Reference no: EM133105756

Question 1 - Kappa Manufacturing Company has 120 machines in its factory. The machines run for three shifts each day. Each machine can be used for production for an average of 6 hours per shift. Assuming that during every shift 1.5 hours are allowed for machine maintenance and break time for machine operators, and that the factory operates for an average of six days per week, what is Kappa's:

a) theoretical capacity number of machine hours per week?

b) practical capacity number of machine hours per week?

Question 2 - Riskivaara Oy owns the rights to extract minerals from beach sands in Enare Lappmark. Riskivaara has costs in three areas:

1. Payment to a mining subcontractor who charges €60 per tonne of beach sand mined and returned to the beach (after being processed on the mainland to extract three minerals: ilmenite, rutile and zircon).

2. Payment of a government mining and environmental tax of €40 per tonne of beach sand mined.

3. Payment to a barge operator. This operator charges €150 000 per month to transport each batch of beach sand - up to 100 tonnes per batch per day - to the mainland and then return to Enare Lappmark (that is, 0-100 tonnes per day = €150 000 per month; 101-200 tonnes = €300 000 per month, and so on). Each barge operates 20 days per month. The €150 000 monthly charge must be paid even if less than 100 tonnes is transported on any day and even if Riskivaara requires fewer than 20 days of barge transportation in that month.

Riskivaara is currently mining 180 tonnes of beach minerals per day for 20 days per month.

a) What is the unit cost per tonne of beach sand mined if 180 tonnes are mined each day?

b) What is the unit cost per tonne of beach sand mined if 220 tonnes are mined each day?

Question 3 - Consider the following details of the income statement of the Manteray Pen Company (MPC) for 1 year ended December 31, 20X6.

Sales $15,900,000

Less cost of goods sold 9,450,000

Gross margin or gross profit $6,450,000

Less selling and administrative expenses 4,350,000

Operating income $2,100,000

MPC's fixed manufacturing costs were $3.6 million and its fixed selling and administrative costs were $3.3 million. Sales commissions of 3% of sales are included in selling and administrative expenses.

The division had produced and sold 3 million pens. Near the end of the year, Pizza Hut offered buy 140,000 pens on a special order. To fill the order, a special Pizza Hut logo would have to be added each pen. Pizza Hut intended to use the pens in special promotions in an eastern city during early 20X7.

Even though MPC had some idle plant capacity, the president rejected the Pizza Hut offer $ 610,400 for the 140,000 pens. He said,

The Pizza Hut offer is too low. We'd avoid paying sales commissions, but we'd have to incur an extra cost of $.35 per pen to add the logo. If MPC sells below its regular selling prices, it will begin a chain reaction of competitors 'price cutting and of customers wanting special deals. I believe in pricing at no lower than 8% above our full costs of $13,800,000 ÷ 3,000,000 units = $4.60 per unit plus the extra $.35 per pen less the savings in commissions.

Using the contribution-margin technique, prepare an analysis and use four columns: without the special order, the effect of the special order (one column total and one column per unit), and totals with the special order.

a) What is variable selling and administration cost for a unit included in the special order?

b) What is the full cost for a unit included in the special order?

c) How much would operating profit change if the special order were accepted?

Question 4 - Suppose BMW executive in Germany is trying to decide whether the company should continue to manufacture an engine component or purchase it from Frankfurt Corporation for €50 each. Demand for the coming year is expected to be the same as for the current year, 200,000 units. Data for the current year follow:

Direct material €5,000,000

Direct labor 1,900,000

Factory overhead, variable 1,100,000

Factory overhead, fixed 3,000,000

Total costs €11,000,000

If BMW makes the components, the unit costs of direct material will increase 10%. If BMW buys the components, 30% of the fixed costs will be avoided. The other 70% will continue regardless of whether the components are manufactured or purchased. Assume that variable overhead varies with output volume.

a) Prepare a schedule (table) that compares the make-or-buy alternatives. Show totals and amounts per unit. Assume that the capacity now used to make the components will become idle if the components are purchased. What is the difference between making and buying at product unit level?

b) Assume also that the BMW capacity in question can be rented to a local electronics firm for €1,150,000 for the coming year. Prepare a schedule (table) that compares the net relevant costs of the three alternatives: make, buy and leave capacity idle, buy and rent. How much are the relevant costs in total of the most favorable alternative?

Question 5 - Fargo Manufacturing Company produces two industrial solvents (XY-7, BD-4) for which the following data have been tabulated. Fixed manufacturing cost is applied to products at a rate of $1.00 per machine hour.

Per Unit	XY-7	BD-4
Selling price	$6.45	$4.20
Variable manufacturing costs	2.70	1.70
Fixed manufacturing cost	.80	.20
Variable selling cost	1.80	1.75

The sales manager has had a $215,000 increase in her budget allotment for advertising and wants to apply the money on the most profitable product. The solvents are not substitutes for one another in the eyes of the company's customers. Suppose Fargo has only 140,000 machine hours that can be made available to produce XY-7 and BD-4.

a) How many machine hours does it take to produce one XY-7?

b) How many machine hours does it take to produce one BD-4?

c) If the potential increase in sales units for either product resulting from advertising is far in excess of production capabilities, determine which product should be produced and advertised. What is then the estimated contribution margin earned?

