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    CVP Analysis, Decision Making, Activity Based Costing, Unit Cost

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    Problem 3 - CVP Analysis and Decision Making

    Part 1:
    Ballpark Concessions currently sells hot dogs. During a typical month, the stand reports
    a profit of $9,000 with sales of $50,000, fixed costs of $21,000, and variable costs of
    $0.64 per hot dog.

    Next year, the company plans to start selling nachos for $3 per unit. Nachos will have a
    variable cost of $0.72 and new equipment and personnel to produce nachos will increase
    monthly fixed costs by $8,808. Initial sales of nachos should total 5,000 units. Most of
    the nacho sales are anticipated to come from current hot dog purchasers, therefore,
    monthly sales of hot dogs are expected to decline to $20,000.

    After the first year of nacho sales, the company president believes that hot dog sales will
    increase to $33,750 a month and nacho sales will increase to 7,500 units a month.


    a. Determine the monthly breakeven sales in dollars before adding nachos.

    b. Determine the monthly breakeven sales during the first year of nachos sales,
    assuming a constant sales mix of 1 hotdog and 2 units of nachos.

    Problem 3 - CVP Analysis and Decision Making

    Part 2:

    Almo Company manufactures and sells adjustable canopies that attach to motor homes and
    trailers. For its 2010 budget, Almo estimates the following:

    Selling Price $400
    Variable cost per canopy $200
    Annual fixed costs $100,000
    Net income $240,000
    Income tax rate 40%

    The May income statement reported that sales were not meeting expectations. For the first five
    months of the year, only 350 units had been sold at the established price, with variable costs as
    planned, and it was clear that the net income projection for 2010 would not be reached unless
    some actions were taken. A management committee presented the following mutually exclusive
    alternatives to the president:

    1. Reduce the selling price by $40. The sales organization forecasts that at this
    significantly reduce price, 2,700 units can be sold during the remainder of the year. Total
    fixed costs and variable cost per unit will stay as budgeted.

    2. Lower variable cost per unit by $10 through the use of less-expensive direct materials
    and slightly modified manufacturing techniques. The selling price will also be reduced by
    $30, and sales of 2,200 units are expected for the remainder of the year.

    3. Reduce fixed costs by $10,000 and lower the selling price by 5%. Variable cost per unit
    will be unchanged. Sales of 2,000 units are expected for the remainder of the year.


    a) If no changes are made to the selling price or cost structure, determine the number of
    units that Almo Company must sell to achieve its net income objective.

    b) Determine which alternative Almo should select to achieve its net income objective.
    Show your calculations.

    Problem 4: Activity-based job costing, unit-cost comparisons

    The Tracy Corporation has a machining facility specializing in jobs for the aircraft-
    components market. Tracy's previous simple job-costing system had two direct-cost categories
    (direct materials and direct manufacturing labor) and a single indirect-cost pool (manufacturing
    overhead, allocated using direct manufacturing labor-hours). The indirect cost-allocation rate of
    the simple system for 2010 would have been $115 per direct manufacturing labor-hour.

    Recently a team with members from product design, manufacturing, and accounting used
    an ABC approach to refine its job-costing system. The two direct-cost categories were retained.
    The team decided to replace the single indirect-cost pool with five indirect-cost pools. The cost
    pools represent five activity areas at the plan., each with its own supervisor and budget
    responsibility. Pertinent data are as follows:

    Activity Area Cost-Allocation Base Cost-Allocation Rate
    Materials handling Parts $0.40
    Lathe work Lathe turns 0.20
    Milling Machine-hours 20.00
    Grinding Parts 0.80
    Testing Units tested 15.00

    Information-gathering technology has advanced to the point at which the data necessary for
    budgeting in these five activity areas are collected automatically.

    Two representative jobs processed under the ABC system at the plant in the most recent period
    had the following characteristics:

    Job 410 Job 411
    Direct material cost per job $9,700 $59,900
    Direct manufacturing labor cost per job $750 $11,250
    Number of direct manufacturing labor-hours per job 25 375
    Parts per job 500 2,000
    Lathe turns per job 20,000 60,000
    Machine-hours per job 150 1,050
    Units per job (all units are tested) 10 200


    1. Compute the manufacturing cost per unit for each job under the previous simple job-
    costing system.
    2. Compute the manufacturing cost per unit for each job under the activity-based costing
    3. Compare the per-unit cost figures for jobs 410 and 411 computed in requirements 1 and 2.
    Why do the simple and activity-based costing systems differ in the manufacturing cost per
    unit for each job? Why might these differences be important to Tracy Corporation?

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    Solution Summary

    The solution provides a CVP analysis, decision making, activity based costing and unit cost comparisons.