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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

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

Instructions:
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

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

Activity Cost Budget
Cost
Pool Cost Driver Rate Assigned

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

Number of Units
Price per unit #DIV/0!

Actvity Cost Deluxe
Cost
Pool Cost Driver Rate Assigned

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

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:
Footballs
Baseballs

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
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 savings:
Direct materials savings
Direct labor savings
Fixed overhead savings - avoidable portion

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
follows:
Direct materials \$15.00
Direct labor \$13.00
Variable selling and administrative expenses \$5.00
\$37.00

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.

Instructions:
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 = )

#### Solution Summary

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

\$2.19

## High-low methods, accounting analysis, CVP, and leverage

EXERCISE4-5. High-Low Method

Campus Copy & Printing wants to predict copy machine repair expense at different levels of copying activity (number of copies made). The following data have been gathered: (see attached)

Required
Determine the fixed and variable components of repair expense using the high-low
method. Use copies made as the measure of activity.

EXERCISE 4-8. Account Analysis

Reef Office Supplies is interested in estimating
the cost involved in hiring new employees. The following information is available regarding
the costs of operating the Human Resource department at Reef Office Supplies
in May when there were 50 new hires.

Human Resource Department
May
Staff salaries \$25,000
Manager salary 7,000
Office supplies 200
Depreciation of office equipment 300
Share of building cost (based
on square feet occupied by
Human Resources) 1,500
Total \$34,000

Required
a. Use account analysis to determine fixed cost per month and variable cost per new
hire.
b. The company is planning to hire 60 employees in June. Estimate the total cost of
Human Resources for June..
c. What is the expected incremental cost associated with hiring 10 more employees
than were hired in May?

EXERCISE 4-12. CVP Analysis, Profit Equation

Clyde's Marina has estimated that fixed costs per month
are \$240,000 and variable cost per dollar of sales is \$0.60.

Required
a. What is the break-even point per month in sales?
b. What level of sales is needed for a monthly profit of \$60,000?
c. For the month of July, the marina anticipates sales of \$1,200,000: What is the expected level of profit?

EXERCISE 4-17. Operating Leverage
(see attached for data)
Required
a. Calculate profit as a percent of sales in the prior year.
b. Suppose sales in the current year increase by 20 percent. Calculate profit as a percent
of sales for the new level of sales and explain why the percent is greater than the
one calculated in Part a.

EXERCISE 4-18. Constraints

Dvorak Music produces two durable music stands:

Stand A Stand B
Selling price \$80 \$70
Less variable costs 20 40
Contribution margin \$60 \$30

Stand Arequires 5 labor hours and standB requires 2 labor hours. The company has
only 320 available labor hours per week. Further, the company can sell all it can produce
of either product.

Required
a. Which stand(s) should the company produce?
b. What would be the incremental benefit of obtaining 10 additional labor hours?

PROBLEM 4-12. Multiproduct CVP

Fidelity Multimedia sells audio and video equipment
and car stereo products. After performing a study of fixed and variable costs in the
prior year, the company prepared a product-line profit statement as follows:

Fidelity Multimedia
Profitability Analysis
For the Year Ended December 31,2007
Audio Video Car Total
Sales \$3,000,000 \$1,800,000 \$1,200,000 \$6,000,000
Less variable costs:
Cost of merchandise 1,800,000 1,260,000 600,000 3,660,000
Salary part-time staff 120,000 80,000 30,000 230,000
Total variable costs 1,920,000 1,340,000 630,000 3,890,000
Contribution margin 1,080,000 460,000 570,000 2,110,000
Less direct fixed costs:
Salary, full-time staff 300,000 250,000 210,000 760,000
Less common fixed costs:
Utilities 20,000
Total common fixed costs 690,000
Profit \$660,000

Required
a. Calculate the contribution margin ratios for the audio, video, and car product lines.
b. What would be the effect on profit of a \$100,000 increase in sales of audio equipment
compared with a \$100,000 increase in sales of video equipment, or a \$100,000
increase in sales of car equipment? Based on this limited information, which product
line would you recommend expanding?
c. Calculate the break-even level of sales for the company as a whole.
d. Calculate sales needed to achieve a profit of \$1,500,000 assuming the current mix.
e. Determine the sales of audio, video, and car products in the total sales amount calculated
for Part d.

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