29 Dec Estimated machine hours

1. (TCO C) Madlem, Inc., produces and sells a single product whose selling price is $120.00 per unit and whose variable expense is $46.20 per unit. The company’s fixed expense is $405,900 per month.

Required: Determine the monthly breakeven in either unit or total dollar sales. Show your work!

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Question 2.2. (TCO B) Industrial Supply Corporation uses the weighted-average method in its process costing system. Data concerning the first processing department for the most recent month are listed below.

Work in process, beginning:

Units in beginning work in process inventory 400

Materials costs $6,900

Conversion costs $2,500

Percent complete for materials 80%

Percent complete for conversion 15%

Units started into production during the month 6,000

Units transferred to the next department during the month 5,200

Materials costs added during the month $112,500

Conversion costs added during the month $210,300

Ending work in process:

Units in ending work-in-process inventory 1,200

Percentage complete for materials 75%

Percentage complete for conversion 30%

Required: Calculate the equivalent units for conversion for the month in the first processing department. (Points : 25)

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Question 1.1. (TCO D) The following absorption costing income statement and additional data are available from the accounting records of Bernon Co. for the month ended May 31, XXXX. During the accounting period, 17,000 units were manufactured and sold at a price of $60 per unit. There were no beginning inventories.

Bernon Co.

Absorption Costing Income Statement

for the Month Ended May 31, XXXX

Sales (17,000 @ $60) $1,020,000

Cost of goods sold 612,000

Gross profit $ 408,000

Selling and administrative expenses 66,000

Income from operations $ 342,000

Additional Information:

Cost Total Cost Number of Units Unit Cost

Manufacturing costs:

Variable $442,000 17,000 $26

Fixed 170,000 17,000 10

Total $612,000 $36

Selling and administrative expenses:

Variable ($2 per unit sold) $34,000

Fixed 32,000

Total $66,000

Required: Prepare a new income statement for the year using variable costing. Comment on the differences, if any, between the absorption costing and the variable costing income statements. (Points : 30)

Question 2.2. (TCO I) (Ignore income taxes in this problem.) Simpson Beauty Products Corporation is considering the production of a new conditioning shampoo that will require the purchase of new mixing machinery. The machinery will cost $700,000, is expected to have a useful life of 10 years, and is expected to have a salvage value of $70,000 at the end of 10 years. The machinery will also need a $45,000 overhaul at the end of Year 5. A $60,000 increase in working capital will be needed for this investment project. The working capital will be released at the end of the 10 years. The new shampoo is expected to generate net cash inflows of $150,000 per year for each of the 10 years. Simpson’s discount rate is 18%.

Required:

(a) What is the net present value of this investment opportunity?

(b) Based on your answer to (a) above, should Simpson go ahead with the new conditioning shampoo? (Points : 30)

a)

Items Year(s) Amount 18% Factor Present Value

Cost of machinery Now ($700,000) 1 ($700,000)

Working capital increase Now ($60,000) 1 ($60,000)

Annual cash inflows 1–10 $150,000 4.494 674,100

Overhaul 5 ($45,000) 0.437 ($19,665)

Salvage value 10 $70,000 0.191 13,370

Working capital release 10 $60,000 0.191 11,460

Net present value ($80,735)

Question 3.3. (TCO A) The following data (in thousands of dollars) have been taken from the accounting records of the Maroon Corporation for the just-completed year.

Sales 1,700

Raw materials inventory, beginning 50

Raw materials inventory, ending 25

Purchases of raw materials 210

Direct labor 360

Manufacturing overhead 330

Administrative expenses 400

Selling expenses 200

Work-in-process inventory, beginning 120

Work-in-process inventory, ending 150

Finished goods inventory, beginning 80

Finished goods inventory, ending 120

Use the above data to prepare (in thousands of dollars) a schedule of Cost of Goods Manufactured and a Schedule of Cost of Goods Sold for the year. In addition, what is the impact on the financial statements if the ending finished goods inventory is overstated or understated? (Points : 25)

Question 4.4. (TCO F) Walker Corporation is preparing its cash budget for November. The budgeted beginning cash balance is $43,000. Budgeted cash receipts total $117,000 and budgeted cash disbursements total $122,000. The desired ending cash balance is $55,000. The company can borrow up to $100,000 at any time from a local bank, with interest not due until the following month.

Required:

Prepare the company’s cash budget for November in good form. Make sure to indicate what borrowing, if any, would be needed to attain the desired ending cash balance(Points : 25)

Question 5.5. (TCO F) The following overhead data are for a department of a large company.

Actual Costs Incurred Static Budget

Activity level (in units) 360 340

Variable costs:

Indirect materials $4,182 $4,148

Electricity $2,536 $2,414

Fixed costs:

Administration $6,540 $6,500

Rent $6,310 $6,400

Required: Construct a flexible budget performance report that would be useful in assessing how well costs were controlled in this department. (Points : 25)

Question 6.6. (TCO H) McMullen Co. uses 10,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $125,000 as follows.

Direct materials $40,000

Direct labor 30,000

Variable manufacturing overhead 25,000

Fixed manufacturing overhead 30,000

Total costs $125,000

An outside supplier has offered to provide Part X at a price of $10 per unit. If McMullen stops producing the part internally, one third of the fixed manufacturing overhead would be eliminated.

Required: Prepare a make-or-buy analysis showing the annual advantage or disadvantage of accepting the outside supplier’s offer. Please state clearly whether the part should be made or bought and share your work. (Points : 30)

Make Buy Net Advantage

Direct Material 40000 0 40000

Direct Labor 30000 0 30000

Variable manufacturing overhead 25000 0 25000

Fixed manufacturing overhead 30000 20000 10000

Purchase cost 0 100000 -100000

Total Cost 125000 120000 5000

Question 7.7. (TCO B) Buckhorn Corporation bases its predetermined overhead rate on the estimated machine hours for the upcoming year. Data for the upcoming year appear below.

Estimated machine hours 37,000

Estimated variable manufacturing overhead $7.77 per machine hour

Estimated total fixed manufacturing overhead $888,000

The actual machine hours for the year turned out to be 35,000.

Required: Compute the company’s predetermined overhead rate. (Points : 25)