Week
2 Chapte3 Cost-Volume Relationship
Managerial
Accounting for Managers 3rd Edition, Noreen, Brewer,Garrison

Problem 3-22 Marlin Company Sales Mix; Multiproduct Break-Even Analysis
(LO 3-9)
1.
Marlin Company, a wholesale
distributor, has been operating for only a few months. The company sells three
products sinks, mirrors, vanities.
Budgeted sales by product and in total for the coming month are shown
below:
Product
Sinks Mirrors Vanities
Total
Percentage of sales 48% 20% 32%
Sales. $ 240,000 100% $100, 000
10% $160, 000 100%
$500, 000 100%
Variable expenses. 72,000 30%
80, 000 80% 88, 000 55%
240, 000 48%
Contribution Margin.. $ 168,000 70%
$ 20,000 20%
$ 72,000 45% 260, 000 52%
Fixed expenses 223, 600
Net operating income. $ 36, 400

Fixed Expenses =
$223,600 =
$430,000
Dollar sales to break-even = CM ration 0.52

As shown by these data, net operating income is budgeted
at $36,400 for the month, and break-even at $430,000.

Assume that actual sales for month total
$ 500,000 as planned. Actual sales by products are:
Sink,
$160,000; Mirror, $200,000; and vanities, $140,000

Required:
1. Prepare a contribution format income statement for the month based
on actual sales data
Present the
income statement in the format shown above.

2. Compute the Break-Even Point in sales dollars for the month, based
on your actual data.
3. Considering the fact that the company met its $500,000 sales budget
for the month, the president is shocked at the results shown on your income
statement in (1) above.
Prepare a
brief memo for the president explaining why both the operating results and the
Break-Even-Point in sales dollars are different from what was budgeted.

Problem
: 3 – 25 Break-Even Analysis:
Pricing ( LO 3-1, LO 3-4, LO 3-6)

Demer holdings AG of Zurich,
Switzerland has just introduced a new fashion watch for which
The company is trying to find an
optional selling price. Marketing
studies suggest that the company can
increase sales by 5,000 units for
each SFr 2 per unit reduction in the selling price. (SFr2 denotes 2 Swiss
Francs). The company s present selling price is SFr90 per unit, and variable
expenses are SFr60 per unit. Fixed
expenses are SFr840,000 per year. The present annual sales volume (at the SFr90
selling price) is 25,000 units.

Required:
1. What is present yearly net operating
income or loss?
2. What is the present Break Even Point in units and in Swiss Francs sales?
3. Assuming that the marketing
studies are correct, what is the maximum profit that the company can
earn yearly? At how many units, and at what selling price per unit would the company generate this profit?
4. What would be the
Break-Even-Point in units and in Swiss Francs sales using the selling price you
determined in (3) above (i.e., the selling price at the level of maximum profits) ?
Why is this
Break-Even-Point different from the Break-Event-Point you computed in (2)
above?

Problem 3 26
Changes in cost Structure; Break-Even Analysis; Operating Leverage;
Margin of Safety ( LO 3 -4, LO 3 -6, LO 3 7, LO 3 -8)

Frieden Companys
contribution format income statement for the most recent month is given
below:

Sales (40,000
units) .. $ 800, 000
Variable
expenses .. 560,
000
Contribution
margin .. 240, 000
Fixed
expenses . 192,
000
Net operating
income .. $ 48, 000

The industry
in which Frieden Company operates is quite sensitive to cyclical movements in
the economy. Thus profits vary considerable from year to year according to
general economic conditions. The company has a large amount of unused capacity and is studying ways of improving
profits.

REQUIRED:
1. New equipment has come on the
market that would allow Frieden Company to automate a portion of its
operations. Variable expenses would be reduced by $6 per unit. However, fixed
expenses would increase to a total of $432,000 each month. Prepare two
contribution format income statements, one showing present operations and one
showing how operations would appear if the new equipment is purchased. Show an amount column, a Per Unit column, and
a Percent Column on each statement. Do not show percentages for the fixed
expenses.
2. Refer to the income statements in (1) above. For both present operations and the proposed
new operations, compute (a) the degree of operating leverage. (b) the
Break-Even Point in dollars, and (c) the margin of safety in both dollars and
percentage terms.
3. Refer again, to the data in (1) above. As a manager, what factor
would be paramount in your mind in deciding whether to purchase the new equipment? (Assume that
ample funds are available to make the purchase).
4. Refer to the original data. Rather than purchase new equipment, the
marketing manager argues that the companys marketing strategy should be
changed. Instead of paying sales commissions, which are included in variable
expenses, the marketing manager suggests that salespersons be paid fixed
salaries and that the company invest heavily in advertising. The marketing
manager claims that this new approach would increase unit sales by 50% without
any change in selling price; the companys
new monthly fixed expenses would be $240,000; and its net operating
income would increase by 25%.

