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Decision Making based upon Costs and Revenues

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Please refer attached file for better clarity of tables.

Problems :

1. Kate's Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate's machinery costs \$100 per day and is the only fixed input. Her variable cost is comprised of the wages paid to the cooks and the food ingredients.

The variable cost associated with each level of output is given in the accompanying table.
Quantity of meals VC
0 \$0
10 200
20 300
30 480
40 700
50 1000

a. Calculate the total cost, the average variable cost, the average total cost, and the marginal cost for each quantity of output.
Quantity of meals FC VC TC MC AVC ATC
0 \$100 \$0
10 100 200
20 100 300
30 100 480
40 100 700
50 100 1,000

b. What is the break-even price?
What is the shut-down price?

c. Suppose that the price at which Kate can sell catered meals is \$21 per meal. In the short run, will Kate earn a profit?
In the short run, should she produce or shut down?

d. Suppose that the price at which Kate can sell catered meals is \$17 per meal. In the short run, will Kate earn a profit?
In the short run, should she produce or shut down?

e. Suppose that the price at which Kate can sell catered meals is \$13 per meal. In the short run, will Kate earn a profit?
In the short run, should she produce or shut down?

2. Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it.

a. A profit-maximizing firm should select the output level at which the difference between the market price and marginal cost is greatest.

b. An increase in fixed cost lowers the profit-maximizing quantity of output produced in the short run.

3. Suppose that De Beers is a single-price monopolist in the market for diamonds. De Beers has five potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at most one diamond-and only if the price is just equal to, or lower than, her willingness to pay. Raquel's willingness to pay is \$400; Jackie's, \$300; Joan's, \$200; Mia's, \$100; and Sophia's, \$0. De Beers's marginal cost per diamond is \$100. This leads to the demand schedule for diamonds shown in the accompanying table.

Price of diamond Qty of diamonds demanded
\$500 0
400 1
300 2
200 3
100 4
0 5

a. Calculate De Beers's total revenue and its marginal revenue
Price of diamond Qty of diamonds demanded Total Revenue Marginal Revenue
\$500 0 -
400 1
300 2
200 3
100 4
0 5

From your calculation, draw the demand curve and the marginal revenue curve.

b. Explain why De Beers faces a downward-sloping demand curve
c. Explain why the marginal revenue from an additional diamond sale is less than the price of the diamond
d. Suppose De Beers currently charges \$200 for its diamonds.

If it lowered the price to \$100, how large is the price effect?
How large is the quantity effect?

e. Draw the marginal cost curve into your diagram and determine which quantity maximizes De Beers's profit and which price De Beers will charge

4.A monopolist knows that if it expands the quantity of output it produces from 8 to 9 units, that will lower the price of its output from \$2 to \$1.

Calculate the quantity effect and the price effect.

Use these results to calculate the monopolist's marginal revenue of producing the 9th unit.

The marginal cost of producing the 9th unit is positive. Is it a good idea for the monopolist to produce the 9th unit?

https://brainmass.com/economics/price-levels/decision-making-based-upon-costs-and-revenues-257503

Solution Preview

Please refer attached file for better clarity of tables and missing graphs.
Solution:

1 a.
Quantity of meals=Q FC VC TC=FC+VC MC* AVC=VC/Q ATC=TC/Q
0 \$100 \$0 \$100
10 100 200 \$300 \$20 \$20 \$30
20 100 300 \$400 \$10 \$15 \$20
30 100 480 \$580 \$18 \$16 \$19
40 100 700 \$800 \$22 \$18 \$20
50 100 1,000 \$1,100 \$30 \$20 \$22
* Marginal Cost=Change in total cost/Change in output

b. What is the break-even price?
Break even price is defined as the price at which total revenue is just equal to total cost. At this level profit is zero.
What is the shut-down price?
Shut down point comes at a point where market price is just sufficient to cover average variable cost and no more. At this point firm's losses per period are just equal to fixed costs.

c. Suppose that the price at which Kate can sell catered meals is \$21 per meal. In the short run, will Kate earn a profit?
For profit maximization, Kate will choose output level at which MR should be greater than or equal to MC.

At Output level of 30, MC(\$18)<MR (P=\$21)
At output level of 40, MC(\$22)>MR(P=\$21)
Kate will produce 30 meals to maximize profits.
Profit=(P-ATC)*Q=(21-19)*30=\$60
In the short run, should she produce or shut down?
Kate is making profit at this level of output. It should continue to ...

