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Linear Profit and Cost Modeling

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Please see the attached Word document for the table.

I need help evaluating the following scenarios in which standard cost systems are in use and calculate direct labor and materials variances.

Manufacturing Cost Classification

A company makes DVD players and incurs a variety of different costs. Place a check in the appropriate column if the cost is a product cost or a period cost. Further, classify each product cost as direct materials, direct labor, or manufacturing overhead.


Medical Instruments

Medical Instruments produces a variety of electronic medical devices. Medical Instruments uses a standard cost system and computes prices variances at the time of purchase. One product, a thermometer, measures patient temperatures orally. It requires a silver lead with a standard length of 5 inches per thermometer. To make the leads, hollow silver tubing is purchased at a standard price of $4 per inch, cut into the required length, and then assembled into the thermometer.
There was no silver tubing in inventory when a batch of 200 thermometers was scheduled for production. Twelve hundred inches of silver tubing were purchased for $4,680 by the purchasing department for this 200-unit batch of thermometers, and 1,100 inches were used in production.

Compute the materials variances for silver tubing and comment on their meaning.


Mickles Ltd.

Mickles Ltd. uses a standard cost system. In June, Mickles' direct labor efficiency variance was $1,470 U and its direct labor rate variance was $825 F. Mickles manufactured 460 batches of product in June. Actual direct labor hours in June were 980 hours. Each batch calls for two standard direct labor hours per batch.
Calculate the standard direct labor wage rate used by Mickles in computing its direct labor variances in June.


Alexander Products

Alexander Products manufactures dental equipment and uses a standard cost system. A new product (HV65) that is being introduced requires a particular type of stainless steel. Alexander purchased a quantity of this stainless steel (in meters). The following data summarize the operations regarding the purchase and use of this new stainless steel.

Calculate the number of meters of stainless steel purchased and the standard price per meter of the stainless steel Alexander used in its standard cost system.


Oaks Auto Supply

Oaks Auto Supply just acquired a patent on an antifreeze recycler that flushes used antifreeze from a car, filters it, removes dissolved chemicals, and the returns it to the automobile without having to dispose of the old antifreeze or use new antifreeze. It is a cheaper and environmentally safer process than replacing the old antifreeze. The recycler will be sold to garages and auto service shops. The patent cost Oaks $2.2 million. The firm will have to invest another $12.6 million in plant, equipment, and working capital. Oaks has a pretax cost of capital of 20%. In order to achieve this level of sales, the firm forecasts that the sales price cannot exceed $2,500 per recycler. Variable selling commissions will be $500 per unit. Purchased parts are projected to cost $750 per unit.

Calculate the target conversion cost (labor and overhead) per recycler if Oaks is to achieve its sales projections and return on investment objectives.



A new pharmaceutical drug calls for 4.5 ounces of compound AN7-X1 per batch of 250 tablets. AN7-X1 has a standard price of $2 per ounce. An initial inventory of 8,000 ounces of AN7-X1 is purchased for $17,200. The firm produces 1,000 batches of the new drug and uses 4,600 ounces of AN7-X1. All variances are calculated as soon as possible.
Calculate the price and quantity variances for AN7-X1.

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Solution Summary

Your work is in Word except for Oaks Auto Supply where I thought you would benefit from an Excel table where you could see the formulas and a good visual to study.

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Evaluating Decision-Making Scenarios Using Linear Profit and Cost Modeling

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Vintage Cellars

Vintage Cellars manufactures a 1,000-bottle wine storage system that maintains optimum temperature (55-57 °F) and humidity (50-80%) for aging wines. The system has a backup battery for power failures and can store red and white wines at different temperatures. The following table depicts how average cost varies with the number of units manufactured and sold (per month):

a. Prepare a table that computes the total cost and marginal cost for each quantity between 1 and 10 units.
b. What is the relation between average cost and marginal cost?
c. What is the opportunity cost of producing one more unit if the company is currently producing and selling four units?
d. Vintage Cellars sells the units for $9,000 each. This price does not vary with the number of units sold. How many units should Vintage manufacture and sell each month?

Sunnybrook Farms

Sunnybrook Farms is a local grocery store that is currently open only Monday through Saturday. Sunnybrook is considering opening on Sundays. The annual incremental costs of Sunday openings are estimated at $24,960. Sunnybrook Farms' gross margin on sales is 20%. Sunnybrook estimates that 60% of its potential Sunday sales to customers are now made on other days. What 1-day volume of Sunday sales would be necessary for Sunnybrook Farms to attain the same weekly operating income as in the current 6-day week?

Taylor Chemicals

Taylor Chemicals produces a particular chemical at a fixed cost of $1,000 per day. The following table displays how marginal cost varies with output (in cases):

a. Given the preceding data, construct a table that reports total cost and average cost at various output levels from 1 to 10 cases.
b. At what quantity is average cost minimized?
c. Does marginal cost always intersect average cost at minimum average cost? Why?

Gas Prices

After the Iraqi invasion of Kuwait in August 1990, the world price of crude oil doubled to more than $30 per barrel in anticipation of reduced supply. Immediately, the oil companies raised the retail price on refined oil products even though these products were produced from oil purchased at the earlier, lower prices: The media charged the oil companies with profiteering and price gouging, and politicians promised immediate investigations.

Critically evaluate the charge that the oil companies profited from the Iraqi invasion. What advice would you offer the oil companies?

Penury Company

You are a new consultant with the Boston Group and have been sent to advise the executives of Penury Company. The company recently acquired product line L from an out-of-state concern and now plans to produce it, along with its old standby K, under one roof in a newly renovated facility. Management is quite proud of the acquisition, contending that the larger size and related cost savings will make the company far more profitable. The planned results of a month's operations, based on management's best estimates of the maximum product demanded at today's selling prices are

a. Based on historical operations, K alone incurred fixed expenses of $40,000, and L alone incurred fixed expenses of $20,000. Find the break-even point in sales dollars and units for each product separately.
b. Give reasons why the fixed costs for the two products combined are expected to be less than the sum of the fixed costs of each product line operating as a separate business.
c. Assuming that for each unit of K sold, one unit of L is sold, find the break-even point in sales dollars and units for each product.

Affording a Hybrid

With gasoline prices at $3.00 per gallon, consumers are flocking to purchase hybrid vehicles (combination of gasoline and electric motors) that get 50 miles per gallon of gasoline. The monthly payment on a 3-year lease of a hybrid is $499 compared to $399 per month on a conventional, equivalent traditional gasoline car that gets 25 miles per gallon. Both vehicles require a one-time $1,500 payment for taxes, license, and dealer charges. Both vehicles have identical lease terms for the residual value, maximum number of miles allowed without penalty, and so forth.

a. Calculate how many miles the consumer must drive per year to make the hybrid the economical choice over the conventional gasoline-only vehicle.
b. How does your answer to part (a) change if the price of the gasoline is $4.00 per gallon?

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