Compute the
Break-Event-Point in dollar sales for the company under the new marketing
strategy.

Do you agree
with the marketing managers proposal?

Problem 4-17 Applying Overhead; Under applied or Over applied Overhead; Income
Statement (LO 4-2, LO 4-4, LO 4-5)

Durnham Company uses a job-order costing system. The
following transactions took place last year:
a. Raw materials requisitioned for use in production, $40,000 (80% direct
and 20% indirect).
b. Factory utility costs incurred,
$14,600.
c. Depreciation recorded on plant and equipment, $28,000. Three-fourths
of the depreciation relates to factory equipment, and the remsinder relates to
selling and administrative equipment.
d. Costs for salaries and wages incurred as follows:
Direct
labor. $ 40,000
Indirect labor.. 18,000
Sales
commissions 10,000
Administrative
salaries 25,000

e. Insurance costs incurred, $3,000 (80% relates to factory operations,
and 20% relates to selling and administrative activities).
f.
Miscellaneous selling and
administrative expenses incurred, $18,000.
g. Manufacturing overhead was applied to production. The company
applies overhead on the basis of 150% of direct labor cost.
h. Goods that cost $130,000 to manufacture according to their job cost
sheets were transferred to the finished goods warehouse.
i.
Goods that had cost $120,000 to
manufacture according to their job cost sheets were sold for $200,000.

REQUIRED:
1. Determine the underapplied or overapplied overhead for the year.
2. Prepare an income statement for the year. (HINT: No calculkations
are required to determine the cost of goods sold before any adjustment for
underapplied or overapplied overhead).

Problem 4-18
Applying Overhead in a Service Company
(LO 4-2, LO 4-4, LO 4-5)

Heritage Gardens provides complete
garden designs and landscaping services. The company uses a job-order costing
system to track the costs of its landscaping projects.
The table below provides data concerning
the three landscaping projects that were in progress during May. There was no
work in process at the beginning of May.

Project
Williams Chandler Nguyen

Designer Hours 200 80 120
Direct Materials.. $ 4,800 $ 1,800 $3,600
Direct labor. $
2,400 $ 1,000 1,500

Actual overhead costs were $16,000 for
May. Overhead costs are applied to
projects on the basis of designer-hours became most of the overhead is related
to the costs of the garden design s studio. The predetermined overhead rate is
$45 per designer-hour. The William and Chandler projects were completed in May.

REQUIRED:
1. Compute the amount of overhead cost that would have been applied to
each project during Ma.
2. Determine the cost of goods manufactured for May.
3. What is the accumulated cost of the work in process at the end of
the month?
4. Determine the underapplied or Overapplied Overhead for May.

Problem 4-22 Multiple Departments; Overhead Rates;
Underapplied or Overapplied
(LO 4-1, LO 4-2, LO 4-3, LO 4-4)

Winkle, Kotter,
and Zale is a small law firm that contains 10 partners and 10 support persons.
The firm employs a job-order costing system to accumulate costs chargeable to
each client, and it is organized into two departments the Research and
Documents Department and the Litigation Department. The firm uses predetermined
overhead rates to charge the costs of these departments to its clients. At the
beginning of the current year, the firms management made the following
estimates for the year:

Department
Research
and Documents Litigation
Research hours.. 20,000 _
Direct
attorney-hours
9,000
16,000
Materials and
supplies. $
18,000 $5,000
Direct attorney
cost
$430,000
$800, 000
Departmental
overhead cost..
$700,000
$320, 000

The
predetermined overhead rate in the Research and Documents Department is based
on research-hours, and the rate in the Litigation Department is based on direct
attorney cost.

The costs charged
to each client are made up of three elements: materials and su[[lies used,
direct attorney costs incurred, and an applied amount of overhead from each
department in which work is performed on the case.

Cae 618-3 was
initiated on February 10 and completed on June 30. During this period, the
following costs and time on the case.

Department

Research and Documents
Litigation
Research
hours.. 18 _
Direct
attorney.. 9 42
Materials and
supplies $ 50 $30
Direct attorney
cost
$410 $2,100

REQUIRED:

1.
Compute
the predetermined overhead rates used during the year in the Research and
documents Department and Litigation Department.
2.
Using
the rate you computed in (1) above, compute the total overhead cost applied to
Case 618-3.
3.
What
would be the total cost charged to Case 618-3? Show computation by department
and in total for the case.
4.
At the end of the year, the firms records
revealed the following actual cost and operating data for all cases handled
during the year:

Department
Research and Documents Litigation
Research hours.. 23,000
_
Direct
attorney-hours
8 ,000
15,000
Materials and
supplies.
$19,000 $ 6,000
Direct attorney
cost . $400,
000
$275,000
Departmental
overhead cost..
$770,000
$300,000

