 per unit | Cost per Unit | Direct material | $ 6 | | Direct labor | 4 | | Variable overhead | 3 | | a. Cost per unit under variable costing | $13 | | Fixed overhead per unit under absorption costing | 2 | | b. Cost per unit under absorption costing | $15 | 2. | a. Delizioso S.p.A. Absorption-Costing Income Statement For the Year Ended December 31, 20x1 | | | | | | Sales revenue (130,000 units sold at $20 per unit) | $2,600,000 | | Less: Cost of goods sold (at absorption cost of $15 per unit) | 1,950,000 | | Gross margin | $ 650,000 | | Less: Selling and administrative expenses: | | | Variable (at $1 per unit) | 130,000 | | Fixed | 150,000 | | Operating income | $ 370,000 | Problem 8-21 (Continued) | b. Delizioso S.p.A. Variable-Costing Income Statement For the Year Ended December 31, 20x1 | | | | | Sales revenue (130,000 units sold at $20 per unit) | $2,600,000 | | Less: Variable expenses: | | | Variable manufacturing costs (at variable cost of $13 per unit) | 1,690,000 | | Variable selling and administrative costs (at $1 per unit) | 130,000 | | Contribution margin | $ 780,000 | | Less: Fixed expenses: | | | Fixed manufacturing...
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...unit. Variable costs are $4.50 per unit, and fixed costs total $135,000 per year. Required: Answer the following independent questions: 1. What is the product’s CM ratio? 2. Use the CM ratio to determine the break-even point in sales dollars. 3. Due to an increase in demand, the company estimates that sales will increase by $56,250 during the next year. By how much should net operating income (or net operating loss) change, assuming that fixed costs do not change? 4. Assume that the operating results for last year were: | |Sales |$300,000 | | |Less variable expenses | 90,000 | | |Contribution margin |210,000 | | |Less fixed expenses | 135,000 | | |Net operating income |$ 75,000 | a. Compute the degree of operating leverage at the current level of sales. b. The president expects sales to increase by 25% next year. By what percentage should net operating income increase? 5. Refer to the original data. Assume that the company sold 16,500 units last year. The sales manager is convinced that a 5% reduction in the selling price, combined with a $22,500 increase in advertising, would cause annual sales in units to increase by one-third. Prepare two contribution income statements, one showing the results of last...
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...MGT 227 Fixed Income Securities and Markets Instructor: Sukwon Thomas Kim Office: Anderson Hall 242 Phone: (951) 827 4995 Fax: (951) E-mail: sukwonk@ucr.edu Quarter: Spring 2014 Lecture time: MW 8:40pm – 10:00pm Classroom: ANDHL 118 Course Website: http://ilearn.ucr.edu/ Office Hours: MW 2:00pm – 4:00pm SoBA Mission Statement Our mission is to develop diverse leaders, propel research-based innovation and promote the sustainable growth of Inland Southern California within the global economy. We harness the powerful resources of UC and our location at the nexus of commerce to create a laboratory for education, research, and productive partnerships across economic enterprises. The strategic activities that propel our mission include: • Conducting basic and applied research in management that explores and informs the creation, development and management of growth; • Providing degree programs that prepare our students to be effective managers and responsible community leaders with a deep understanding of the dynamics of growth in both a regional and global context; • Partnering with business and community leaders through a shared commitment to exemplary growth; and • Delivering educational programs to executives and the public at large that respond to the needs of our local, state, national, and international communities. MBA Program - Learning Goals Professional Integrity / Ethical Reasoning Skills Students will be able to recognize ethical issues, demonstrate familiarity with...
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...Case 4-33: Cost Structure; Target Profit and Break Even Analysis Question 1: Compute Pittman Company’s break-even point in sales dollars for next year assuming: a. The agents’ commission remains unchanged at 15% $12,000,000 in sales is needed to break even while employing an outside sales force with commissions of 15% of sales. b. The agents’ commission rate is increased to 20% $13,714,286 in sales is needed to break even while employing an outside sales force with commissions of 20% of sales. c. The company employs its own sales force. $15,000,000 in sales is needed to break even while employing the company's own sales force with commissions of 7.5% of sales. Before Pittman Company’s break-even point in sales can be determined, we must initially “reformat” the provided Budgeted Income Statement for the Year Ended December 31 (for the next year) to reflect a Contribution Income Statement format. The reason for this application is to separate the Variable and Fixed costs associated in selling telecommunications equipment to derive pertinent data needed to determine break even sales. The restructuring of each Income Statement may be found in Appendix A of this report. Reformatting the Income Statement allows us to determine first, the Contribution Margin. The Contribution Margin is significant in determining Break-even point whether by the number of units to break even or the number of sales dollars needed to break-even. After determining the Contribution...
