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# Computing Various Average Markup Percentages

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Nancy Company has budgeted sales of \$300,000 with the following budgeted costs:

Direct materials \$60,000

Direct manufacturing labor 40,000

Variable 30,000

Fixed 50,000

Variable 20,000

Fixed 30,000

Question 1: Compute the average markup percentage for setting prices as a percentage of the full cost of the product

Question 2: Compute the average markup percentage for setting prices as a percentage of the variable cost of the product

Question 3: Compute the average markup percentage for setting prices as a percentage of the variable manufacturing costs

#### Solution Summary

Given a contribution margin income statement, this solution illustrates how to (a) compute the average markup percentage for setting prices as a percentage of the full cost of the product, (b) compute the average markup percentage for setting prices as a percentage of the variable cost of the product, and (c) compute the average markup percentage for setting prices as a percentage of the variable manufacturing costs.

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## Solving Various Accounting Problems

1. The income statement for Thomas Manufacturing Company for 2006 is as follows:

Sales (10,000 units) \$120,000
Variable expenses 72,000
Contribution margin \$ 48,000
Fixed expenses 36,000
Operating income \$ 12,000

What is the contribution margin per unit?
a. \$7.20
b. \$1.20
c. \$4.80
d. \$120,000

2. Baker Company sells its product for \$60. In addition, it has a variable cost ratio of 40 percent and total fixed costs of \$9,000. How many units must be sold in order to obtain a before-tax profit of \$12,000?
a. 350 units
b. 584 units
c. 875 units
d. 333 units

3. Lewis Production Company had the following projected information for 2006:

Selling price per unit \$150
Variable cost per unit \$90
Total fixed costs \$300,000

What is the break-even point in units?
a. 2,000 units
b. 5,000 units
c. 3,333 units
d. 60,000 units

4. Assume the following cost behavior data for Portrait Company:

Sales price \$18.00 per unit
Variable costs \$13.50 per unit
Fixed costs \$22,500
Tax rate 40%

What volume of sales dollars is required to earn a before-tax income of \$27,000?
a. \$198,000
b. \$180,000
c. \$90,000
d. \$270,000

5. Assume the following cost behavior data for Portrait Company:

Sales price \$18.00 per unit
Variable costs \$13.50 per unit
Fixed costs \$22,500
Tax rate 40%

What volume of sales dollars is required to earn an after-tax income of \$40,500?
a. \$360,000
b. \$90,000
c. \$252,000
d. \$495,000

6. Which of the following statements is TRUE when making a decision between two alternatives?
a. Variable costs may not be relevant when the decision alternatives have the same activity levels.
b. Variable costs are not relevant when the decision alternatives have different activity levels.
c. Sunk costs are always relevant.
d. Fixed costs are never relevant.

7. Which of the following costs is NOT relevant to a special-order decision?
a. the direct labor costs to manufacture the special-order units
b. the variable manufacturing overhead incurred to manufacture the special-order units
c. the portion of the cost of leasing the factory that is allocated to the special order
d. all of these costs are relevant

8. Which of the following costs is NOT relevant to a make-or-buy decision?
a. \$10,000 of direct labor used to manufacture the parts
b. \$30,000 of depreciation on the plant used to manufacture the parts
c. the supervisor's salary of \$25,000 that will be avoided if the part is purchased from an outside supplier
d. \$15,000 in rent from leasing the production space to another company if the part is purchased from an outside supplier

9. Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows:

Direct materials \$150,000
Direct labor 240,000
Inspecting products 60,000
Providing power 30,000
Providing supervision 40,000
Setting up equipment 60,000
Moving materials 20,000
Total \$600,000

If the component is not produced by Foster, inspection of products and provision of power costs will only be 10 percent of the production costs; moving materials costs and setting up equipment costs will only be 50 percent of the production costs; and supervision costs will amount to only 40 percent of the production amount. An outside supplier has offered to sell the component for \$25.50.

What is the effect on income if Foster Industries purchases the component from the outside supplier?
a. \$25,000 increase
b. \$45,000 increase
c. \$90,000 decrease
d. \$90,000 increase

10. Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows:

Direct materials \$150,000
Direct labor 240,000
Total \$600,000

An outside supplier has offered to sell the component for \$25.50.

