Week 6 Quiz Flashcards
Adventure Products produces a camp lantern that has the following standard production cost per unit:
Direct materials
$13
Direct labour (0.8 DLH @ $15 per DLH)
12
Variable overhead (0.5 MH @ $10 per MH)
5
Fixed overhead (0.5 MH @ $20 per MH)
10
Standard cost per unit
$40
The company is considering purchasing a new component to replace an existing component, which will increase the direct-materials cost by $1, but will cause a 40% reduction in machine hours (MH) required for production.
What should be Adventure Product’s decision with respect to the new component?
a) To not use the new component in production because it will increase variable costs.
b) To not use the new component in production because it will increase fixed costs
c) To use the new component in production because it will increase profits
d) To use either component because the decision has no impact on profits
Answer C is correct. Direct materials would increase by $1. Variable manufacturing overhead will decrease by $2 (0.5 MH × 40% reduction × $10). This will result in an overall reduction in variable cost of $1 per unit. Note that fixed costs will be unaffected. While the allocation basis is affected, there is no overall change to fixed costs. Any discrepancies created by changes to the allocation basis will be offset by an equivalent variance. Therefore, the overall increase in profit to Adventure Products is $1 per unit.
JYD Inc. is introducing a new product next year. Costs pertaining to this product are budgeted as follows:
Variable manufacturing costs per unit 89.00 Variable selling expenses per unit $22.50 Variable administration expenses per unit $10.90 Fixed manufacturing costs $870,000 Fixed selling expenses $545,000 Fixed administration expenses $275,000
The marketing department estimates the following sales at various selling prices:
Price Volume $180 59,000 $170 75,000 $160 90,000 $150 120,000 In order to maximize profits, what price should JYD Inc. set for the new product?
a)
$180
b)
$170
c)
$160
d)
$150
Answer B is the correct answer. Fixed costs are not relevant as they remain the same regardless of volume. The correct solution will maximize total contribution margin. The expected unit contribution margin at a price of $170 is $47.60 ($170 – variable costs (89.00 + 22.50 + 10.90 = $122.40) = $47.60). The total contribution margin is $3,570,000 ($47.60 × 75,000 units). This results in the highest monthly contribution margin.
VT Inc. sells telephones for $50 per unit. Variable costs are $20 per unit and fixed costs are $590,000. How many units of product must be sold to realize an operating profit of $200,000?
a) 6,667 units
b) 15,800 units
c) 19,667 units
d) 26,334 units
Answer D is correct.
Required sales volume = ($590,000 + $200,000) / ($50 – $20) = 26,334
Note that the solution must be rounded up, as 1) you can’t produce partial units, and 2) 26,333 units will not meet the requirement of $200,000 in operating profit.
Joie Inc. produces Product X. Each unit of the product requires 0.2 hours of direct labour, two kilograms of material A, and one kilogram of material B. The company has a production capacity of 30,000 units of Product X per year, but its current production and sales are 25,000 units per year. For the current year, costs and revenues are as follows:
Price per unit of Product X $13.50 Direct labour cost per hour $15.00 Material A cost per kilogram $0.80 Material B cost per kilogram $2.40 Fixed factory overhead $50,000 Variable selling and administration costs $12,500 All other fixed expenses $37,500
At the current level of production, the contribution margin per unit of Product X is
a) $6.50
b) $4.50
c) $4.00
d) $6.00
Answer D is correct.
A company produces three products, A, B and C, all using the same machine which has a monthly capacity of 480 hours. In the current market, there is limited demand for these products but the company does not have the capacity to fulfill demand for all three products.
In order to maximize profits in the next month, which of the following concepts should be used to ensure that the company makes an optimal use of its capacity?
a) Contribution margin per unit
b) Gross margin per unit
c) Contribution margin per machine hour
d) Net margin per unit
Answer C is correct. When faced with one constraining factor, the objective is to maximize contribution margin per constraining factor, in this case direct machine hours. Such an analysis allows a company to optimally plan its capacity usage.
A manufacturer runs a process by which it transforms 100,000 kg of direct materials into three products, X, Y and Z. The total cost incurred in the joint manufacturing process is $1,000,000. Assume that Product Y can be further processed into a specialized product, Y1. There is a loss of 10% in output units between Y1 and Y.
In deciding whether Product Y should be further processed into the specialized product Y1, what is the main relevant factor to consider?
