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Financial Accounting - Various Examples

1. RNO Company's market for the Model 55 has changed significantly, and RNO has had to drop the price per unit from $265 to $125. There are some units in the work in process inventory that have costs of $150 per unit associated with them. RNO could sell these units in their current state for $100 each. It will cost RNO $10 per unit to complete these units so that they can be sold for $125 each.

Which of the following is the amount of sunk costs in this problem?
A) $150 per unit
B) $125 per unit
C) $10 per unit
D) $265 per unit

A new employee looks at the analysis and exclaims, "We'll lose money with either of these alternatives! Let's just throw these units in the trash!" Suppose the alternative to trashing is choosing the more profitable of the two alternatives (that the new employee looked at and did not like). What effect will the trashing option (that the new employee wants) have on net income?

A) Net income will increase by $35 per unit for each unit discarded.
B) Net income will decrease by $115 per unit for each unit discarded.
C) It will have no effect on net income.
D) Net income will decrease by $265 per unit for each unit discarded.

When the incremental revenues and expenses are analyzed, the company is better off by
A) $10 per unit if the sell the units in their current state.
B) $25 per unit if they sell the units in their current state.
C) $15 per unit if they complete the units.
D) $125 per unit if they complete the units.

Which of the following is not a relevant value in this problem?
A) $10 = cost to complete units
B) $265 = former price
C) $125 = current price
D) $100 = price for partially completed units

2. A company using activity based pricing marks up the direct cost of goods by 30% plus charges customers for indirect costs based on the activities utilized by the customer. Indirect costs are charged as follows: $8.00 per order placed; $4.00 per separate item ordered; $30.00 per return. A customer places 10 orders with a total direct cost of $3,000, orders 300 separate items, and makes 5 returns. What will the customer be charged?
A) $5,330
B) $3,000
C) $5,759
D) $3,900

3. Manufacturing overhead is allocated to products based on the number of machine hours required. In a year when 20,000 machine hours were anticipated, costs were budgeted at $125,000. If a product requires 7,000 machine hours, how much manufacturing overhead will be allocated to this product?
A) $41,667
B) $43,750
C) $1,120
D) $50,000

4. The Sunrise Hotel has 200 rooms. Each room rents at $110 per night and variable costs total $16 per room per night of occupancy. Fixed costs total $84,000 per month.

Go back to the original data. If the hotel spends an additional $10,000 in the month of February on advertising they feel that they can expect occupancy rate to increase by 5%. What would be the financial impact of spending this additional money on advertising for the month of February (28 days)?

A) Total fixed costs will increase by $10,500.
B) Net income will increase by $16,320.
C) Net income will increase by $26,320.
D) Total fixed costs will remain the same.

If 80% of the rooms are occupied each night in the month of February (28 days) what will total costs be for the month?
A) $86,560.
B) $173,600.
C) $71,680.
D) $155,680.

If the hotel is able to increase occupancy to 90% by how much will total costs increase for the month of February (28 days)?
A) $7,168.
B) $8,960.
C) $17,360.
D) $15,568.

5. Jones Company manufactures widgets. Old Ham Company has approached Jones with a proposal to sell the company one of the components used to make widgets at a price of $100,000 for 50,000 units. Jones is currently making these components in its own factory. The following costs are associated with this part of the process when 50,000 units are produced:

Direct material $44,000
Direct labor 20,000
Manufacturing overhead 60,000
Total $124,000

The manufacturing overhead consists of $32,000 of costs that will be eliminated if the components are no longer produced by Jones. The remaining manufacturing overhead will continue whether or not Jones makes the components.
What is the amount of avoidable costs if Jones buys rather than makes the components?
A) $60,000
B) $96,000
C) $124,000
D) $100,000

6. K-Henry's Dull Diner has a contribution margin ratio of 16%. If fixed costs are $176,800, how many dollars of revenue must K-Henry's generate in order to reach the break-even point?
A) $282,880
B) $1060,800
C) $208,476
D) $1,105,000

7. Conan Company's monthly activity level ranged from a low of 17,000 units in May to a high of 26,000 units in October. Average production was 20,000 units per month. Utilities cost was $8,250 in May and $10,500 in October. The variable utility cost per unit, to the nearest cent, is:
A) $0.49.
B) $0.47.
C) $0.25.
D) $0.40.

8. Crede Company sells a single product that has variable costs of $10 per unit. Fixed costs will be $700,000 across all levels of sales shown.

Units Sold Price per unit
80,000 $35
90,000 $33
100,000 $31
110,000 $30
120,000 $28

What price should Crede charge to maximize profits?
A) $28
B) $30
C) $35
D) $31
E) $33

What price would Crede charge to maximize revenues?
A) $30
B) $31
C) $35
D) $28
E) $33

What, if any information given was not relevant to the profit maximization decision?
A) The variable costs per unit
B) The quantities demanded
C) All of the information was relevant
D) The selling prices
E) The total fixed costs

9. Anderson Manufacturing makes a single product. Budget information regarding the current period is given below:

Revenue (100,000 units at $8.00) $800,000
Direct materials 150,000
Direct labor 125,000
Variable manufacturing overhead 235,000
Fixed manufacturing overhead 110,000
Net income $180,000

10. Dye Company approaches Anderson with a special order for 15,000 units at a price of $7.50 per unit. Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company's orders. However, Anderson is operating at capacity and will incur an additional $50,000 in fixed manufacturing overhead if the order is accepted.

What is the incremental income (loss) associated with accepting the special order?
A) ($14,000)
B) $36,000
C) ($23,500)
D) $27,000

What is the incremental revenue associated with accepting the special order?
A) $170,000
B) $112,500
C) $70,000
D) $120,000

11. Paul's Pizza produced and sold 2,000 pizzas last month and had fixed costs of $6,000. If production and sales are expected to increase by 10% next month, which of the following statements is true?
Total fixed costs will decrease.
Fixed cost per unit will decrease.
Total fixed costs will increase.
Fixed cost per unit will increase.

12. The Dynamaco Company uses cost-plus pricing with a 50% mark-up. The company is currently selling 100,000 units at $12 per unit. Each unit has a variable cost of $6. In addition, the company incurs $200,000 in fixed costs annually. If demand falls to 80,000 units and the company wants to continue to earn a 50% return, what price should the company charge?
A) $12.75
B) $14.55
C) $13.50
D) $10.95

13. Taylor's Treasures has collected the following information over the last six months.

Month Units produced Total costs
March 10,000 $25,600
April 12,000 26,200
May 18,000 27,600
June 13,000 26,450
July 12,000 26,000
August 15,000 26,500

Using the high-low method, what is the variable cost per unit?
A) $0.25
B) $2.56
C) $0.22
D) $2.00

Using the high-low method, what is the total fixed cost?
A) $1,000
B) $4,500
C) $23,100
D) $5,600

14. A manufacturing company produces and sells 20,000 units of a single product. Total products costs are $14 per unit. If total sales were $560,000 what markup percentage is the company using?
A) 100%
B) 4%
C) 200%
D) 50%

Solution Summary

The solution provides varied examples related to management accounting, activity based costing, CVP analysis etc.

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