Foster Industries can rent its unused manufacturing facilities for \$45,000 if it purchases the component from the outside supplier.

What is the effect on income if Foster purchases the component from the outside supplier?
a. \$45,000 increase
b. \$15,000 increase
c. \$75,000 decrease
d. \$105,000 increase

11. Jamie Corporation had the following information:

Revenues \$250,000
Cost of goods sold:
Direct materials \$50,000
Direct labor 37,500
Gross profit \$100,000
Operating income \$ 62,500

What would be the price for a product that has a cost of \$500, assuming that the markup is based on cost of goods sold?
a. \$834
b. \$625
c. \$708
d. \$2,000

12. Gage Company had the following information:
Revenues \$600,000
Cost of Goods Sold 60%
What is the markup on Cost of Goods sold?
a. .1833
b. .6667
c. .3611
d. none of these

ANS: B
Support:
Cost of Goods Sold = .60 ? \$600,000 = \$360,000
Operating Income = \$600,000 - \$360,000 - \$130,000 = \$110,000
Markup on COGS = (selling and administrative expenses + operating income) / COGS
.6667 = (\$130,000 + \$110,000) / \$360,000

PTS: 1 DIF: Difficult OBJ: 18-2 NAT: AACSB Analytic

13. Perry Products is thinking of expanding their product line. Their current income statement is as follows:
Revenues \$600,000
Cost of Goods Sold:
Direct Materials \$250,000
Direct Labor 100,000
Gross Profit 170,000
Operating Income \$100,000

The cost of the new product is \$95 per unit made up of \$50 of direct materials, \$35 of direct labor and \$10 of overhead per unit. What is the bid price assuming Perry utilizes a mark-up on direct materials?
a. \$70
b. \$133
c. \$119
d. \$19.77

14. The following information pertains to Stark Corporation:

Beginning inventory 0 units
Ending inventory 5,000 units
Direct labor per unit \$20
Direct materials per unit 16
Variable selling costs per unit 12
Fixed selling costs per unit 16

What is the value of ending inventory using the variable costing method?
a. \$310,000
b. \$250,000
c. \$200,000
d. \$390,000

15. Toshi Company incurred the following costs in manufacturing desk calculators:

Direct materials \$14
Indirect materials (variable) 4
Direct labor 8
Indirect labor (variable) 6
Variable selling expenses 20
Fixed selling expenses 14

During the period, the company produced and sold 1,000 units.

What is the inventory cost per unit using variable costing?
a. \$52
b. \$62
c. \$42
d. \$70

16. Meulo Company is considering the purchase of production equipment that costs \$800,000. The equipment is expected to generate an annual cash flow of \$250,000 and have a useful life of five years with no salvage value. The firm's cost of capital is 12 percent. The company uses the straight-line method of depreciation with no mid-year convention. There are no income taxes.

The payback period in years for the project is
a. 2.90 years.
b. 3.20 years.
c. 3.25 years.
d. 4.20 years.

17. Dunkin, Inc., is considering the purchase of production equipment that costs \$300,000. The equipment is expected to generate an annual cash flow of \$100,000 and have a useful life of five years with no salvage value. The firm's cost of capital is 14 percent. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes.

Payback for the project is
a. 5.00 years.
b. 3.50 years.
c. 3.00 years.
d. 2.38 years.

18. Hunziker Company is considering the purchase of wood cutting equipment. Data on the equipment are as follows:

Original investment \$45,000
Net annual cash inflow \$18,000
Expected economic life in years 5
Salvage value at the end of five years \$4,500

The company uses the straight-line method of depreciation with no mid-year convention.

What is the accounting rate of return on original investment rounded to the nearest percent, assuming no taxes are paid?
a. 40%
b. 73%
c. 22%
d. 24%

19. Holloway Company is considering the purchase of a new machine for \$40,000. The machine would generate an annual cash flow before depreciation and taxes of \$15,647 for four years. At the end of four years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate.