Question 6 - Carleton Company has two service departments and two production departments. Information on annual manufacturing overhead costs and cost drivers follows:

	SERVICE DEPARTMENTS		PRODUCTION DEPARTMENTS
ITEM	S1	S2	P1	P2
Overhead costs	$65,000	$55,000	$160,000	$240,000
Direct labor hours	2,000	1,500	2,000	3,000
Number of square feet	800	1,200	2,400	2,600

The company allocates service department costs using the sequential method (portaittainen menetelmä). First, S1 costs are allocated on the basis of direct labor hours. Next, S2 costs are allocated on the basis of square footage.

a) Determine the total overhead costs allocated to production department P1.

b) Determine the total overhead costs allocated to production department P2.

Question 7 - Collins Company uses a traditional activity-based costing system to assign $600,000 of committed resource costs for customer service on the basis of the following information gathered from interviews with customer service personnel:

ACTIVITY	TIME PERCENTAGE	ESTIMATED COST DRIVER QUANTITY
Handle customer orders	75%	8,000 customer orders
Process customer complaints	10%	400 customer complaints
Perform customer credit checks	15%	450 credit checks
	100%

a) Compute the activity cost driver rate for customer orders

b) Compute the activity cost driver rate for customer complaints

c) Compute the activity cost driver rate for customer credit checks

d) If the actual number of customer orders were 6000, customer complaints 350, and credit checks 420, what is the cost of unused capacity?

Question 8 - Having attended a seminar on activity-based costing (ABC) you decide to experiment by applying the principles of ABC to the four products currently made and sold by your company. Details of the four products and relevant information are given below for one period:

Product	A	B	C	D
Output in units	120	100	80	120
Costs per unit:	(£)	(£)	(£)	(£)
Direct material	40	50	30	60
Direct labour	28	21	14	21
Machine hours (per unit)	4	3	2	3

The four products are similar and are usually produced in production runs of 20 units and sold in batches of 10 units. The production overhead is currently absorbed (=kohdennettu) by using a machine hour rate (= konetuntiperusteinen yk-lisä), and the total of the production overhead for the period has been analyzed as follows:

(£)

Machine department costs (rent, business rates, depreciation and supervision) 10,430

Set-up costs 5,250

Stores receiving 3,600

Inspection/Quality control 2,100

Materials handling and despatch 4,620

You have ascertained that the 'cost drivers' to be used are as listed below for the overhead costs shown:

Cost	Cost Driver
Machine department	Machine hours
Set up costs	Number of production runs
Stores receiving	Requisitions raised
Inspection/Quality control	Number of production runs
Materials handling and despatch	Orders executed

The number of requisitions (=tilauspyyntö) raised on the stores was 20 for each product and the total number of orders executed was 42, each order being for a batch of 10 of a product. You are required:

Calculate the total costs for each product if all overhead costs are absorbed on a machine hour basis

a) Total cost of product A (tuoteryhmä A:n kustannukset) by using ABC

b) Total cost of product B (tuoteryhmä A:n kustannukset) by using ABC

c) Total cost of product C (tuoteryhmä A:n kustannukset) by using ABC

d) Total cost of product D (tuoteryhmä A:n kustannukset) by using ABC

Question 9 - Hamley's Toy Store is on Regent Street in London. It has a magic department near the main door. Suppose that management is considering dropping the magic department, which has consistently shown an operating loss. The predicted income statements, in thousands of pounds (£), follow (for ease of analysis, only three product lines are shown):

	Total	General Merchandise	Electronic Products	Magic Department
Sales	£6,000	£5,000	£400	£600
Variable expenses	4,090	3,500	200	390
Contribution margin	£1,910 (32%)	£1,500 (30%)	£200 (50%)	£210 (35%)
Fixed expenses (compensation, depreciation, property taxes, insurance, etc.)	1,100	750	50	300
Operating income (loss)	£810	£750	£150	£(90)

The £300,000 of magic department fixed expenses include the compensation of employees of £120,000. These employees will be released if the magic department is abandoned. All of the magic department's equipment is fully depreciated, so none of the £300,000 pertains to such items. Furthermore, disposal values of equipment will be exactly offset by the costs of removal and remodeling.

If the magic department is dropped, the manager will use the vacated space for either more general merchandise or more electronic products. The expansion of general merchandise would not entail hiring any additional salaried help, but more electronic products would require an additional person at an annual cost of £30,000. The manager thinks that sales of general merchandise would increase by £250,000; electronic products, by £200,000. The manager's modest predictions are partially based on the fact that she thinks the magic department has helped lure customers to the store and, thus, improved overall sales. If the magic department is closed, that lure would be gone.

a) What is the operating income if Magic Department is replaced with General Merchandise?

b) What is the operating income if Magic Department is replaced with Electronic Products?

c) What is the operating income in the most profitable option?