Solution Summary

There are four problems. Solution to these problems explain the methodology to calculate various costs and to take production decisions based upon these calculations.

\$2.19

Accounting - Multiple Choice

Multiple Choice

1. Costs which can be eliminated in whole or in part if a particular business segment is discontinued are called:
a. irrelevant costs.
b. sunk costs.
c. opportunity costs.
d. avoidable costs.

2. Which of the following cash flows is relevant in a decision about accepting Alternative X or Alternative Y?
a. a cash inflow for Alternative X that is not a cash inflow for Alternative Y.
b. a cash inflow that is lost if Alternative X is accepted and is not lost if Alternative Y is accepted.
c. a cash outflow that is avoided if Alternative X is accepted and is not avoided if Alternative Y is accepted
d. all of the above.

3. Which of the following best describes an opportunity cost:
a. it is not a relevant cost in decision making, and is not part of the traditional accounting records
b. it is a relevant cost in decision making, and is part of the traditional accounting records.
c. it is a relevant cost in decision making, but is not part of the traditional accounting records.
d. it is not a relevant cost in decision making, but is part of the traditional accounting records

4. The acceptance of a special order will improve overall net operating income so long as the revenue from the special order exceeds:
a. the contribution margin on the order.
b. the incremental costs associated with the order.
c. the variable costs associated with the order.
d. the sunk costs associated with the order.

5. Rice Corporation currently operates two divisions which had operating results last year as follows:
West Division Troy Division
Sales \$600,000 \$300,000
Variable costs 310,000 200,000
Contribution margin 290,000 100,000
Traceable fixed costs 110,000 70,000
Allocated common corporate costs 90,000 45,000
Net operating income (loss) \$ 90,000 (\$15,000)

Since the Troy Division also sustained an operating loss in the prior year, Rice's president is considering the elimination of this division. Troy Division's traceable fixed costs could be avoided if the division were eliminated. The total common corporate costs would be unaffected by the decision. If the Troy Division had been eliminated at the beginning of last year, Rice Corporation's operating income for last year would have been:
a. \$15,000 higher
b. \$45,000 lower
c. \$30,000 lower
d. \$60,000 higher

6. Supler Company produces a part used in the manufacture of one of its products. The unit product cost is \$18, computed as follows:

Direct materials \$ 8
Direct labor 4
Unit product cost \$18

An outside supplier has offered to provide the annual requirement of 4,000 of the parts for only \$14 each. It is estimated that 60 percent of the fixed overhead cost above could be eliminated if the parts are purchased from the outside supplier. Based on these data, the per-unit dollar advantage or disadvantage of purchasing from the outside supplier would be:

7. Motor Company manufactures 10,000 units of Part M-l each year for use in its production. The following total costs were reported last year:

Direct materials \$ 20,000
Direct labor 55,000
Total manufacturing cost \$190,000

Valve Company has offered to sell Motor 10,000 units of Part M-l for \$18 per unit. If Motor accepts the offer, some of the facilities presently used to manufacture Part M-l could be rented to a third party at an annual rental of \$15,000. Additionally, \$4 per unit of the fixed overhead applied to Part M-l would be totally eliminated. Should Motor Company accept Valve Company's offer, and why?
a. No, because it would be \$15,000 cheaper to make the part
b. Yes, because it would be \$10,000 cheaper to buy the part
c. Yes, because it would be \$25,000 cheaper to buy the part
d. No, because it would be \$5,000 cheaper to make the part

8. The following standard costs pertain to a component part manufactured by Bor Company:

Direct materials \$ 4
Direct labor 10
Standard cost per unit \$54

An outside supplier has offered to supply all of the parts needed by Bor Company for \$50 each. The 60% of the manufacturing overhead cost that is fixed would be unaffected by this decision. In the decision to "make or buy," what is the relevant unit cost to make the part internally?
a. \$5
b. \$38
c. \$54
d. \$30

9. Two products, UG and BC, emerge from a joint process. Product UG has been allocated \$29,400 of the total joint costs of \$42,000. A total of 9,000 units of product UG are produced from the joint process. Product UG can be sold at the split-off point for \$15 per unit, or it can be processed further for an additional total cost of \$63,000 and then sold for \$17 per unit. If product UG is processed further and sold, what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point?
a. \$74,400 less profit
b. \$15,600 less profit
c. \$90,000 more profit
d. \$45,000 less profit