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...and variable costing differ in how they handle fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead is treated as a product cost and hence is an asset until products are sold. Under variable costing, fixed manufacturing overhead is treated as a period cost and is expensed on the current period’s income statement. 7-2 Selling and administrative expenses are treated as period costs under both variable costing and absorption costing. 7-3 Under absorption costing, fixed manufacturing overhead costs are included in product costs, along with direct materials, direct labor, and variable manufacturing overhead. If some of the units are not sold by the end of the period, then they are carried into the next period as inventory. When the units are finally sold, the fixed manufacturing overhead cost that has been carried over with the units is included as part of that period’s cost of goods sold. 7-4 Absorption costing advocates argue that absorption costing does a better job of matching costs with revenues than variable costing. They argue that all manufacturing costs must be assigned to products to properly match the costs of producing units of product with the revenues from the units when they are sold. They believe that no distinction should be made between variable and fixed manufacturing costs for the purposes of matching costs and revenues. 7-5 Advocates of variable costing argue that fixed manufacturing costs are not really the cost of any...
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...Case 16-3: Bill French Note: This case is unchanged from the Eleventh Edition. Approach This case requires quite a few calculations, but it is a good case for introducing students to the uses and limitations of break-even analysis. It can be used to discuss many of the hidden assumptions involved in such an approach. Some instructors also find it a good vehicle for discussing some of the human problems arising when a young, well-educated person begins working in a business. Finally, at The University of Michigan we have found it useful to defer this case until Chapter 26, when we teach several cases on linear programming: Bill French can be used as an introductory case to raise the issue of what product mix is optimal given resource and/or sales volume constraints. Comments on Questions Question 1 There is undoubtedly a long list of assumptions that can be related to this, or any, break-even analysis. Part of the problem of dealing with analyses of this sort is that they take on the characteristic of being static even though the form of presentation might lead one to believe that here is a moving, dynamic analysis that allows for a variety of changed conditions. To an extent this is true; but there are many conditions that are assumed to be constant. It is to the assumed constants that the students must ultimately direct their attention. For instance: 1. French has had to assume that the variability of the variable costs is constant. French has thus assumed a relatively constant...
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...Jan Turyna MANAGERIAL ACCOUNTING – CASE ANALYSES CASE 1 Management Board of Furniture Company X is considering one-year contract for producing office desks. Accounting Department has prepared preliminary list of contract costs and revenues: |Specification |Amount | |1. Direct material costs, including: | | |- plywood (stock-carried in company’s store) |20000 | |- varnish (ordered) |9000 | |- metal connectors (still not ordered) |1500 | |2. Direct labor costs |20000 | |3. Indirect labor costs (salary of technical supervisor) |5000 | |4. Technical equipment, including: | | |- rented one (200/per week) |10400 | |- company’s own equipment (one year’s depreciation)...
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... | 7 | Variable manufacturing overhead | 2 | Fixed manufacturing overhead (640,000 ÷ 40,000 units) | 16 | Absorption costing unit product cost | $40 | | | b. The absorption costing income statement is: | Sales (35,000 units × $60 per unit) | $2,100,000 | | Cost of goods sold (35,000 units × $40 per unit) | 1,400,000 | | Gross margin | 700,000 | | Selling and administrative expenses (35,000 units × $2 per unit) + $560,000 | 630,000 | | Net operating income | $ 70,000 | | | | 2. a. The unit product cost under variable costing is: Direct materials | $15 | Direct labor | 7 | Variable manufacturing overhead | 2 | Variable costing unit product cost | $24 | | | b. The variable costing income statement is: Sales (35,000 units × $60 per unit) | | $2,100,000 | Variable expenses: | | | Variable cost of goods sold ($35,000 × $24 per unit) | $840,000 | | Variable selling expense (35,000 units × $2 per unit) | 70,000 | 910,000 | Contribution margin | | 1,190,000 | Fixed expenses: | | | Fixed manufacturing overhead | 640,000 | | Fixed selling and administrative expense | 560,000 | 1,200,000 | Net operating loss | | $ (10,000) | | | | Problem 6-16 (continued) 3. The difference in the ending inventory relates to a difference in the handling of fixed manufacturing overhead costs. Under variable costing, these...