Determine the
amount of underapplied or overapplied overhead cost in each department for the
year. Week
2 Chapte3 Cost-Volume RelationshipManagerial
Accounting for Managers 3rd Edition, Noreen, Brewer,GarrisonProblem 3-22 Marlin Company Sales Mix; Multiproduct Break-Even Analysis
(LO 3-9)1.
Marlin Company, a wholesale
distributor, has been operating for only a few months. The company sells three
products sinks, mirrors, vanities.
Budgeted sales by product and in total for the coming month are shown
below: Product Sinks Mirrors Vanities
TotalPercentage of sales 48% 20% 32%Sales. $ 240,000 100% $100, 000
10% $160, 000 100%
$500, 000 100%Variable expenses. 72,000 30%
80, 000 80% 88, 000 55%
240, 000 48%Contribution Margin.. $ 168,000 70%
$ 20,000 20%
$ 72,000 45% 260, 000 52%Fixed expenses 223, 600Net operating income. $ 36, 400 Fixed Expenses =
$223,600 =
$430,000 Dollar sales to break-even = CM ration 0.52As shown by these data, net operating income is budgeted
at $36,400 for the month, and break-even at $430,000.Assume that actual sales for month total
$ 500,000 as planned. Actual sales by products are:Sink,
$160,000; Mirror, $200,000; and vanities, $140,000Required:1. Prepare a contribution format income statement for the month based
on actual sales dataPresent the
income statement in the format shown above.2. Compute the Break-Even Point in sales dollars for the month, based
on your actual data.3. Considering the fact that the company met its $500,000 sales budget
for the month, the president is shocked at the results shown on your income
statement in (1) above.Prepare a
brief memo for the president explaining why both the operating results and the
Break-Even-Point in sales dollars are different from what was budgeted.Problem
: 3 – 25 Break-Even Analysis:
Pricing ( LO 3-1, LO 3-4, LO 3-6)Demer holdings AG of Zurich,
Switzerland has just introduced a new fashion watch for whichThe company is trying to find an
optional selling price. Marketing
studies suggest that the company can
increase sales by 5,000 units for
each SFr 2 per unit reduction in the selling price. (SFr2 denotes 2 Swiss
Francs). The company s present selling price is SFr90 per unit, and variable
expenses are SFr60 per unit. Fixed
expenses are SFr840,000 per year. The present annual sales volume (at the SFr90
selling price) is 25,000 units.Required:1. What is present yearly net operating
income or loss?2. What is the present Break Even Point in units and in Swiss Francs sales?3. Assuming that the marketing
studies are correct, what is the maximum profit that the company can
earn yearly? At how many units, and at what selling price per unit would the company generate this profit?4. What would be the
Break-Even-Point in units and in Swiss Francs sales using the selling price you
determined in (3) above (i.e., the selling price at the level of maximum profits) ?Why is this
Break-Even-Point different from the Break-Event-Point you computed in (2)
above? Problem 3 26
Changes in cost Structure; Break-Even Analysis; Operating Leverage;
Margin of Safety ( LO 3 -4, LO 3 -6, LO 3 7, LO 3 -8)Frieden Companys
contribution format income statement for the most recent month is given
below:Sales (40,000
units) .. $ 800, 000Variable
expenses .. 560,
000Contribution
margin .. 240, 000Fixed
expenses . 192,
000Net operating
income .. $ 48, 000The industry
in which Frieden Company operates is quite sensitive to cyclical movements in
the economy. Thus profits vary considerable from year to year according to
general economic conditions. The company has a large amount of unused capacity and is studying ways of improving
profits.REQUIRED:1. New equipment has come on the
market that would allow Frieden Company to automate a portion of its
operations. Variable expenses would be reduced by $6 per unit. However, fixed
expenses would increase to a total of $432,000 each month. Prepare two
contribution format income statements, one showing present operations and one
showing how operations would appear if the new equipment is purchased. Show an amount column, a Per Unit column, and
a Percent Column on each statement. Do not show percentages for the fixed
expenses.2. Refer to the income statements in (1) above. For both present operations and the proposed
new operations, compute (a) the degree of operating leverage. (b) the
Break-Even Point in dollars, and (c) the margin of safety in both dollars and
percentage terms.3. Refer again, to the data in (1) above. As a manager, what factor
would be paramount in your mind in deciding whether to purchase the new equipment? (Assume that
ample funds are available to make the purchase).4. Refer to the original data. Rather than purchase new equipment, the
marketing manager argues that the companys marketing strategy should be
changed. Instead of paying sales commissions, which are included in variable
expenses, the marketing manager suggests that salespersons be paid fixed
salaries and that the company invest heavily in advertising. The marketing
manager claims that this new approach would increase unit sales by 50% without
any change in selling price; the companys
new monthly fixed expenses would be $240,000; and its net operating