Incorrect Response
a) The incremental contribution margin generated by selling Y1 instead of Y
Correct Answer
b) The incremental operating earnings generated by selling Y1 instead of Y
c) The revenues associated with selling Y1
d) The impact of producing Y1 on the joint costs allocated to Y
B
Answer A is incorrect. In making the decision, incremental revenue and all incremental costs incurred in transforming Y into Y1 after split-off must be considered.
Joie Inc. produces Product X. The company has a production capacity of 30,000 units of Product X per year, but its current production and sales are 25,000 units per year. For the current year, costs and revenues are as follows:
Fixed factory overhead $50,000 Variable selling and administration costs $12,500 All other fixed expenses $37,500
Assume that variable production costs for next year will be $8.00 per unit of Product X and that all other costs will be the same as for the current year. If the selling price remains at $13.50 per unit, the break-even volume for next year would be:
a) 17,500 units.
b) 18,182 units.
c) 15,909 units.
d) 10,294 units.
nswer A is correct.
Fixed costs = $50,000 + $37,500 = $87,500
Variable selling and administration costs = $12,500 / 25,000 units sold = $0.50
Contribution margin = $13.50 – $8.00 variable production costs – $0.50 variable selling & administration costs = $5.00 per unit
Break-even volume = $87,500 / $5.00 = 17,500 units
Walter Woods Work (WWW) Inc. manufactures a classic wooden chair known as the “3W chair.” Due to the popularity of this product, WWW is currently operating at full capacity in its existing plant. To meet future demand requirements, Walter Woods, the owner and founder of WWW, recently acquired a new building in which he installed state-of-the-art, fully automated manufacturing equipment that can manufacture the “3W chair” in high volumes and virtually eliminate the need for direct manufacturing labour. In comparing the forecasts produced by WWW’s controller for both the existing and the new plant, Walter realized that the break-even point was much higher in the new plant than in the old one.
Which of the following is the most likely explanation for this difference in break-even points?
a)
The new plant is less profitable than the old plant.
b)
Current volumes manufactured at the new plant are too low.
c)
Fixed costs are higher in the new plant than the old plant.
d)
Average unit cost is higher in the new plant than the old plant.
Answer C is correct. We are told that direct labour costs are lower, which likely indicates a higher unit contribution margin. This on its own would generate a lower break-even point (fixed costs/unit contribution margin). We are told that the break-even point is higher. It is most likely, then, that fixed costs have increased. This seems plausible given that the new plant is “state of the art and fully automated.”
MC Ltd. manufactures widgets that have a regular contribution margin of $200. Buyer Ltd. has approached MC Ltd. with a firm order to purchase 1,000 units of the widget at a price that is $20 below the regular price. MC currently has only sufficient excess capacity to manufacture 500 additional units.
What is the opportunity cost of accepting the special order?
a) $180,000
b) $100,000
c) $90,000
d) $20,000
Answer B is correct. The opportunity cost is equal to the contribution margin related to the sales of regular units that will be lost if MC accepts the order.
1,000 units – 500 units = 500 units × $200 = $100,000
DBS Ltd. produces a single product. For the current year, budgeted sales volume is 90,000 units and budgeted production volume is 100,000 units. The following standards were used in preparing the current year’s budget:
Selling price $200 per unit Variable manufacturing costs $127 per unit Variable selling and administration costs $6 per unit Fixed manufacturing overhead $2,800,000 per year Fixed selling and administration $300,000 per year
Assuming DBS Ltd. uses standard variable (direct) costing, what is its budgeted net profit for the current year?
a) $3,600,000
b) $2,930,000
c) $1,660,000
d) $3,240,000
B
Answer D is incorrect.
It allocates all the costs, including fixed selling and administration cost, to the product.
Budgeted profit = [$200 – $127 – $6 – (($2,800,000 + $300,000) / 100,000)] × 90,000 = $3,240,000
DBS Ltd. produces a single product. For the current year, budgeted sales volume is 90,000 units and budgeted production volume is 100,000 units. The following standards were used in preparing the current year’s budget:
Selling price $200 per unit Variable manufacturing costs $127 per unit Variable selling and administration costs $6 per unit Fixed manufacturing overhead $2,800,000 per year Fixed selling and administration $300,000 per year
Assume DBS uses standard absorption costing, what is its budgeted net profit for the current year?
a) $3,210,000
b) $1,600,000
c) $3,240,000
d) $2,930,000
Answer A is correct.
Fixed cost per unit = $2,800,000 / 100,000 units = $28 per unit
Budgeted profit = [($200 – $127 – $6 – $28) × 90,000] – $300,000 = $3,510,000 – $300,000 = $3,210,000