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...Case l6-1: Hospital Supply, Inc.* Approach The Hospital Supply case is placed in this chapter for those instructors who wish to expose students to alternative choice decisions and the related differential costing prior to getting into the details of full costing. Because in many programs the marketing and management accounting courses begin at the same time, this case also enables the accounting instructor to assist his or her colleagues in marketing by introducing break-even analysis at the start of the term; questions 1 and 4 can be used for this purpose. The case is also useful for giving students a good understanding of the fixed/variable cost dichotomy. In particular, I think it worthwhile to emphasize to students that fixed costs may be "unitized" (i.e., allocated to individual units of product) for certain purposes, and that this allocation procedure may make such costs appear to be variable. Indeed, many students treat the $660 per unit fixed manufacturing overhead and $770 per unit fixed marketing costs as though they were variable costs, despite the fact that they are clearly labeled "fixed." Finally, I use the case to introduce the concept of opportunity cost. Question 3 can be used in this way, as can question 5 if you postulate a scrap value for the obsolete hoists. * This teaching note was prepared by Professor James S. Reece based on solutions prepared by Professor Michael Maher. Copyright © by. James S. Reece. Comments on Questions Question 1 Total fixed...
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...until a later period, when the products are sold. The product costs remain in the Work-in-Process or Finished-Goods Inventory account until the time period when the goods are sold. 2-3 The most important difference between a manufacturing firm and a service industry firm, with regard to the classification of costs, is that the goods produced by a manufacturing firm are inventoried, whereas the services produced by a service industry firm are consumed as they are produced. Thus, the costs incurred in manufacturing products are treated as product costs until the period during which the goods are sold. Most of the costs incurred in a service industry firm to produce services are operating expenses that are treated as period costs. 4. The five types of production processes are as follows: ▪ Job shop: Low production volume; little standardization; one-of-a-kind products. Examples include custom home construction, feature film production, and ship building. ▪ Batch: Multiple products; low volume. Examples include construction equipment, tractor trailers, and cabin cruisers. ▪ Assembly line: A few major products; higher volume. Examples include kitchen appliances and automobile assembly. ▪ Mass customization: High production volume; many standardized components; customized combination of components. An...
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...ANSWERS 1. Do you think it was important for Michael to stipulate that he wanted a business that he would enjoy, that would give back to the community, that would grow and be more successful every year, and that would generate a net income of $25,000 annually? Why or why not? It's always important to set goals to measure the success of any business. However, the first three goals are more of a mission statement while the fourth is an objective for the company. The problem is there no plan and one objective. What is he going to do if the company doesn't net the $25,000? Or what if it nets the $25,000 but there is not enough cash to sustain the business? There need to be more objectives to make allowances for these types of situations. There needs to be a plan of action where goals change from period to period. Otherwise, the business cannot succeed. 2. If Michael has sales of $12,000 during January of his first year of business, determine the amount of variable and fixed costs associated with utilities and maintenance using the high-low method for each. Hi-Lo Maintenance | Units | Cost | September | 8,000 | $1,914.00 | January | 2,000 | $1,716.00 | Difference | 6,000 | $198.00 | Cost/unit | | $0.03 | | | | | | | Hi-Lo Utilities | Units | Cost | September | 8,000 | $1,400.00 | January | 2000 | $1,100.00 | Difference | 6,000 | $300.00 | Cost/Unit | | $0.05 | | | | January Sales | 12000 | | January /unit...
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...Case Preparation Questions (Note that questions sometimes continue on the next page) Use a spreadsheet program such as Excel for computations for all cases Riley Supply 1. Prepare one indirect cash flow statement (operating-investing-financing) for 2004-2005 and a second one for 2005-2006. Do not aggregate any accounts. 2. Calculate common-size income statement for each year. 3. Calculate all financial ratios (use “A Basis Set of Financial Ratios”) for each year. You will always be expected to have all ratios and cash flows statements for all years of data. Coming to class without all if these completed means that you are unprepared for quizzes and class discussions. 4. Identify the major factors influencing Riley’s cash flow. Use the cash flow statements together with the ratios and common-size statements. 5. What is the length of Riley’s cash conversion cycle? Does it take a long time for Riley to go from spending cash to receiving cash? Why? 6. What are the implications of Riley’s cash flow for the financing needs of the firm? Westmoreland Inc. 1. Examine the beginning financial statements (2005) and the pro forma statements (2006 projected) for Westmoreland (Exhibit 1). Do complete ratio, common-size income statement and cash flow statement analyses with these data. The pro forma statements reflect management’s opinion about what will happen in the future. Incorporated into these statements is their business plan. 2. What...
