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Sell or process further

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Mesa Industrial Products Co. (MIPC) is a diversified industrial-cleaner processing company. The company's Verde plant produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG). Each week 900,000 ounces of chemical input are processed at a cost of $210,000 into 600,000 ounces of floor cleaner and 300,000 ounces of table cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name Floor Shine. The additional processing costs for this conversion amount to $250,000.

F1oorShine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $25 per 30-ounce bottle. However, the table cleaner can be converted into two other products by adding 300,000 ounces of another compound (TCP) to the 300,000 ounces of table cleaner. This joint process will yield 300,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $100,000. Both table products can be sold for $18 per 30-ounce bottle.

The company decided not to process the table cleaner into TSR and TP based on the following analysis.

Process Further
Table Cleaner Table Stain Remover (TSR) Table Polish (TP) Total
Production in ounces (300,000) 300,000 300,000
Revenue $250,000 $180,000 $180,000 $360,000
Costs:
CDG costs 70,000*
52,500 52,500 105,000**

TCP costs 0 50,000 50,000 100,000
Total costs 70,000 102,500 102,500 205,000
Weekly gross profit $180,000 $ 77,500 $ 77,500 $155,000

Hint:
Determine if product should be sold or processed further.

Instructions
(a) Determine if management made the correct decision to not process the table cleaner further by doing the following.

1. Calculate the company's total weekly gross profit assuming the table cleaner is not processed further.

2. Calculate the company's total weekly gross profit assuming the table cleaner is processed further.

3. Compare the resulting net incomes and comment on management's decision.

(b) Using incremental analysis, determine if the table cleaner should be processed further. (If amount decreases the income, use either a negative sign preceding the number eg -45 or parentheses eg (45).)

(CMA adapted)

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Solution Summary

The solution explains the analysis relating to selling at split off point or processing further

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Managerial accounting: manufacturing costs, process, inventory, WIP, variable

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1. Cost of goods manufactured during a period is obtained by taking the total manufacturing costs incurred during the period and adding and subtracting the following inventories:

Adding Subtracting
a. Beginning finished goods inventory Ending finished goods inventory
b. Beginning work in process inventory Ending finished goods inventory
c. Beginning raw materials inventory Ending work in process inventory
d. Beginning work in process inventory Ending work in process inventory

2. Cost of goods sold is equal to
a. total manufacturing costs plus beginning work in process less ending work in process.
b. cost of goods sold plus beginning work in process less ending work in process.
c. total manufacturing costs plus ending work in process less beginning work in process.
d. cost of goods manufactured plus beginning finished goods less ending finished goods.

3. Inventory accounts for a manufacturer consist of
a. direct materials, work in process, and finished goods.
b. direct labor, work in process, and finished goods.
c. manufacturing overhead, direct materials, and direct labor.
d. work in process, direct labor, and manufacturing overhead.

4. In a process cost system, equivalent units of production are the
a. work done on physical units expressed in fully completed units.
b. units that are transferred to the next processing department.
c. units completed and transferred to finished goods.
d. units that are incomplete at the end of a period.

Use the following information for questions 5 and 6.

In the month of November, a department had 500 units in the beginning work in process inventory that were 60% complete. These units had $8,000 of materials cost and $6,000 of conversion costs. Materials are added at the beginning of the process and conversion costs are added uniformly throughout the process. During November, 10,000 units were completed and transferred to the finished goods inventory and there were 2,000 units that were 25% complete in the ending work in process inventory on November 30. During November, manufacturing costs charged to the department were: Materials $184,000; Conversion costs $204,000.

5. The cost assigned to the units transferred to finished goods during November was
a. $360,000.
b. $362,000.
c. $376,000.
d. $358,000.

6. The cost assigned to the units in the ending work in process inventory on November 30 was
a. $72,000.
b. $42,000.
c. $32,000.
d. $58,000.

7. An appropriate cost driver for ordering and receiving materials cost is the
a. direct labor hours.
b. machine hours.
c. number of parts.
d. number of purchases orders.

8. Benefits of activity-based costing include all of the following except
a. more accurate product costing.
b. fewer cost pools used to assign overhead costs to products.
c. enhanced control over overhead costs.
d. better management decisions.

9. An example of a value-added activity in a manufacturing operation is
a. machine repair.
b. inventory control.
c. engineering design.
d. building maintenance.

10. Assigning manufacturing costs to work in process results in credits to all of the following accounts except
a. Factory Labor.
b. Manufacturing Overhead.
c. Raw Materials Inventory.
d. Work in Process Inventory.

11. Juniper, Inc. sells a single product with a contribution margin of $12 per unit and fixed costs of $74,400 and sales for the current year of $100,000. How much is Juniper's break even point?
a. 4,600 units
b. $25,600
c. 6,200 units
d. 2,133 units

12. Homer Company's variable costs are 30% of sales. The company is contemplating an advertising campaign that will cost $22,000. If sales are expected to increase $40,000, by how much will the company's net income increase?
a. $18,000
b. $6,000
c. $12,000
d. $13,000

13. Twix Company sells two products, beer and wine. Beer has a 10 percent profit margin and wine has a 12 percent profit margin. Beer has a 27 percent contribution margin and wine has a 25 percent contribution margin. If other factors are equal, which product should Twix push to customers?
a. Beer
b. Wine
c. Selling either results in the same additional income for the company
d. It should sell an equal quantity of both.

