Multiple Choice 1.The Breakeven Point Is The Activity Level Where

Cost Accounting Exam #2, Fall 2003

Multiple Choice Circle the best answer

1. The breakeven point is the activity level where a. revenues equal fixed costs. b. revenues equal variable costs. c. contribution margin equals variable costs. d. revenues equal the sum of variable and fixed costs.

2. Product costing information is used by managers a. to make decisions and strategy. b. for planning and control. c. for cost management. d. for all of the above.

3. ______is the process of distributing indirect costs to products. a. Cost allocation b. Job cost recording c. Cost pooling d. Cost tracing

4. Actual costing is a costing method that allocates ______indirect costs. a. actual b. budgeted c. estimated d. predetermined

5. For decision making, a listing of the relevant costs a. will help the decision maker concentrate on the pertinent data. b. will only include future costs. c. will only include costs that differ among alternatives. d. should include all of the above.

6. In evaluating different alternatives, it is useful to concentrate on a. variable costs. b. fixed costs. c. total costs. d. relevant costs. PROBLEM 1 Yurus Manufacturing Company produces two products, bracelets and necklaces. Price and cost data for these two products are as follows:

Bracelets Necklaces Selling price $36 $24 Variable costs per unit 28 12

Total fixed costs and $234,000.

REQUIRED: A. Calculate the contribution margin per unit for each product. B. Calculate the contribution margin percentage for each product. C. Calculate the breakeven point in units if only bracelets are sold. D. Calculate the breakeven point in units if only necklaces are sold. E. Calculate the breakeven point in units of both bracelets and necklaces if the sales mix is 3 units of bracelets for every necklace.

2 PROBLEM 2 Martha Stuart publishes three types of books; Smut, Textbooks and Classics. The three books are manufactured on a common assembly line and have only 50,000 machine hours available. The following information is available:

Smut Textbooks Classics Selling price $120 $100 $150 Variable manufacturing costs per unit 80 60 100 Variable marketing costs per unit 20 15 35 Units produced per hour 2 1 2

The reading craze is such that the company can sell everything it can produce.

REQUIRED: Which product (or products) should be produced? Briefly explain your answer.

3 PROBLEM 3

Assume the total cost function of The Taylor Guitar Company is the following:

Y = 500,000 + 564(x)

Where Y is the total cost and x is the number of units.

REQUIRED: Assume Taylor has excess capacity to produce an additional 100 units without increasing fixed costs. What is the minimum price per guitar Taylor could charge to manufacture 100 guitars for Gibson and still maintain the current operating income?

4 PROBLEM 4 Schulz Corporation allocates overhead base on machine-hours. Budgeted manufacturing overhead was $266,400 and budgeted machine-hours were 18,500. Actual manufacturing overhead was $287,920 and actual machine-hours were 19,050. Before disposition of under- or over allocated overhead, the cost of goods sold was $560,000 and the ending inventories were as follows: these two products are as follows:

Direct materials $60,000 Work in process 190,000 Finished goods 250,000 Total $500,000

REQUIRED: A. Determine the budgeted manufacturing overhead rate per machine-hour. B. Compute the under- or over allocated overhead. C. Prepare the journal entry to dispose of the under- or over allocated overhead using the write-off to Cost of Goods sold approach D. Prepare the journal entry to dispose of the under- or over allocated overhead using the proration approach.

5 PROBLEM 5 Galbraith Guitar Company manufactures electric guitars. The company manufactures its own guitar pickups, an important component part for electric guitars. The company reports the following costs of manufacturing the pickups in 2003 and the expected costs for the pickups if it were to manufacture the pickups in 2004. Current Costs Expected Costs in 2003 in 2004 Variable Manufacturing costs Direct material per pickup $5.40 $6.00 Direct manufacturing labor per pickup 24.00 30.00 Variable manufacturing costs per pickup 8.00 12.00 Fixed manufacturing cost Fixed manufacturing costs that can be avoided if pickups are not made 100,000 100,000 Fixed manufacturing costs that cannot be avoided even if pickups are not made 60,000 60,000 Galbraith manufactured 8,000 pickups in 2003, but anticipates needing 10,000 pickups in 2004. Flynn, Inc. has approached Galbraith about supplying the pickups for 2004 at a price of $60.00 each.

REQUIRED: A. Calculate the total expected manufacturing cost per unit of making the pickups in 2004. B. Assuming the production capacity currently used to make pickups will become idle if Galbraith purchased the pickups from Flynn, which alternative is best for Galbraith? By how much? C. Assume the production capacity currently used to make pickups can be used to manufacture another item at a savings of $90,000 if Galbraith accepts the offer. Which alternative is best for Galbraith? By how much? D. Assume (as in requirement B) the production capacity currently used to make pickups will become idle if Galbraith purchased the pickups from Flynn. At what volume would Galbraith be indifferent about buying the pickup versus making the pickup?