10. The usual starting point for a master budget is:
a. the direct materials purchase budget
b. the production budget
c. the sales forecast or sales budget
d. the budgeted income statement

11. Which of the following benefits could an organization reasonably expect from an effective budget program?
a. Better control of the organization's costs
b. Better coordination of an organization's activities
c. Better communication of the organization's objectives
d. All of the above

12. An organization's budget program should not be used
a. to help evaluate managers
b. to assign blame to managers that do not meet budgetary goals
c. to motivate employees
d. to allocate resources to the various parts of an organization

13. A basic idea underlying __________________ is that a manager should be held responsible only for those items that the manager can actually control to a significant extent.
a. responsibility accounting
b. planning and control
c. participative budgeting
d. the master budget

14. Pitkins Company collects 20% of a month's sales in the month of sale, 70% in the month following sale, and 6% in the second month following sale. The remainder is uncollectible. Budgeted sales for the next four months are

January February March April
Budgeted sales \$200,00 \$300,000 \$350,000 \$250,000

Cash collections in April are budgeted to be:
a. \$321,000
b. \$292,000
c. \$313,000
d. \$320,000

15. Betz Company's sales budget shows the following projections for next year

Sales in units
First Quarter 60,000
Second Quarter 80,000
Third Quarter 45,000
Fourth Quarter 55,000

Inventory at the beginning of the year was 18,000 units. The finished goods inventory at the end of each quarter is to equal 30% of the next quarter's budgeted unit sales. How many units should be produced during the first quarter?
a. 48,000
b. 24,000
c. 72,000
d. 66,000

16.
Month 1 Month 2 Month 3
Sales in units 15,000 20,000 18,000
Production in units 16,000 22,000 15,000

One pound of material is required for each finished unit. The inventory of materials at the end of each month should equal 20% of the following month's production needs. At the beginning of Month 1, 3,200 lbs. of materials were on hand. Purchases of raw materials for Month 2 would be budgeted to be:
a. 20,600 pounds
b. 25,000 pounds
c. 23,400 pounds
d. 17,600 pounds

17. Arciba Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The direct labor budget indicates that 7,400 direct labor-hours will be required in January. The variable overhead rate is \$9.50 per direct labor-hour. The company's budgeted fixed manufacturing overhead is \$130,980 per month, which includes depreciation of \$10,360. All other fixed manufacturing overhead costs represent current cash flows. The company recomputes its predetermined overhead rate every month. The predetermined overhead rate for January should be:
a. \$27.20
b. \$25.80
c. \$17.70
d. \$9.50

18. Sedita Inc. is working on its cash budget for July. The budgeted beginning cash balance is \$46,000. Budgeted cash receipts total \$175,000 and budgeted cash disbursements total \$174,000. The desired ending cash balance is \$50,000. The excess (deficiency) of cash available over disbursements for July will be
a. \$47,000
b. \$45,000
c. \$1,000
d. \$221,000

19. Tatman Corporation uses an activity-based costing system with the following three activity cost pools

Activity Cost Pool Total Activity
Fabrication 10,000 machine-hours
Order processing 80 orders
Other Not applicable

The Other activity cost pool is used to accumulate costs of idle capacity and organization-sustaining costs. The company has provided the following data concerning its costs:

Wages and salaries \$320,000
Depreciation 220,000
Occupancy 120,000
Total \$660,000

The distribution of resource consumption across activity cost poos is given below:

Activity Cost Pools
Order
Fabrication Processing Other Total
Wages and salaries 20% 65% 15% 100%
Depreciation 15% 35% 50% 100%
Occupancy 5% 70% 25% 100%

The activity rate for the Fabrication activity cost pool is closest to:
a. \$8.80 per machine-hour
b. \$13.20 per machine-hour
c. \$3.30 per machine-hour
d. \$10.30 per machine-hour

20. Feldpausch Corporation has provided the following data from its activity-based costing system:

Activity Cost Pool Total Cost Total Activity
Assembly \$1,137,360 84,000 machine-hours
Processing orders \$28,479 1,100 orders
Inspection \$97,155 1,270 inspection-hours