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...ACC00152 Business Finance Topic 3 Tutorial Answers 1. Widget Pty Ltd is analysing the prospect of purchasing an additional (and very specialised) widget-making machine, the XX1000. The XX1000 costs $150,000 installed and has an effective life of 10 years. The company will use the prime cost depreciation method for tax purposes and management expects it will be able to sell the machine at the end of its effective life for about $20,000. It is estimated that the additional machine will increase annual revenues by $200,000 and operating expenses will be around 80% of revenues. The expansion will require an additional initial investment of $5,000 in its stock of raw materials, which will be recovered at the end of the project. The company's tax rate is 30% and the required return is 12%. Prepare a schedule of the relevant cash flows generated by the new machine, calculate the NPV, and advise management as to whether they should invest the new machine. Depreciation: For an effective life of 10 years, the prime cost depreciation rate is 10%. Therefore: 150000 x 10% = $15000 depreciation expense per year. | Year 0 | Years 1-9 | Year 10 | Revenue | | $200 000 | $200 000 | Operating costs (200 000 x 80%) | | (160 000) | (160 000) | Depreciation | | (15 000) | (15 000) | Gain on sale of equipment* | | | 20 000 | EBIT | | 25 000 | 45 000 | Tax | | (7 500) | (13 500) | Incremental earnings | | 17 500 | 31 500 | Add back depreciation | | 15 000 | 15 000...
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...formula: [pic] b. In the equation approach, the following profit equation is used: |[pic] |fixed expenses |[pic] | This equation is solved for the sales volume in units. c. In the graphical approach, sales revenue and total expenses are graphed. The break-even point occurs at the intersection of the total revenue and total expense lines. 7-2 The term unit contribution margin refers to the contribution that each unit of sales makes toward covering fixed expenses and earning a profit. The unit contribution margin is defined as the sales price minus the unit variable expense. 7-3 In addition to the break-even point, a CVP graph shows the impact on total expenses, total revenue, and profit when sales volume changes. The graph shows the sales volume required to earn a particular target net profit. The firm's profit and loss areas are also indicated on a CVP graph. 7-4 The safety margin is the amount by which budgeted sales revenue exceeds break-even sales revenue. 7-5 An increase in the fixed expenses of any enterprise will increase its break-even point. In a travel agency, more clients must be served before the fixed expenses are covered by the agency's service fees. 7-6 A decrease in the variable expense per pound of oysters results in an increase in the contribution margin per pound. This will reduce the company's...
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...Individual assignment #1 – Matteo Ambrogini CASE: Cafè Xaragua Questions 1) Prepare a forecast for the first year of operations using the information provided in the case. Clearly identify your assumptions. See the frame used to analyze the case in Exhibit 1, the forecast in Exhibit 2, a breakdown of costs calculations in Exhibit 3, a breakdown of “Equipment & Fixture” costs and time allocation of all fixed costs in Exhibit 4. ASSUMPTIONS MADE (refer to the framework shown in exhibit 1 to identify each element: Price, Quantity, Fixed costs, Variable costs): General Assumptions: I assumed the cafè to stay opened 50 weeks, 350 days per year. Price: All data available from the case. No assumptions needed. Quantity: 200-300 drinks per day, assumed 250 Assumed 1 drink per customer, so 250 customers per day 50% of customers purchasing a baked good, so 125 baked goods per day 10% of customers purchasing a bag of coffee, so 25 bags of coffee per day Fixed Costs: Assumptions on useful life of fixed assets and on allocation periods are reported in exhibit 4. The useful life of fixed assets and equipment has been estimated by research and personal experience. I assumed legal fees, permits etc. to be renewed every 10 years, the property to be improved and maintained every 10 years, the roaster installation cost to be allocated over time coherently to its assumed useful life of 5 years. Variable Costs: All data available from the case. No assumption needed. [216 words] 2)...
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