Acct 5200Chapter 10 Handout Questions
1. A finance manager has to select one of the four different suppliers of raw materials. The total cost
functions under the four options are given below. Assume the quality of the raw material to be the same,
which of the following is preferred by the finance manager?
A) y = 600 + 4.96X
B) y = 600 + 5.49X
C) y = 600 + 4.41X
D) y = 600 + 4.67X
2. Write a linear cost function equation for each of the following conditions. Use y for estimated costs and
X for activity of the cost driver.
a. Direct manufacturing labor is $15 per hour.
b. Direct materials cost $25.60 per cubic yard.
c. Utilities have a minimum charge of $500, plus a charge of $0.25 per kilowatt-hour.
d.
Machine operating costs include $250,000 of machine depreciation per year, plus $100 of utility
costs for each day the machinery is in operation.
3. M & G TV and Appliance Store is a small company that has hired you to perform some management
advisory services. The following information pertains to 2017 operations.
Sales (2,000 televisions)
Cost of goods sold
Store manager’s salary per year
Operating costs per year
Advertising and promotion per year
Commissions (2.3% of sales)
$2,000,000
570,000
130,000
280,000
32,000
46,000
What are the estimated total costs if the company expects to sell 3,300 units next year?
A) $1,458,400
B) $2,803,700
C) $2,361,700
D) $517,900
4. High Tech Manufacturing Inc., incurred total indirect manufacturing labor costs of $490,000. The
company is labor intensive. Total labor hours during the period were 4,100. Using qualitative analysis,
the manager and the management accountant determine that over the period the indirect manufacturing
labor costs are mixed costs with only one cost driver–labor-hours. They separated the total indirect
manufacturing labor costs into costs that are fixed ($120,000 based on 8,600 hours of labor) and costs that
are variable ($370,000) based on the number of labor-hours used. The company has estimated 7,300 labor
hours during the next period.
Which of the following represents the correct linear cost function?
A) y = $370,000 + $43.02X
B) y = $120,000 + $119.51X
C) y = $120,000 + $90.24X
D) y = $370,000 + $56.98X
5. Quantum Company uses the high-low method to estimate the cost function. The information for 2017 is
provided below:
Machine-hours
Labor Costs
Highest observation of cost driver
400
$20,000
Lowest observation of cost driver
100
$8,000
What is the slope coefficient?
A) $80.00
B) $56.00
C) $40.00
D) $50.00
6. Quantum Company uses the high-low method to estimate the cost function. The information for 2017 is
provided below:
Machine-hours
Labor Costs
Highest observation of cost driver
1,000
$32,000
Lowest observation of cost driver
200
$16,000
What is the constant for the estimated cost equation?
A) $12,000
B) $16,000
C) $20,000
D) $32,000
7. The Connors Company has assembled the following data pertaining to certain costs that cannot be
easily identified as either fixed or variable. Connors Company has heard about a method of measuring
cost functions called the high-low method and has decided to use it in this situation.
Cost
$23,000
$26,000
$34,600
$42,000
$38,000
Hours
5,000
6,450
7,650
10,000
9,350
What is the estimated total cost at an operating level of 9,000 hours?
A) $34,200
B) $38,200
C) $41,400
D) $37,800
8. Salter Manufacturing Company produces inventory in a highly automated assembly plant in Fall
River, Massachusetts. The automated system is in its first year of operation and management is still
unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first
six months of operations, the following data were collected:
January
February
March
April
May
June
Machine-hours
4,560
4,380
4,680
3,960
3,900
3,720
Kilowatt-hours Total Overhead Costs
5,424,000
$405,600
5,208,000
404,160
5,400,000
407,040
5,148,000
404,160
5,040,000
391,200
4,944,000
384,000
Required:
a. Use the high-low method to determine the estimating cost function with machine-hours as the cost
driver.
b. Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost
driver.
c.
For July, the company ran the machines for 4,000 hours and used 4,550,000 kilowatt-hours of
power. The overhead costs totaled $365,000. Which cost driver was the best predictor for July?
9. Patrick Ross, the president of M & M Materials Company, has asked for information about the cost
behavior of manufacturing overhead costs. Specifically, he wants to know how much overhead cost is
fixed and how much is variable. The following data are the only records available:
Month
February
March
April
May
June
Machine-hours
1,870
3,080
1,100
2,750
3,850
Overhead Costs
$22,500
24,475
24,321
23,650
31,196
Required:
Using the high-low method, determine the overhead cost equation. Use machine-hours as your cost
driver.
Acct 5200
Chapter 12 Handout Questions
1.
Crandle Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only
special order for a product similar to one offered to domestic customers. The company has excess
capacity. The following per unit data apply for sales to regular customers:
Variable costs:
Direct materials
Direct labor
Manufacturing support
Marketing costs
Fixed costs:
Manufacturing support
Marketing costs
Total costs
Markup (50%)
Targeted selling price
What is the full cost of the product per unit?