income would increase by 25%.Compute the
Break-Event-Point in dollar sales for the company under the new marketing
strategy.Do you agree
with the marketing managers proposal?Problem 4-17 Applying Overhead; Under applied or Over applied Overhead; Income
Statement (LO 4-2, LO 4-4, LO 4-5)Durnham Company uses a job-order costing system. The
following transactions took place last year:a. Raw materials requisitioned for use in production, $40,000 (80% direct
and 20% indirect).b. Factory utility costs incurred,
$14,600.c. Depreciation recorded on plant and equipment, $28,000. Three-fourths
of the depreciation relates to factory equipment, and the remsinder relates to
selling and administrative equipment.d. Costs for salaries and wages incurred as follows:Direct
labor. $ 40,000 Indirect labor.. 18,000Sales
commissions 10,000Administrative
salaries 25,000 e. Insurance costs incurred, $3,000 (80% relates to factory operations,
and 20% relates to selling and administrative activities).f.
Miscellaneous selling and
administrative expenses incurred, $18,000.g. Manufacturing overhead was applied to production. The company
applies overhead on the basis of 150% of direct labor cost.h. Goods that cost $130,000 to manufacture according to their job cost
sheets were transferred to the finished goods warehouse.i.
Goods that had cost $120,000 to
manufacture according to their job cost sheets were sold for $200,000.REQUIRED:1. Determine the underapplied or overapplied overhead for the year.2. Prepare an income statement for the year. (HINT: No calculkations
are required to determine the cost of goods sold before any adjustment for
underapplied or overapplied overhead).Problem 4-18
Applying Overhead in a Service Company
(LO 4-2, LO 4-4, LO 4-5)Heritage Gardens provides complete
garden designs and landscaping services. The company uses a job-order costing
system to track the costs of its landscaping projects.The table below provides data concerning
the three landscaping projects that were in progress during May. There was no
work in process at the beginning of May. Project Williams Chandler NguyenDesigner Hours 200 80 120Direct Materials.. $ 4,800 $ 1,800 $3,600Direct labor. $
2,400 $ 1,000 1,500Actual overhead costs were $16,000 for
May. Overhead costs are applied to
projects on the basis of designer-hours became most of the overhead is related
to the costs of the garden design s studio. The predetermined overhead rate is
$45 per designer-hour. The William and Chandler projects were completed in May.REQUIRED:1. Compute the amount of overhead cost that would have been applied to
each project during Ma.2. Determine the cost of goods manufactured for May.3. What is the accumulated cost of the work in process at the end of
the month?4. Determine the underapplied or Overapplied Overhead for May.Problem 4-22 Multiple Departments; Overhead Rates;
Underapplied or Overapplied (LO 4-1, LO 4-2, LO 4-3, LO 4-4)Winkle, Kotter,
and Zale is a small law firm that contains 10 partners and 10 support persons.
The firm employs a job-order costing system to accumulate costs chargeable to
each client, and it is organized into two departments the Research and
Documents Department and the Litigation Department. The firm uses predetermined
overhead rates to charge the costs of these departments to its clients. At the
beginning of the current year, the firms management made the following
estimates for the year: Department Research
and Documents LitigationResearch hours.. 20,000 _Direct
attorney-hours
9,000
16,000Materials and
supplies. $
18,000 $5,000Direct attorney
cost
$430,000
$800, 000Departmental
overhead cost..
$700,000
$320, 000The
predetermined overhead rate in the Research and Documents Department is based
on research-hours, and the rate in the Litigation Department is based on direct
attorney cost.The costs charged
to each client are made up of three elements: materials and su[[lies used,
direct attorney costs incurred, and an applied amount of overhead from each
department in which work is performed on the case.Cae 618-3 was
initiated on February 10 and completed on June 30. During this period, the
following costs and time on the case. Department
Research and Documents
LitigationResearch
hours.. 18 _Direct
attorney.. 9 42Materials and
supplies $ 50 $30Direct attorney
cost
$410 $2,100REQUIRED:1.
Compute
the predetermined overhead rates used during the year in the Research and
documents Department and Litigation Department.2.
Using
the rate you computed in (1) above, compute the total overhead cost applied to
Case 618-3.3.
What
would be the total cost charged to Case 618-3? Show computation by department
and in total for the case.4.
At the end of the year, the firms records
revealed the following actual cost and operating data for all cases handled
during the year:Department Research and Documents LitigationResearch hours.. 23,000
_Direct
attorney-hours
8 ,000
15,000Materials and
supplies.
$19,000 $ 6,000Direct attorney
cost . $400,
000
$275,000Departmental
overhead cost..
$770,000
$300,000Determine the
amount of underapplied or overapplied overhead cost in each department for the
year.