14. Monroe Company manufactures a product with a unit variable cost of $42 and a unit sales price of $75. Fixed manufacturing costs were $80,000 when 10,000 units were produced and sold, equating to $8 per unit. The company has a one-time opportunity to sell an additional 1,000 units at $55 each in an international market which would not affect its present sales. The company has sufficient capacity to produce the additional units. How much is the relevant income effect of accepting the special order?
a. $42,000
b. $5,000
c. $50,000
d. $13,000

15. Beavers, Inc. is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $16, while the cost of assembling each unit is estimated at $17. Unassembled units can be sold for $55, while assembled units could be sold for $71 per unit. What decision should Beavers make?
a. Sell before assembly, the company will save $1 per unit.
b. Sell before assembly, the company will save $15 per unit.
c. Process further, the company will save $1 per unit.
d. Process further, the company will save $16 per unit.

16. Lion Company sells office chairs with a selling price of $25 and a contribution margin per unit of $15. It takes 3 machine hours to produce one chair. How much is the contribution margin per unit of limited resource?
a. $5
b. $3.33
c. $45
d. $10

Use the following information for items 17 - 19.

Dustin Company sells its product for $40 per unit. During 2005, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $10, direct labor $6, and variable overhead $2. Fixed costs are: $480,000 manufacturing overhead, and $60,000 selling and administrative expenses.

17. The per unit manufacturing cost under absorption costing is:
a. $16.
b. $18.
c. $26.
d. $27.

18. The per unit manufacturing cost under variable costing is:
a. $16.
b. $18.
c. $26.
d. $27.

19. Cost of goods sold under absorption costing is:
a. $ 900,000.
b. $1,080,000.
c. $1,300,000.
d. $1,560,000.

20. The following per unit information is available for a new product of Rivers Company:
Desired ROI $ 48
Fixed cost 80
Variable cost 120
Total cost 200
Selling price 248
Rivers Company's markup percentage would be
a. 19%.
b. 24%.
c. 40%.
d. 60%.
21. Tablewater Company has just developed a new product. The following data is available for this product:
Desired ROI $ 36
Fixed cost 60
Variable cost 90
Total cost 150
The target selling price for this product is
a. $186.
b. $150.
c. $126.
d. $96.

22. Eden Co. has variable manufacturing costs per unit of $20, and fixed manufacturing cost per unit is $10. Variable selling and administrative costs per unit are $5, while fixed selling and administrative costs per unit are $2. Eden desires an ROI of $8 per unit. If Eden Co. uses the contribution cost approach, what is its markup percentage?
a. 50%
b. 80%
c. 30%
d. 100%

23. At January 1, 2006, Smithfield, Inc. has beginning inventory of 3,000 surfboards. Jake estimates it will sell 14,000 units during the first quarter of 2006 with a 10% increase in sales each quarter. Smithfield's policy is to maintain an ending inventory equal to 20% of the next quarter's sales. Each surfboard costs $140 and is sold for $200. How many units should Smithfield produce during the first quarter of 2006?
a. 14,080
b. 14,000
c. 16,800
d. 14,200
24. At January 1, 2006, Smithfield, Inc. has beginning inventory of 3,000 surfboards. Jake estimates it will sell 14,000 units during the first quarter of 2006 with a 10% increase in sales each quarter. Smithfield's policy is to maintain an ending inventory equal to 20% of the next quarter's sales. Each surfboard costs $140 and is sold for $200. How much is budgeted sales revenue for the third quarter of 2006?
a. $16,940
b. $3,388,000
c. $3,360,000
d. $3,080,000
25. Items from Tedder Company's budget for March in which 2,100 units were produced and sold appear below:

Direct materials $12,000
Indirect material-variable 2,000
Supervisor salaries 10,000
Depreciation on factory equipment 8,000
Direct Labor 7,000
Property taxes on factory 3,000
Total $42,000

At 2,200 units, how much are budgeted variable manufacturing costs?
a. $22,000
b. $43,000
c. $21,000
d. $19,905

26. A company developed the following per-unit standards for its product: 2 pounds of direct materials at $6 per pound. Last month, 2,000 pounds of direct materials were purchased for $11,400. The direct materials price variance for last month was
a. $11,400 favorable.
b. $600 favorable.
c. $300 favorable.
d. $600 unfavorable.

27. The per-unit standards for direct materials are 2 gallons at $4 per gallon. Last month, 11,200 gallons of direct materials that actually cost $42,400 were used to produce 6,000 units of product. The direct materials quantity variance for last month was
a. $3,200 favorable.
b. $2,400 favorable.
c. $3,200 unfavorable.
d. $5,600 unfavorable.

