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Acct 2302 Lecture Note 18

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Acct 2302 Lecture Note 18 Powered By Docstoc
					   AIM 2302 – SOLUTION TO PRACTICE EXAM III

Chapter 7: Pricing and Product Planning

1. Short-term pricing decisions depend on all of the following, EXCEPT:
   a. Whether surplus capacity is available for the additional production.
   b. Whether the available capacity limits production.
   c. The time period of the contract over which capacity is committed.
   d. The level of product-sustaining activities and costs.
                                                                   ____D____

2. A small firm on the fringe of an industry is probably
   a. A price setter
   b. A price taker
   c. Both a price taker and a price setter
   d. A price maker
                                                                   _____B____

3. Ram Company produces two products, AR4 and AR8. AR4 has a
contribution per unit of $3.00 and requires 0.3 machine hours per unit, whereas
AR8 has a contribution of $2.50 per unit and requires 0.2 machine hours per
unit. The company’s policy is to sell only products with a contribution per
machine, the constrained or scare resource, greater than $9.90. What should
they do?
    a. Sell both AR4 and AR8.
    b. Sell only AR4.
    c. Sell only AR8.
    d. Sell neither AR4 nor AR8.
                                                                  _____A____

4. An opportunity cost is
   a. Completely intangible and not measurable.
   b. The sacrificed potential benefit of choosing one alternative over another.
   c. The sacrificed past benefit of choosing one alternative over another.
   d. Not relevant to any decision.
                                                                   _____B____




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5. Lido Company manufactures product MY40. Currently, the product sells
for $55, with total costs to manufacture of $30. In order to add a new feature
to the product, additional direct materials of $3.00, direct labor of $2.50, and
batch-related costs of $1.45 per unit would have to be incurred. What are the
incremental costs per unit of the decision to add the new feature?
    a. $3.00
    b. $2.50
    c. $6.95
    d. $5.50
                                                                    _____C____

6. Full-cost pricing is LEAST likely to be economically justified under which
of the following?
    a. When customized products are produced.
    b. When contracts are developed with government agencies.
    c. When a firm enters into a long-term contractual relationship with a
        customer to supply a product.
    d. When a firm enters into a short-term contractual relationship with a
        customer to supply a product.

                                                                  _____D____

7. Demand is elastic when
   a. A small increase in price results in a small decrease in demand.
   b. Price increases cause demand to fluctuate wildly.
   c. A small increase in price results in a large decrease in demand
   d. Price increases cause demand to increase.
                                                                   _____C____

8. For long-term product mix decisions, comparison of the price of a product
with its ___________ costs provides a valuable evaluation of its long-term
profitability.
    a. Variable
    b. Opportunity
    c. Incremental
    d. Full
                                                               ____D_____



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9.     Plasticraft Company produces and sells a single product called a
DROID. Plasticraft has excess capacity to manufacture 5,000 additional
DROIDS. Variable costs are $35 per unit, and fixed costs total $300,000 per
month. Ajax Company has offered to pay Plasticraft $39 per unit for a one-
time special order for 4,000 DROIDS. This special order requires some
additional selling expenses of $1.50 per unit. Should Plasticraft accept this
special order?

YES: PLASTICRAFT SHOULD ACCEPT AJAX COMPANY’S OFFER
     BECAUSE IT WILL INCREASE OPERATING INCOME BY
     $10,000 = ($39 – ($35 + $1.50) * 4,000 UNITS.

OR: BECAUSE INCREMENTAL REVENUE OF $39 > INCREMENTAL
     COSTS OF $36.50.


10. Peanuts Company produces porcelain figurines of Lucy and Linus.
The selling prices and variable costs for each figurine are as follows:

                             Linus        Lucy
Selling price                $25.00       $20.00
Variable costs
 Direct materials            $9.00        $6.00
 Direct labor                 5.00         2.00
 Indirect manufacturing       4.00         2.00

The cost of direct labor is $10.00 per hour and only 500 hours of labor time
are available each week.

a.) Determine the contribution margin per direct labor hour for each product.

                                                  Linus   Lucy
Selling Price                                     $25     $20
Less: Variable Costs
      Direct materials                              9       6
      Direct labor                                  5       2
      Support                                       4       2
Contribution Margin per figurine                  $7      $10
Direct labor hours per figurine                   .5hrs   .2hrs
Contribution Margin per direct labor hour         $14     $50

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b.) Which product should Peanuts’ sales force promote?

Peanuts’ sales force should promote the Lucy figurine, because it has the
higher contribution margin per unit of constrained resource (DL hours).

