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    Cost Behavior, Operating Leverage, and Profitability Analysis. Cost Accumulation, Tracing, and Allocation.

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    Problem #1
    Powertime, Inc., produces and sells electric lawn mowers for $250 each. The variable costs of each
    mower total $160 while total monthly fixed costs are $22,500. Current monthly sales are $100,000.

    The company is considering a proposal that will increase the selling price by 10%, increase total fixed
    costs by 10% and increase unit sales to 500 units per month.

    1) Compute the company's current break-even point in units.
    2) What is the company's current margin of safety in units, dollars, and percentage?
    3) Compute the company's margin of safety in units assuming the proposal is accepted.
    4) Compute the increase or decrease in profit assuming the proposal is accepted.

    Problem #2
    Costs that might be incurred by service, merchandising, and manufacturing companies are described below:

    ___ A. Sales commissions paid to sales associates in a department store
    ___ B. Insurance on a factory producing MP3 players
    ___ C. Chicken breasts used to make chicken sandwiches in a restaurant
    ___ D. Rent on a storeroom used by Larry's Landscapers to store lawn equipment
    ___ E. Salary of a supervisor in a Wal-Mart distribution center
    ___ F. Wages paid to production workers in an automobile assembly plant
    ___ G. Pepperoni sausage used by a restaurant to make pizza
    ___ H. Shipping costs incurred by IBM to ship its computers to customers
    ___ I. Depreciation of office equipment by Microsoft Corporation
    ___ J. Electricity used to operate equipment in a factory
    ___ K. Salary of the CEO of General Motors Corporation
    ___ L. Lubricants used to maintain machinery in a textile factory
    ___ M. Cost of metal cans used in a dog food factory
    ___ N. Advertising costs incurred by AT&T
    ___ O. Fuel costs for an airline

    Classify each cost as variable (V) or fixed (F) with respect to volume or level of activity.

    Probleme #3
    Farmington Corporation manufactures toaster ovens, generally selling from 20,000 to 30,000 units
    per year. The following cost data apply to the activity levels shown:
    1. Complete the preceding table by filling the missing amounts for 25,000 and 30,000 units.

    2. Assume that Farmington actually makes 28,000 units. What would be the total costs and the cost per unit at this level of activity?

    See attached for table

    Problem #4
    Banning Company expects to incur $450,000 in manufacturing overhead costs during 2012. Other budget information follows:

    See attached

    1) Use direct labor hours as the cost driver to compute the allocation rate. Determine the amount of budgeted overhead cost for each department.
    2) Use machine hours as the cost driver to compute the allocation. Determine the amount of budgeted overhead cost for each department.

    Problem #5
    Perez Company makes wooden tables, chairs, and lamp bases. Its expected overhead costs for the
    next fiscal year are:

    Factory manager's salary: $180,000
    Factory utilities: $100,000
    Depreciation on equipment: $70,000
    Miscellaneous factory costs: $50,000
    Total: $400,000

    Perez uses direct labor hours as the cost driver to allocate overhead costs. Budgeted direct labor hours for the three products are: tables, 8,000; chairs, 10,000; lamp bases, 2,000.

    a) Allocate the budgeted overhead costs to the three products.

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    Solution Summary

    The expert examines cost behavior, operating leverages, and profitability analysis.