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Activity Based Cost Accounting & CVP Excercise

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Vid-saver, Inc., has five activity cost pools and two products (a budget tape rewinder and a deluxe tape rewinder). Information is presented below:

Activity Cost Cost Estimated Cost Driver by Product
Pool Driver Overhead Budget Deluxe

Ordering & Receiving Orders $110,000 600 400
Machine Setup Setup $275,000 500 400
Machining Machine Hours $1,500,000 150,000 100,000
Assembly Parts $1,200,000 1,200,000 800,000
Inspection Inspections $300,000 550 450

Compute the overhead cost per unit for each product. Production is 600,000 units of Budget and 300,000 units of Deluxe. Round your answer to the nearest cent.

Solution Template

Activity Estimated Total EstimatedRate Overhead
Cost Pool Overhead ActvityPer Rate

Ordering & Receiving $110,000 order
Machine Setup $275,000 setup
Machining $1,500,000 machine hr
Assembly $1,200,000 parts
Inspection $300,000 inspections

Total overhead $3,385,000

Activity Cost Budget
Pool Cost Driver Rate Assigned

Ordering & Receiving $-
Machine Setup $-
Machining $-
Assembly $-
Inspection $-

Total overhead $-
Number of Units
Price per unit #DIV/0!

Actvity Cost Deluxe
Pool Cost Driver Rate Assigned

Ordering & Receiving $-
Machine Setup $-
Machining $-
Assembly $-
Inspection $-

Total overhead $-
Number of Units
Price per unit #VALUE!

Exercise B Complete the following CVP Exercise 2.5 points

Sam Company makes 2 products, footballs and baseballs. Additional information follows:
Footballs Baseballs
Units 4,000 2,500
Sales $60,000 $25,000
Variable Costs $36,000 $7,000
Fixed Costs $9,000 $9,000
Net Income $15,000 $9,000

Profit per Unit 3.75 3.60

Instructions: If Sam has unlimited demand for both products, which product should Sam tell his sales
people to emphasize?

Solution template:

Contribution Margin per unit:

Sam should tell his sales people to sell more due to

Exercise C: Make or buy decision - Incremental Analysis Exercise 2.5 points

Hernandex, Inc., manufactures 3 models of picture frames for a total of 5,000 frames per year.
The unit cost to produce a metal frame follows:

Direct Materials $8.00
Direct Labor $6.00
Variable Overhead $2.00
Fixed Overhead (70% unavoidable) $5.00
Total $21.00

A local company has offered to supply Hernandex the 5,000 metal frames it needs for $16 each.
Instructions: Create an incremental analysis for the make or buy decision.

Solution Template: (Note in dollars, not price per unit)
Incremental cost to buy
Incremental savings:
Direct materials savings
Direct labor savings
Variable overhead savings
Fixed overhead savings - avoidable portion
Incremental savings if 'buy' decision is made $-

Exercise D: Complete the following Pricing Decision Exercise 2.5 Points

Tree Top Company is in the process of setting a selling price for its newest model stunt kite, the
looper. The controller of Tree Top estimates variable cost per unit for the new model to be as
Direct materials $15.00
Direct labor $13.00
Variable manufacturing overhead $4.00
Variable selling and administrative expenses $5.00

In addition, Tree Top anticipates incurring the following fixed cost per unit at a budgeted sales
volume of 20,000 units:
Total Cost Budget Cost
Cost Volume per unit
Fixed manufacturing overhead $240,000 20,000 $12.00
Fixed selling and administrative expenses $260,000 20,000 $13.00
Fixed cost per unit $25.00

Tree Top uses cost-plus pricing and would like to earn a 12% return on its investment (ROI)
of $250,000.

Compute the selling price that would provide Tree Top a 12% ROI.

Solution Template: Unit Price

Variable cost per unit
Fixed cost per unit
Desired ROI per unit
Target Selling price

Desired ROI per unit
( * .12% / 20,000 units = )

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Solution Summary

The solution provides activity based costing example along with CVP analysis.