11.    Charlie’s Chairs manufactures 2 models of chairs, Standard and
Premium. Weekly demand is estimated to be 120 units of the Standard
Model and 70 units of the Premium Model. Only 420 machine hours are
available per week. The following per unit data apply:

                                        Standard         Premium
Contribution margin per unit                 $12              $15
Number of machine hours                        2                3

   a.) For each model, compute contribution margin per machine hour.

      CM per unit                          $12               $15
      Machine Hours                          2                 3
      CM per Machine Hour                  $ 6               $ 5

   b.) To maximize weekly production profits, how many units would you
       recommend of each model?

      Standard: 120 units * 2MH = 240 MH
      Premium: 70 units * 3MH = 210 MH
                                  450 MH

      Available Capacity = 420MH vs. Required Hours = 450MH

      To maximize profits, Charlie’s should maximize sales of standard
      chairs. 240 machine hours should be used to manufacture 120 units of
      the Standard Chair, and 180 machine hours should be used to
      manufacture 60 units of the Premium Chair




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     c.) If there are 500 machine hours available per week (instead of only
         420 MH), how many chairs of each model should Charlie’s produce to
         maximize profits.?

        500 Machine Hours results in excess capacity. Therefore, demand for
        both types of chairs can be met:

        120 units of Standard Chair
        70 units of the Premium Chair

Chapter 6:Activity and Process Decisions

1. Each of the following should result in reduction in the level of work-in-
process inventory and cycle time, EXCEPT:
    a. Quality improvement programs.
   b. Corporate downsizing programs.
    c. Just-in-time programs.
   d. Cellular manufacturing.
                                                                 ____B____

2.    Which of the following is NOT one of the four cost of quality categories?
     a. Appraisal costs
     b. Internal failure costs
     c. Prevention costs
     d. Benchmarking costs
                                                                   _____D____

3. Each of the following should be considered in the make-or-buy decision,
EXCEPT:
   a. Unavoidable facility-sustaining costs
   b. The costs to produce the product
   c. The cost to purchase the product outside the firm
   d. The general implications for the firm to buy the product from another
      firm (e.g., sustainability of outside price, quality of outside product, etc.)

                                                                      _____A____




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4. The cost of which of the following is an example of an appraisal cost in the
cost of quality framework?
    a. Inspection of batches of products
    b. Supplier certification
    c. Product liability lawsuits
    d. Warranty claims
                                                                 _____A____


5. In ____________, equipment is organized to accommodate the production
of a specific product.
    a. A process layout
    b. A product layout
    c. Cellular manufacturing
    d. Just-in-Time Production

                                                                  ____B_____

6. Shields Company has the capacity to produce 5,000 units of product H199.
Currently it is producing 3,900 units. Foster Company asks Shield to produce
800 more units of H199 for a special order. Neither new machinery nor extra
plant space is needed for the special order. Which of the following statements
is true?
     a. Only product-sustaining costs will increase.
     b. Only facility-sustaining costs will increase.
     c. Both product-sustaining and facility –sustaining costs will increase.
     d. Neither product-sustaining nor facility-sustaining costs will increase.

                                                                  ____D_____

7. The theory of constraints
   a. Emphasizes long-term optimization
   b. Maintains that maximizing volume through production bottlenecks will
      increase operating income
   c. Helps managers make special one-time decisions
   d. Suggests that some component parts should be outsourced

                                                                  ____B_____


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8. All of the following statements about just-in-time (JIT) are true, EXCEPT:
   a. Processing time decreases
   b. It simplifies accounting
   c. It reduces the amount of money invested in inventory
   d. JIT processing systems must be reliable
                                                                    ____B_____

9.    Gumby Company is determining whether to outsource product Pokey.
An outside bidder has quoted a price of $52. The following costs of the
product when produced in-house are shown below on a per-unit basis:

                                    Pokey
 Direct materials                   $13.95
 Direct labor                        15.00
 Unit-related overhead               17.80
 Batch-related overhead               6.55
 Product-sustaining overhead          3.25
 Facility-sustaining overhead         8.35
 TOTAL                              $64.90

a.)   Which support costs will not be incurred if Pokey is outsourced?

      UNIT-RELATED COSTS ARE AVOIDABLE

      BATCH-RELATED & PRODUCT-SUSTAINING ARE MOST
      LIKELY AVOIDABLE

      POSSIBLY FACILITY-SUSTAINING IF THE FACILITY CAN BE
      CONVERTED TO ANOTHER USE WHEN PRODUCT POKEY IS
      OUTSOURCED




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b.) Suppose that unit-related, batch-related and product-sustaining costs
can be eliminated if Pokey is outsourced. However, the machinery, factory
space, and other facility-related costs will still be incurred if Pokey is
outsourced. Should Gumby outsource Pokey?

