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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.