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Question 1:

Problem 7-10 Variable Costing Income Statement; Reconciliation [LO2, LO3]
During Denton Company's first two years of operations, the company reported absorption costing net operating income as follows:

Year 1 Year 2
Sales (at \$50 per unit) \$ 1,000,000 \$ 1,500,000
Cost of goods sold:
Beginning inventory 0 170,000
Add cost of goods manufactured (at \$34 per unit) 850,000 850,000
Goods available for sale 850,000 1,020,000
Less ending inventory (at \$34 per unit) 170,000 0
Cost of goods sold 680,000 1,020,000
Gross margin 320,000 480,000
Selling and administrative expenses* 310,000 \$ 340,000
Net operating income \$ 10,000 \$ 140,000
________________________________________
*\$3 per unit variable; \$250,000 fixed each year.

The company's \$34 unit product cost is computed as follows:

Direct materials \$ 8
Direct labor 10
Fixed manufacturing overhead (\$350,000 Ã· 25,000 units) 14
Unit product cost \$ 34
________________________________________

Production and cost data for the two years are given below:

Year 1 Year 2
Units produced 25,000 25,000
Units sold 20,000 30,000
________________________________________

Requirement 1:
Prepare a variable costing income statement for each year in the contribution format. (Enter net losses with a minus sign to the left of the amount. Enter all other numbers as positive values. Omit the "\$" sign in your response.)

Year 1 Year 2
Sales \$
\$

Variable expenses:
Variable cost of goods sold

Total variable expenses

Contribution margin

Fixed expenses:

Total fixed expenses

Net Operating income (loss) \$
\$

________________________________________

Requirement 2:
Determine the absorption costing and variable costing net operating income figures for each year. (Enter net losses with a minus sign to the left of the amount. Enter all other numbers as positive values. Leave no cells blank - be certain to enter "0" wherever required. Omit the "\$" sign in your response.)

Year 1 Year 2
Variable costing net operating income (loss) \$
\$

: Fixed manufacturing overhead cost deferred in inventory under absorption costing

: Fixed manufacturing overhead cost released from inventory under absorption costing

Absorption costing net operating income (loss) \$
\$

________________________________________

________________________________________
Question 2:

Problem 8-29 (Appendix 8B) Activity-Based Costing as an Alternative to Traditional Product Costing [LO7]

Erte, Inc., manufactures two models of high-pressure steam valves, the XR7 model and the ZD5 model. Data regarding the two products follow:

Product Direct labor hours Annual
production Total Direct
Labor Hours
XR7 0.2 DLHs per unit 15,000 Units 3,000 DLHs
ZD5 0.4 DLHs per unit 45,000 Units 18,000 DLHs
21,000 DLHs
________________________________________

a. Product XR7 requires \$40 in direct materials per unit, and product ZD5 requires \$24.
b. The direct labor rate is \$20 per hour.
c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products. Manufacturing overhead totals \$1,203,100 per year.
d. Product XR7 is more complex to manufacture than product ZD5 and requires the use of a special milling machine.
e. Because of the special work required in (d) above, the company is considering the use of activity based costing to apply overhead cost to products. Three activity cost pools have been identified and the first-stage allocations have been completed. Data concerning these activity cost pools appear below:

Estimated Total Activity
Activity Cost Pool Activity Measure Estimated
Total Cost XR7 ZDS Total
Machine setups Number of setups \$ 188,500 174 116 290
Special milling Machine-hours 264,600 980 0 980
General factory Direct labor-hours 750,000 3,000 12,000 15,000
\$ 1,203,100
________________________________________

Requirement 1:
Assume that the company continues to use direct labor-hours as the base for applying overhead cost to products.

Per DLH

Model
XR7 ZDS
Total Unit product Cost \$
\$

________________________________________

Requirement 2:
Assume that the company decides to use activity-based costing to apply overhead cost to products.

(a) Compute the activity rate for each activity cost pool. Also compute the amount of overhead cost that would be applied to each product. (Leave no cells blank - be certain to enter "0" wherever required. Round the Overhead cost per unit to 2 decimal places. Omit the "\$" sign in your response.)

Activity cost Pool Activity Rate
Machine setups \$
Per set up
Special milling \$
Per MH
General factory \$
Per DLH
________________________________________

Model XR7:
Applied
Machine setups \$

Special milling

General factory

________________________________________

Model ZD5
Applied
Machine setups \$

Special milling

General factory

________________________________________

Unit product cost of Model XR7 \$

Unit product cost of Model ZD5 \$

Problem 13-18 Close or Retain a Store [LO2]
Thrifty Markets, Inc., operates three stores in a large metropolitan area. The company's segmented absorption costing income statement for the last quarter is given below:

Thrifty Markets, Inc.
Income Statement
For the Quarter Ended March 31
Total Uptown
Store Downtown
Store Westpark
Store
Sales \$ 2,830,000 \$ 1,060,000 \$ 580,000 \$ 1,190,000
Cost of goods sold 1,571,200 604,200 417,000 550,000
Gross margin 1,258,800 455,800 163,000 640,000
Selling expenses:
Direct advertising 107,500 40,000 31,000 36,500
General advertising* 22,640 8,480 4,640 9,520
Sales salaries 163,000 43,000 50,000 70,000
Delivery salaries 29,000 12,000 9,000 8,000
Store rent 219,000 76,000 56,000 87,000
Depreciation of store fixtures 45,750 18,500 8,200 19,050
Depreciation of delivery equipment 25,700 8,600 8,700 8,400
Total selling expenses 612,590 206,580 167,540 238,470
Store management salaries 64,000 14,000 15,000 35,000
General office salaries* 56,600 21,200 11,600 23,800
Utilities 108,800 39,000 29,200 40,600
Insurance on fixtures and inventory 25,100 7,700 8,100 9,300
Employment taxes 37,512 10,824 10,272 16,416
General office expenses-other* 28,300 10,600 5,800 11,900
Total administrative expenses 320,312 103,324 79,972 137,016
Total operating expenses 932,902 309,904 247,512 375,486
Net operating income (loss) \$ 325,898 \$ 145,896 \$ (84,512 ) \$ 264,514
________________________________________
*Allocated on the basis of sales dollars.

Management is very concerned about the Downtown Store's inability to show a profit, and consideration is being given to closing the store. The company has asked you to make a recommendation as to what course of action should be taken. The following additional information is available on the store:

a. The manager of the store has been with the company for many years; he would be retained and transferred to another position in the company if the store were closed. His salary is \$5,000 per month, or \$15,000 per quarter. If the store were not closed, a new employee would be hired to fill the other position at a salary of \$4,000 per month.
b. The lease on the building housing the Downtown Store can be broken with no penalty.
c. The fixtures being used in the Downtown Store would be transferred to the other two stores if the Downtown Store were closed.
d. The company's employment taxes are 12% of salaries.
e. A single delivery crew serves all three stores. One delivery person could be discharged if the Downtown Store were closed; this person's salary amounts to \$6,500 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use, but it does eventually become obsolete.
f. One-third of the Downtown Store's insurance relates to its fixtures.
g. The general office salaries and other expenses relate to the general management of Thrifty Markets, Inc. The employee in the general office who is responsible for the Downtown Store would be discharged if the store were closed. This employee's compensation amounts to \$8,900 per quarter.

Requirement 1:
Prepare a schedule showing the change in revenues and expenses and the impact on the overall company net operating income that would result if the Downtown Store were closed. (Enter the gross margin preceded by a minus sign. Input all other amounts as positive values. Omit the "\$" sign in your response.)

\$

:costs that can be avoided:

\$

\$

________________________________________

Requirement 2:
Based on your computations in (1) above, what recommendation would you make to the management of Thrifty Markets, Inc. ?

should not be closed

should be closed

Requirement 3:
Assume that if the Downtown Store were closed, sales in the Uptown Store would increase by \$300,000 per quarter due to loyal customers shifting their buying to the Uptown Store. The Uptown Store has ample capacity to handle the increased sales, and its gross margin is 43% of sales. Compute the net effect of these factors. (Omit the "\$" sign in your response.)

Net advantage of closing the Downtown Store \$

________________________________________
Question 4:

Problem 13-19 Make or Buy Decision [LO3]

Bronson Company manufactures a variety of ballpoint pens. The company has just received an offer from an outside supplier to provide the ink cartridge for the company's Zippo pen line, at a price of \$0.68 per dozen cartridges. The company is interested in this offer, since its own production of cartridges is at capacity.
Bronson Company estimates that if the supplier's offer were accepted, the direct labor and variable manufacturing overhead costs of the Zippo pen line would be reduced by 10% and the direct materials cost would be reduced by 20%.
Under present operations, Bronson Company manufactures all of its own pens from start to finish. The Zippo pens are sold through wholesalers at \$4.80 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs charged to the Zippo pen line total \$40,000 each year. (The same equipment and facilities are used to produce several pen lines.) The present cost of producing one dozen Zippo pens (one box) is given below:

Direct materials \$ 1.50
Direct labor 0.90
Total cost \$ 3.1
________________________________________
*Includes both variable and fixed manufacturing overhead, based on production of 100,000 boxes of pens each year.

Requirement 1:
(a) Calculate the total variable cost of one box of Zippo pens if the company manufactures all of its own pens from start to finish. (Round your answer to 2 decimal places. Omit the "\$" sign in your response.)

Total variable cost per box \$

(b) Calculate the total variable cost of one box of Zippo pens if the cartridges are purchased from the outside supplier. (Round your answer to 2 decimal places. Omit the "\$" sign in your response.)

Total variable cost per box \$

(c) Should Bronson Company accept the outside supplier's offer?

Accept

Reject

Requirement 2:
What is the maximum price that Bronson Company should be willing to pay the outside supplier per dozen cartridges? (Round your answer to 2 decimal places. Omit the "\$" sign in your response.)

Maximum price \$
per box

Requirement 3:
Due to the bankruptcy of a competitor, Bronson Company expects to sell 150,000 boxes of Zippo pens next year. As stated above, the company presently has enough capacity to produce the cartridges for only 100,000 boxes of Zippo pens annually. By incurring \$33,000 in added fixed cost each year, the company could expand its production of cartridges to satisfy the anticipated demand for Zippo pens. The variable cost per unit to produce the additional cartridges would be the same as at present. Calculate the cost under the three alternatives. (Omit the "\$" sign in your response.)

(a) Cost to produce all cartridges internally

Cost \$

(b) Purchase all cartridges externally:

Cost \$

(c) Produce 100,000 boxes internally, and purchase 50,000 boxes externally:

Cost \$