RELEVANT COSTS OF PRODUCING POKEY ARE AS FOLLOWS:

Direct materials                      $13.95
Direct labor                           15.00
Unit-related overhead                  17.80
Batch-related overhead                  6.55
Product-sustaining overhead             3.25
TOTAL                                 $56.55

VERSUS THE PURCHASE PRICE OF $52

GUMBY SHOULD OUTSOURCE

OR YOU COULD HAVE WORKED IT AS FOLLOWS:

TOTAL COST TO MAKE (INCLUDING FACILITY) = $64.90 VS.
COST TO PURCHASE INCLUDING FACILITY ($52 + $8.35) = $60.35

10. Eastco purchased a stamping machine four months ago and now
realizes that a much better machine is available on the market. The
following information pertains to both machines.

                                            OLD          NEW
Acquisition cost                          $150,000     $200,000
Remaining Life                             3 years      3 years
Current disposal value                     $60,000         -
Salvage value at the end of 3 years        $6,000       $9,000
Annual operating costs                     $60,000      $12,000

The estimates above do not include rework costs. The new stamping
machine also will reduce the defect rate from 4% to 2%. All defective units
are reworked at a cost of $1.25 per unit. Eastco produces 150,000 units
annually.



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   a.      What costs are considered sunk?

           ACQUISITION COST OF OLD MACHINE OF $150,000

   b.      Should Eastco replace the old machine?

           NET BENEFITS OVER 3 YEARS                        NEW – OLD

           Salvage value increase (9,000 – 6,000)           $ 3,000
           Decrease in annual operating costs
              (3 years * 48,000)                            144,000
           Reduction in rework costs
              (150,000 * 2% * $1.25 * 3 years)                11,250
           Acquisition of new machine                       (200,000)
           Current disposal value of old machine              60,000
           Net cash inflow                                   $18,250

           Eastco should purchase the new machine.

11. Jerry’s 5-year-old Chevy Geo Prism requires repairs estimated at $3,000
to make it roadworthy again. His friend, Elaine, suggested that he should
buy a 5-year-old Honda Civic instead for $3000 cash. Elaine estimated the
following costs for the two cars:

                                       Chevy Geo Prism        Honda Civic
        Acquisition cost                    $15,000              $3,000
        Repairs                             $ 3,000               ---
        Annual operating costs
          (Gas, maintenance, insurance)      $ 2,280             $2,100

   a.      What costs are NOT relevant for this decision?

           ACQUISITION COST OF GEO PRISM




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   b.    What should Jerry do? What is his savings in the first year?

         REPAIR THE PRISM:

         REPAIR COSTS                             $3,000
         ANNUAL OPERATING COSTS                   $2,280
           TOTAL COSTS                            $5,280


         PURCHASE THE CIVIC:

         PURCHASE PRICE                           $3,000
         ANNUAL OPERATING COSTS                   $2,100
           TOTAL COSTS                            $5,100

         JERRY SHOULD BUY THE CIVIC. HIS SAVINGS IN THE
         FIRST YEAR ARE $180 ($5,280 - $5,100)


Chapter 11: Budgeting

1. _______________ bases a period’s expenditure level for a discretionary
item on the amount spent on that item during the previous period
    a. Zero-based budgeting
    b. Periodic budgeting
    c. Incremental budgeting
    d. Continuous budgeting
                                                                 ____C___


2. Operating budgets include all of the following, EXCEPT:
   a. Sales plan
   b. Purchasing plan
   c. Production plan
   d. Cash flow plan
                                                                 _____D____




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3. A demand forecast is
   a. An estimate of sales demand given a product price
   b. Developed largely because of customer dissatisfaction
   c. An estimate of market demand given the amount sold the previous year
   d. An estimate for the demand for labor
                                                               ____A_____

4. Financial budgets include all of the following except a:
   a. Projected balance sheet
   b. Production plan
   c. Cash flow plan
   d. Projected income statement
                                                               ____B_____

5. When discussing the roles of budgets, a control role includes?
   a. Identify organizational objectives and short-term goals
   b. Developing long-term strategies and short-term plans
   c. Measuring and assessing performance against budgeted amounts
   d. Developing the master budget.
                                                                  _____C____

6. Financial budgets are prepared
   a. To specify expectation for selling, purchasing, and production
   b. To evaluate financial results of the proposed decisions
   c. So that financial statements can be prepared for shareholders
   d. To plan for production capacity
                                                                  _____B____

7. Although planners update or revise the budgets during the period,
____________ is typically performed once per year
   a. Zero-based budgeting
   b. Periodic budgeting
   c. Incremental budgeting
   d. Continuous budgeting
                                                        ____B_____