The company makes 470 units of product W26B a year, requiring a total of 660 machine-hours, 50 orders, and 40 inspection-hours per year. The product's direct materials cost is \$40.30 per unit and its direct labor cost is \$42.22 per unit. The product sells for \$118.00 per unit. According to the activity-based costing system, the product margin for product W26B is:
a. \$6,444.70 per unit
b. \$16,675.60 per unit
c. \$3,384.70 per unit
d. \$4,679.20 per unit

21. Dobles Corporation has provided the following data from its activity-based costing system:

Activity Cost Pool Total Cost Total Activity
Assembly \$228,060 18,000 machine-hours
Processing orders \$34,068 1,200 orders
Inspection \$125,560 1,720 inspection-hours

The company makes 420 units of product D28K a year, requiring a total of 460 machine-hours, 80 orders, and 10 inspection-hours per year. The product's direct materials cost is \$48.96 per unit and its direct labor cost is \$25.36 per unit. According to the activity-based costing system, the average cost of product D28K is closest to:
a. \$95.34 per unit
b. \$89.93 per unit
c. \$74.32 per unit
d. \$93.60 per unit

22. Gould Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products

Activity Cost Pools Activity Rate
Setting up batches \$59.06 per batch
Processing customer orders \$72.66 per customer order
Assembling products \$3.75 per assembly hours

Data concerning two products appear below:

Product K91B Product F650
Number of batches 84 50
Number of customer orders 32 43
Number of assembly hours 483 890

How much overhead cost would be assigned to Product K91B using the activity-based costing system?
a. \$135.47
b. \$4,961.04
c. \$9,097.41
d. \$81,146.53

23. How would the following costs be classified (product or period) under variable costing at a retail clothing store?

Cost of purchasing clothing Sales commissions
A Product Product
B Product Period
C Period Product
D Period Period

a. Item D
b. Item A
c. Item B
d. Item C

24. The principal difference between variable costing and absorption costing centers on:
a. whether variable manufacturing costs should be included as product costs
b. whether fixed manufacturing costs should be included as product costs
c. whether fixed manufacturing costs and fixed selling and administrative costs should be included as product costs
d. none of these

25. Which of the following will usually be found on an income statement prepared using the absorption costing method?

Contribution Margin Gross Margin
A Yes Yes
B Yes No
C No Yes
D No No

a. Item A
b. Item D
c. Item B
d. Item C

26. When production exceeds sales, net operating income reported under variable costing generally will be:
a. higher or lower because no generalization can be made
b. greater than net operating income reported under absorption costing
c. equal to net operating income reported under absorption costing.
d. less than net operating income reported under absorption costing

29. Contribution margin can be defined as:
a. the amount of sales revenue necessary to cover fixed and variable expenses
b. the amount of sales revenue necessary to cover variable expenses.
c. sales revenue minus variable expenses
d. sales revenue minus fixed expenses

30. If both the fixed and variable expenses associated with a product decrease, what will be the effect on the contribution margin ratio and the break-even point, respectively?

Contribution Margin ratio Break-even point
A Decrease Increase
B Increase Decrease
C Decrease Decrease
D Increase Increase

a. Item A
b. Item B
c. Item C
d. Item D

31. At the break-even point:
a. contribution margin would be equal to fixed expenses.
b. sales would be equal to contribution margin
c. sales would be equal to fixed expenses
d. contribution margin would be equal to net operating income

32. Escareno Corporation has provided its contribution format income statement for June. The company produces and sells a single product.

Sales (8,400 units) \$764,400
Variable expenses 445,200
Contribution margin 319,200
Fixed expenses 250,900
Net operating income \$68,300

If the company sells 8,200 units, its total contribution margin should be closest to
a. \$301,000
b. \$66,674
c. \$311,600
d. \$319,200

33. Rovinsky Corporation, a company that produces and sells a single product, has provided its contribution format income statement for November.

Sales (5,700 units) \$319,200
Variable expenses 188,100
Contribution margin 131,100
Fixed expenses 106,500
Net operating income \$24,600

If the company sells 5,300 units, its net operating income should be closest to:
a. \$2,200
b. 24,600
c. \$15,400
d. \$22,874

34. The Bronco Birdfeed Company reported the following information:

Sales (400 cases) \$100,000
Variable expenses 60,000
Contribution margin 40,000
Fixed expenses 35,000
Net operating income \$5,000

How much will the sale of one additional case add to Bronco's net operating income?
a. \$150.00
b. \$12.50
c. \$250.00
d. \$100.00

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