Accounting Class

1. As an analyst at Delta Airlines, you are asked to help the operations staff. Operations has identified a new method of loading baggage that is expected to result in a 30 percent reduction in labor time but no changes in any other costs. The current labor cost to load bags is $2 per bag. Other costs are $1 per bag.

Required:

a.

What differential costs should the operations staff consider for the decision to use the new method next year? What would be the cost savings per bag using it?(Round your answer to 2 decimal places.)

b.

Describe how management would use the information in requirement (a) and any other appropriate information to proceed with the contemplated use of the new baggage loading method.

2. State University Business School (SUBS) offers several degrees, including Bachelor of Business Administration (BBA). The new dean believes in using cost accounting information to make decisions and is reviewing a staff-developed income statement broken down by the degree offered. The dean is considering closing down the BBA program because the analysis, which follows, shows a loss. Tuition increases are not possible. The dean has asked for your advice. If the BBA degree program is dropped, school administration costs are not expected to change, but direct costs of the program, such as operating costs, building maintenance, and classroom costs, would be saved. There will be no other changes in the operations or costs of other programs.

STATE UNIVERSITY BUSINESS SCHOOL, BBA DEGREE
Degree Income Statement
For the Academic Year Ending June 30

Revenue

$

425,000

Costs

Advertising—BBA program

20,000

Faculty salaries

210,000

Degree operating costs (part-time staff)

24,000

Building maintenance

34,000

Classroom costs (building depreciation)

90,000

Allocated school administration costs

55,000

Total costs

$

433,000

Net loss

$

(8,000)

Required:

What revenues and costs are probably differential for the decision to drop the BBA program?

5. The City of Imperial Falls contracts with Evergreen Waste Collection to provide solid waste collection to households and businesses. Until recently, Evergreen had an exclusive franchise to provide this service in Imperial Falls, which meant that other waste collection firms could not operate legally in the city. The price per pound of waste collected was regulated at 20 percent above the average total cost of collection.

Cost data for the most recent year of operations for Evergreen are as follows:

Administrative cost

$

400,000

Operating costs—trucks

1,280,000

Other collection costs

320,000

Data on customers for the most recent year are:

Households

Businesses

Number of customers

12,000

3,000

Waste collected (tons)

4,000

12,000

The City Council of Imperial Falls is considering allowing other private waste haulers to collect waste from businesses, but not from households. Service to businesses from other waste collection firms would not be subject to price regulation. Based on information from neighboring cities, the price that other private waste collection firms will charge is estimated to be $0.04 per pound (= $80 per ton).

Evergreen's CEO has approached the city council with a proposal to change the way costs are allocated to households and businesses, which will result in different rates for households and businesses. She proposes that administrative costs and truck operating costs be allocated based on the number of customers and the other collection costs be allocated based on pounds collected. The total costs allocated to households would then be divided by the estimated number of pounds collected from households to determine the cost of collection. The rate would then be 20 percent above the cost. The rate for businesses would be determined using the same calculation.

Required:

(a)

Based on cost data from the most recent year, what is the price per pound charged by Evergreen for waste collection under the current system (the same rate for both types of customers)? (Do not round your intermediate calculations. Round your answer to 3 decimal places.)

(b)

Based on cost and waste data from the most recent year, what would be the price per pound charged to households and to businesses by Evergreen for waste collection if the CEO's proposal were accepted?(Do not round your intermediate calculations. Round your answers to 4 decimal places.)

6. Assume that Ocean King Products sells three varieties of canned seafood with the following prices and costs:

Selling Price
per Case

Variable Cost
per Case

Fixed Cost
per Month

Variety 1

$

11

$

9

–

Variety 2

9

7

–

Variety 3

14

10

–

Entire firm

–

–

$

47,000

The sales mix (in cases) is 50 percent Variety 1, 25 percent Variety 2, and 25 percent Variety 3.

Required:

(a)

At what sales revenue per month does the company break even?(Do not round your intermediate calculation.)

Break-even revenue:___________

(b)

Suppose the company is subject to a 35 percent tax rate on income. At what sales revenue per month will the company earn $44,330 after taxes assuming the same sales mix?(Do not round your intermediate calculation.)

7. Cambridge, Inc., is considering the introduction of a new calculator with the following price and cost characteristics:

Sales price

$

360

per unit

Variable costs

140

per unit

Fixed costs

203,000

per month

Required:

(a)

What number must Cambridge sell per month to break even?(Round up your final answer to the nearest whole dollar.)

(b)

What number must Cambridge sell to make an operating profit of $166,000 for the month?(Round up your final answer to the nearest whole dollar.)

8. Cambridge, Inc., is considering the introduction of a new calculator with the following price and cost characteristics:

Sales price

$

16

per unit

Variable costs

8

per unit

Fixed costs

21,000

per year

Assume that the projected number of units sold for the year is 5,500. Consider requirements (b), (c), and (d) independently of each other.

Required:

(a)

What will the operating profit be?

9. Cambridge, Inc., is considering the introduction of a new calculator with the following price and cost characteristics:

Sales price

$

69

per unit

Variable costs

38

per unit

Fixed costs

96,100

per month

Required:

Using the Goal Seek function in Microsoft Excel,

(a)

What number must Cambridge sell to break even?

(b)

What number must Cambridge sell to make an operating profit of $31,000 per month?

10. Durant Manufacturers has performed extensive studies on its costs and production and estimates the following annual costs based on 157,000 units (produced and sold):

Total Annual
Costs
(157,000 units)

Direct material

$

282,000

Direct labor

254,000

Manufacturing overhead

221,000

Selling, general, and administrative

149,000

Total

$

906,000

Required:

(a)

Compute Durant's unit selling price that will yield a profit of $491,300, given sales of 157,000 units.(Round your answer to 2 decimal places.)

11. Mel's Meals 2 Go purchases cookies that it includes in the 10,000 box lunches it prepares and sells annually. Mel's kitchen and adjoining meeting room operate at 70 percent of capacity. Mel's purchases the cookies for $1.00 each but is considering making them instead. Mel's can bake each cookie for $.30 for materials, $.25 for direct labor, and $.65 for overhead without increasing its capacity. The $.65 for overhead includes an allocation of $.40 per cookie for fixed overhead. However, total fixed overhead for the company would not increase if Mel's makes the cookies.

Mel himself has come to you for advice. "It would cost me $1.20 to make the cookies, but only $1.00 to buy. Should I continue buying them?" Materials and labor are variable costs, but variable overhead would be only $.25 per cookie. Two cookies are put into every lunch.

Required:

a.

Prepare a schedule to show the differential costs per cookie. (Round your answers to 2 decimal places.)

12. Dino's, Inc., makes a variety of T-shirts with logos. The company has discovered a new market for sweatshirts with logos. Market research indicates that a sweatshirt like this would sell well in the market priced at $46.80 each. Dino's desires an operating profit of 20 percent of costs.

Required:

What is the highest acceptable manufacturing cost for which Dino's would be willing to produce the sweatshirt? (Round your answer to 2 decimal places.)