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8. The finished goods production budget determines
   a. The units to be produced during a period
   b. Budgeted sales dollars
   c. The predetermined factory overhead rate
   d. The amount of labor hours worked

                                                                  ____A____

9. Direct material purchases equal
   a. Usage plus production needs
   b. Production needs plus target ending finished goods inventory
   c. Beginning inventories plus production needs
   d. Usage plus target ending inventories less beginning inventories

                                                                  ____D____

10. ______________ occur(s) when subordinates ask for excess resources
above and beyond what they need to accomplish budget objectives
   a. Pseudo participation
   b. Effective budgeting
   c. Budget slack
   d. Participative budgeting

                                                                  ____C____

11.   Amigo Corporation developed the following sales budget:

Month                             Sales
July                           $ 30,000
August                           34,000
September                        38,000
October                          42,000
November                         48,000
December                         60,000

Cash is collected from customers in the following manner
  Month of sale                       30%
  Month following sale                50%
  Two months following sale           15%
  Amount uncollectible                 5%

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Prepare a summary of cash collections for the 4th quarter. ($126,100)

Month                           October     November       December
August                            5,100            ---            ---
September                        19,000         5,700             ---
October                          12,600        21,000          6,300
November                             ---       14,400         24,000
December                             ---           ---        18,000
                                 36,700        41,100         48,300


12. The Mahoney Company has prepared a sales budget of 24,000 units
for a 3-month period starting from January 1. The company has an inventory
of 11,000 units of finished goods on hand at December 31 and has a target
finished goods inventory of 13,000 units at the end of the succeeding
quarter.

It takes 5 gallons of direct materials to make 1 unit of finished product. The
company has an inventory of 110,000 gallons of direct materials at
December 31 and has a target ending inventory of 100,000 gallons.

      How many gallons of direct materials should be purchased during the
      3 months ending March 31?

                                                            FG (Units)
         Budgeted sales                                      24,000
         Add target ending FG inventory                      13,000
         Total requirements                                  37,000
         Deduct beginning FG inventory                       11,000
         Units to be produced                                26,000


                                                          DM (Gallons)
         DM needed for production (26,000 x 5)              130,000
         Add target ending DM inventory                     100,000
         Total requirements                                 230,000
         Deduct beginning DM inventory                      110,000
         DM to be purchased                                 120,000



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Chapter 12: Variance Analysis

1. Madzinga’s Draperies manufactures curtains. Each window requires the
following:

Direct materials, standards                  10 square yards at $5 per yard
Direct labor, standards                      5 hours at $10 per hour

During the second quarter, the company made 1,500 curtains and used
14,000 square yards of fabric costing $68,600. Direct labor totaled 7,600
hours for $79,800.

   a.    Compute the direct materials price and efficiency variances for the
         quarter.

        Actual Unit Costs:      = $68,600 / 14,000 square yards
                                = $4.90 per square yard

        Price Variance          (AP – SP) * AQ
                                = ($4.90 - $5.00) * 14,000
                                = $1,400 F

        Usage Variance          (AQ – SQ) * SP
                                = [14,000 – (10 * 1,500)] * $5.00
                                = $5,000 F

   b.    Compute the direct labor price and efficiency variances for the
         quarter.

        Actual Labor Rate:      = $79,800 / 7,600 hours
                                = $10.50 per hour

        Rate Variance           (AR – SR) * AH
                                = ($10.50 - $10.00) * 7,600
                                = $3,800 U

        Efficiency Variance     (AH – SH) * SR
                                = [7,600 – (5 * 1,500)] * $10.00
                                = $1,000 U



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2. Robb Industries Inc. (RII) developed standard costs for direct material
and direct labor. In 2004, RII estimated the following standard costs for one
of their major products, the 10-gallon plastic container.

                          Budgeted quantity         Budgeted price
    Direct materials      0.10 pounds               $30 per pound
    Direct labor          0.05 hours                $15 per hour

During June RII produced and sold 5,000 containers using 490 pounds of
direct materials at an average cost per pound of $32 and 250 direct
manufacturing labor-hours at an average wage of $15.25 per hour.

   a. Calculate the direct materials price and usage variances for June.

      Price Variance            (AP – SP) * AQ
                                = ($32 - $30) * 490
                                = $980 U

      Usage Variance            (AQ – SQ) * SP
                                = [490 – (.10 * 5,000)] * $30
                                = $300 F

   b. Calculate the direct labor rate and efficiency variances for June.

      Rate Variance             (AR – SR) * AH
                                = ($15.25 - $15.00) * 250
                                = $62.50 U

      Efficiency Variance       (AH – SH) * SR
                                = [250 – (.05 * 5,000)] * $15
                                = $0




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