A) $430
B) $1,035
C) $690
D) $345
$130
110
125
65
175
85
690
345
$1,035
2.
Crandle Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only
special order for a product similar to one offered to domestic customers. The company has excess
capacity. The following per unit data apply for sales to regular customers:
Variable costs:
Direct materials
Direct labor
Manufacturing support
Marketing costs
Fixed costs:
Manufacturing support
Marketing costs
Total costs
Markup (50%)
Targeted selling price
$140
100
105
55
175
65
640
320
$960
For Crandle Manufacturers Inc., what is the minimum acceptable price of this special order?
A) $400
B) $320
C) $480
D) $640
3.
Snapper Tool Company has plenty of excess capacity to accept a special order. Shown below is
an “what-if” analysis of the special order. Which of the following is the correct decision and
reason?
Sales
variable costs:
Manufacturing
Selling and
administrative
Contribution
margin
Fixed cost
Operating
profit
Status Quo
$128,000
With Special
Order
$133,000
51,200
54,400
25,600
26,600
$51,200
19,200
$52,000
19,200
$32,000
$32,800
A) Yes, since the goal is to fill capacity as much as possible to keep fixed overhead variances as low as
possible.
B) No, the company will only break even.
C) No, since only the employees will benefit from this in that they will earn more overtime.
D) Yes, since operating profits will most likely increase.
4. Dantley’s Furniture manufactures rustic furniture. The cost accounting system estimates manufacturing
costs to be $240 per table, consisting of 75% variable costs and 25% fixed costs. The company has surplus
capacity available. It is Back Forrest’s policy to add a 45% markup to full costs. A large hotel chain is
currently expanding and has decided to decorate all new hotels using the rustic style. Dantley’s Furniture
Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Dantley’s
Furniture should bid on this long-term order?
A) $168
B) $180
C) $240
D) $348
4.
Swan Manufacturing is approached by a customer to fulfill a one-time-only special order for a
product similar to one offered to domestic customers. The following per unit data apply for sales
to regular customers:
Direct materials
$1,825
Direct labor
900
Variable manufacturing support
1,300
Fixed manufacturing support
3,000
Total manufacturing costs
$7,025.00
Markup (50%)
3,512.50
Targeted selling price
$ 10,537.50
Swan Manufacturing has excess capacity.
Required:
a. What is the full cost of the product per unit if the marketing costs is $3,000?
b. What is the contribution margin per unit?
c. Which costs are relevant for making the decision regarding this one-time-only special order? Why?
d. For Swan Manufacturing, what is the minimum acceptable price of this one-time-only special order?
e.
For this one-time-only special order, should Parker and Spitzer Manufacturing consider a price of
$5,400 per unit? Why or why not?
5.
Sarasota Bicycles has been manufacturing its own wheels for its bikes. The company is currently
operating at 100% capacity, and variable manufacturing overhead is charged to production at the
rate of 30% of direct labor cost. The direct materials and direct labor cost per unit to make the
wheels are $3.00 and $3.60 respectively. Normal production is 200,000 wheels per year.
A supplier offers to make the wheels at a price of $8 each. If the bicycle company accepts this offer, all
variable manufacturing costs will be eliminated, but the $84,000 of fixed manufacturing overhead
currently being charged to the wheels will have to be absorbed by other products.
Required:
a. Prepare an incremental analysis for the decision to make or buy the wheels.
b. Should Sarasota Bicycles buy the wheels from the outside supplier? Justify your answer.
6.
Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per
unit are as follows:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total
$54.00
35.00
40.00
34.00
$163.00
Crayola Technologies Inc. has contacted Rubium with an offer to sell 6,000 of the subassemblies for
$144.00 each. Rubium will eliminate $89,000 of fixed overhead if it accepts the proposal. Should Rubium
make or buy the subassemblies? What is the difference between the two alternatives?
A) Buy; savings = $89,000
B) Buy; savings = $7,000
C) Make; savings = $1,000
D) Make; savings = $203,000
7.
The management accountant for Giada’s Book Store has prepared the following income statement
for the most current year:
Cookbook Travel Book
Classics
Total
Sales
$65,000
$164,000
$55,000
$284,000
Cost of goods sold
37,000
67,000
20,000
124,000
Contribution margin
28,000
97,000
35,000
160,000
Order and delivery processing 21,000
25,000
11,000
57,000
Rent (per sq. foot used)
5,000
4,000
4,000
13,000
Allocated corporate costs
10,000
10,000
10,000
30,000
Corporate profit
$ (8,000)
$58,000
$10,000
$60,000
If the travel book line had been discontinued, corporate profits for the current year would have decreased
by ________.
A) $97,000
B) $72,000
C) $68,000
D) $58,000
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