28. The per-unit standards for direct labor are 2 direct labor hours at $12 per hour. If in producing 2,400 units, the actual direct labor cost was $51,200 for 4,000 direct labor hours worked, the total direct labor variance is
a. $1,920 unfavorable.
b. $6,400 favorable.
c. $4,000 unfavorable.
d. $6,400 unfavorable.

29. The standard rate of pay is $5 per direct labor hour. If the actual direct labor payroll was $19,600 for 4,000 direct labor hours worked, the direct labor price (rate) variance is
a. $800 unfavorable.
b. $800 favorable.
c. $1,000 unfavorable.
d. $400 favorable.

30. The standard number of hours that should have been worked for the output attained is 8,000 direct labor hours and the actual number of direct labor hours worked was 8,400. If the direct labor price variance was $8,400 unfavorable, and the standard rate of pay was $18 per direct labor hour, what was the actual rate of pay for direct labor?
a. $17.00 per direct labor hour
b. $15.00 per direct labor hour
c. $19.00 per direct labor hour
d. $18.00 per direct labor hour

31. The purchase of office equipment for $15,000 cash
a. is a cash outflow from financing activities.
b. is a cash outflow from operating activities.
c. is a cash outflow from investing activities.
d. does not affect cash flow.

32. Jones Company reported net income of $40,000 for the year ended December 31, 2005. During the year, inventories decreased by $14,000, accounts payable decreased by $16,000, depreciation expense was $20,000 and a gain on disposal of equipment of $13,000 was recorded. Net cash provided by operations in 2005 using the indirect method was
a. $103,000.
b. $21,000.
c. $77,000.
d. $45,000.

33. Barker Company reported cost of goods sold of $500,000 for the year ended December 31, 2005. During the year, inventories decreased $14,000 and accounts payable decreased $16,000. The cash payments to suppliers in 2005, using the direct method was
a. $498,000.
b. $530,000.
c. $478,000.
d. $502,000.

34. Which one of the following transactions does not affect cash?
a. Acquisition and retirement of bonds payable
b. Write-off of an uncollectible accounts receivable
c. Acquisition of treasury stock
d. Payment of cash dividend

35. Erickson Company reported net income of $140,000 for 2005. The income statement also indicates that interest expense for 2005 was $50,000. Assuming an income tax rate of 30%, the number of times interest was earned for 2005 was
a. 4 times.
b. 5 times.
c. 3.8 times.
d. 2.8 times.

36. During 2005, Thomas Company had an asset turnover ratio of 4 times with sales totaling $1,000,000. If net income was $80,000, Thomas Company's return on assets in 2005 was
a. 8%.
b. 32%.
c. 40%.
d. 80%.

37. Equipment was purchased for $72,000 and it is estimated to have a $12,000 salvage value at the end of its estimated 8-year life. The equipment is estimated to generate cash inflows of $10,000 each year and will be depreciated by using the straight-line method. The payback period on this investment is
a. 6 years.
b. 7.2 years.
c. 4.8 years.
d. 4.5 years.

38. Jensen Company purchased a new machine for $200,000 and will use the straight-line method of depreciation over 4 years with no salvage value. If the company's minimum annual rate of return is 10%, this investment must generate expected annual income of
a. $3,000.
b. $10,000.
c. $20,000.
d. $50,000.

PART II ? MATCHING

Instructions: Designate the terminology that best represents the definition or statement given below by placing the identifying letter(s) in the space provided. No term should be used more than once.

A. Activity-based costing Q. Job cost sheet
B. Annual rate of return R. Market-based transfer price
C. Budgetary control S. Negotiated transfer price
D. Cash debt coverage ratio T. Noncontrollable costs
E. Contribution margin U. Non-value-added activity
F. Contribution margin ratio V. Operating budgets
G. Controllable costs W. Overhead controllable variance
H. Absorption costing X. Overhead volume variance
I. Cost accounting Y. Physical units
J. Cost centers Z. Process cost systems
K. Cost of capital AA. Product costs
L. Earnings per share AB. Profit center
M. Equivalent units of production AC. Solvency ratios
N. Financial budgets AD. Value-added activity
O. Fixed costs AE. Variable costs
P. Free cash flow AF. Variances

____ 39. Costs that a manager has the authority to incur within a given period of time.

____ 40. A form used to record the costs chargeable to a job.

____ 41. A responsibility center that incurs costs and also generates revenues.

____ 42. The difference between overhead budgeted for standard hours allowed and overhead incurred.

____ 43. The amount of revenue remaining after deducting variable costs.

____ 44. Used to apply costs to similar products that are mass-produced in a continuous fashion.

____ 45. Costs that vary in total directly and proportionately with changes in the activity level.

____ 46. The differences between actual costs and standard costs.

____ 47. The net income earned on each share of outstanding common stock.

____ 48. The rate a company must pay to obtain funds from creditors and stockholders.

____ 49. A transfer price that is determined by the agreement of the division managers.

____ 50. Allocates overhead to multiple cost pools and assigns the cost pools to products by means of cost drivers.

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