What is the accounting rate of return on the original investment in the machine approximated to two decimal points?
a. 14.12%
b. 8.47%
c. 39.12%
d. 16.92%

20. Which of the following methods uses income instead of cash flows?
a. payback
b. accounting rate of return
c. internal rate of return
d. net present value

21. Waterhouse Company decreased the size of inventory order quantities that had previously been determined using the EOQ model. If demand remains the same, what is the impact on the number of orders made during the year?
a. increase
b. no change
c. decrease
d. cannot be determined

22. Waterhouse Company decreased the size of inventory order quantities that had previously been determined using the EOQ model. What is the impact on the total amount of annual carrying and ordering costs?
a. increase
b. no change
c. decrease
d. cannot be determined

23. The economic order quantity is the order quantity that results in
a. the minimum total annual inventory costs.
b. the maximum total annual inventory costs.
c. no inventory shortages.
d. minimum ordering costs.

24. Strategic objectives of JIT include
a. increasing profits.
b. improving a firm's competitive position.
c. increasing inventory.
d. both a and b.

25. The objectives of JIT are achieved by
a. controlling costs.
b. improving delivery performance.
c. improving quality.
d. all of these.

SECTION II

1. The operations of Grant Corporation are divided into the Fix Division and the Roach Division. Projections for the next year are as follows:

Fix Roach
Division Division Total
Sales \$60,000 \$ 40,000 \$100,000
Variable costs 20,000 15,000 35,000
Contribution margin \$40,000 \$ 25,000 \$ 65,000
Direct fixed costs 12,500 30,000 42,500
Segment margin \$27,500 \$ (5,000) \$ 22,500
Allocated common costs 10,000 7,500 17,500
Operating income (loss) \$17,500 \$(12,500) \$ 5,000

Required:

a. Determine operating income for Grant Corporation as a whole if the Roach Division is dropped.
b. Should the Roach Division be eliminated?

2. The management of James Industries has been evaluating whether the company should continue manufacturing a component or buy it from an outside supplier. A \$200 cost per component was determined as follows:

Direct materials \$ 15
Direct labor 40
Total \$100

James Industries uses 4,000 components per year. After Light, Inc., submitted a bid of \$80 per component, some members of management felt they could reduce costs by buying from outside and discontinuing production of the component. If the component is obtained from Light, Inc., James's unused production facilities could be leased to another company for \$50,000 per year.

Required:

a. Determine the maximum amount per unit James should pay an outside supplier.
b. Indicate if the company should make or buy the component and the total dollar difference in favor of that alternative.
c. Assume the company could eliminate production supervisors with salaries totaling \$30,000 if the component is purchased from an outside supplier. Indicate if the company should make or buy the component and the total dollar difference in favor of that alternative.

3. Baker Company produced 30,000 units and sold 28,000 units in 2011. Beginning inventory was zero. During the period, the following costs were incurred:

Indirect labor \$ 60,000
Indirect materials 30,000
Fixed selling expenses 120,000
Variable selling expenses, per unit 40
Direct labor, per unit 80
Direct materials, per unit 20

Required:

Compute the dollar amount of ending inventory using:

a. Absorption costing
b. Variable costing

4. Bert Corporation is considering an investment in equipment for \$150,000.
Data related to the investment are as follows:

Income before
Year Depreciation and Taxes
1 \$60,000
2 60,000
3 60,000
4 60,000
5 60,000

Cost of capital is 10 percent.

Bert uses the straight-line method of depreciation with mid-year convention for tax purposes. In addition, its tax rate is 40 percent and the depreciable life of the equipment is four years with no salvage value. The equipment is sold at the end of the fifth year.

Required:

Determine the following amounts using after-tax cash flows:

a. Payback period
b. Accounting rate of return on original investments for each year
c. Net present value

5. Cardinal Dry Cleaners has 400 hours a week available to use in dry cleaning or laundry. Four thousand inches of hanging space is available. The average item that is dry cleaned takes six inches of hanging space, whereas laundry items take up only three inches of hanging space. The contribution margin for laundry items averages \$3.50; dry cleaned items average \$6.50. Fifty items can be washed per hour, whereas only twenty can be dry cleaned.

Required:

a. Determine the objective function. Is it a minimization or maximization function?
b. Set up the constraint equations.

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