Question 1:
In 2017, Ahmad & Sons, a small environmental-testing firm, performed 12,200 radon tests for
$290 each and 16,400 lead tests for $240 each. Because newer homes are being built with leadfree pipes, lead-testing volume is expected to decrease by 10% next year. However, awareness of
radon-related health hazards is expected to result in a 6% increase in radon-test volume each year
in the near future. Jim Rouse feels that if he lowers his price for lead testing to $230 per test, he
will have to face only a 7% decline in lead-test sales in 2018.
Instructions:
1. Prepare a 2018 sales budget for Ahmad & Sons assuming that Rouse holds prices at 2017
levels.
2. Prepare a 2018 sales budget for Ahmad & Sons assuming that Rouse lowers the price of a lead
test to $230. Should Rouse lower the price of a lead test in 2018 if the company’s goal is to
maximize sales revenue?
1
Question 2:
Ahlia Arts is a manufacturer of designer vases. The cost of each vase is the sum of three variable
costs (direct material costs, direct manufacturing labor costs, and manufacturing overhead costs)
and one fixed-cost category (manufacturing overhead costs). Variable manufacturing overhead
cost is allocated to each vase on the basis of budgeted direct manufacturing labor-hours per vase.
For June 2017, each vase is budgeted to take 4 labor-hours. Budgeted variable manufacturing
overhead cost per labor-hour is $14. The budgeted number of vases to be manufactured in June
2017 is 1,100.
Actual variable manufacturing costs in June 2017 were $65,205 for 1,150 vases started and
completed. There were no beginning inventories or ending inventories for the vases. Actual
direct manufacturing labor-hours for June were 4,830.
Instructions:
1. Compute the flexible-budget variance, the spending variance, and the efficiency variance
for variable manufacturing overhead.
2. Comment on the results.
2
Question 3:
Part A:
Ahlia Computers makes 5,200 units of a circuit board, CB76, at a cost of $280 each. Variable
cost per unit is $190 and fixed cost per unit is $90. Zain Electronics offers to supply 5,200 units
of CB76 for $260. If Ahlia buys from Zain, it will be able to save $10 per unit in fixed costs but
continue to incur the remaining $80 per unit. Should Ahlia accept Zain ’s offer? Explain.
Part B:
Bahrain Manufacturing is deciding whether to keep or replace an old machine. It obtains the
following information:
Old Machine
New Machine
Original cost
$10,700
$9,000
Useful life
10 years
3 years
Current age
7 years
0 years
Remaining useful life
3 years
3 years
Accumulated depreciation
$7,490
Not acquired yet
Book value
$3,210
Not acquired yet
Current disposal value (in cash)
$2,200
Not acquired yet
Terminal disposal value (3 years from now)
$0
$0
Annual cash operating costs
$17,500
$15,500
Bahrain Manufacturing uses straight-line depreciation. Ignore the time value of money and
income taxes. Should Bahrain Manufacturing replace the old machine? Explain.
3
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