BEC 4 - Operations Management

Question 1

What is the formula for break even point?

Answer 1

BE Point = Total Fixed Costs divided by contribution margin

Question 2

What is regression analysis?

Answer 2

studying the relationship between two or more variables; explains the variation in a dependent variable as a linear function of one or more independent variables

Question 3

What’s the difference between a simple and multiple regression model?

Answer 3

a simple only has one independent variable; multiple regressions involve more than one independent variable

Question 4

What is the equation for simple linear regression model?

Answer 4

y = a + bx

y = the dependent variable (variable we are trying to explain) ie y might be total costs measured in dollars for a cost function

a = y axis intercept of the regression line (i.e. if y is total costs, the “a” would be total fixed costs)

b = the slope of the regression line. (ie. if y is total costs, and x is output, B measures the change in total costs due to a one-unit change in output (variable cost per unit)

x = the independent variable. The variable that explains y. (ie in a cost function, x would be total activity (or output)

Question 5

What is the high low method?

Answer 5

a simple technique that is used to estimate the fixed and variable portions of cost, usually production costs

Question 6

What is learning curve analysis?

Answer 6

based on the premise that as workers become more familiar with a specific task, the per unit labor hours will decline as experience is gained an production becomes more efficient

Question 7

It takes the Jones Production Company 50 hours to produce the first unit of its only product.

Assuming a 70 percent learning curve, estimate the average time and total to produce 2 and 4 units?

Answer 7

2 units

What is the average time it takes Jones to produce 2 units?

Average time (2 units) = 50 hours x .7 = 35 hours

What is the total time it takes Jones to produce 2 units?

Total time (2 units) = 35 hours x 2 units = 70 hours

4 units

What is the average time it takes Jones to produce 4 units?

Average time (4 units) = 35 hours x .7 = 24.5
Total time (4 units) = 24.5 x 4 hours = 98 hours

as the cumulative production doubles, the cumulative average time per unit falls to a fixed percentage of the previous average time

Question 8

What is the Cost Volume Profit analysis?

Answer 8

used by managers to forecast profits at different levels of sales and production volume

it is the same as breakeven analysis

Question 9

What is contribution approach?

Answer 9

aka direct costing; not GAAP but is useful for internal decision making

Revenue - Variable costs = Contribution margin - fixed costs = net income

Question 10

What is the formula for contribution margin ratio?

Answer 10

= contribution margin / revenue

Question 11

What is the impact on Net Income for absorption and variable costing?

1. If all production is sold during the period?
2. If units produced exceed units sold?
3. If units sold exceed units produced?

Answer 11

1. net income will be the same
2. net income is higher for the absorption method than variable
3. net income is lower for absorption costing than variable (also ending inventory is lower)

Question 12

Sales price per unit of $125 and variable costs per unit of $50.

Fixed costs of $150K

Desired pretax profit of $60K, a tax rate of 40%

Potential unit sales of 2,500 at the current sales price, and a maximum of 3,000 in unit sales to reach market saturation

1. what is the contribution per unit?
2. what is the contribution margin ratio?
3. what is the desired after tax profit?

Answer 12

1. The contribution margin per unit is $75 ($125 - $50)
2. The contribution margin ratio is 60% ($75 / $125)
3. Desired after tax profit of $36K ($60K x 60%)

Question 13

Sales price per unit of $125 and variable costs per unit of $50.

Fixed costs of $150K

Desired pretax profit of $60K, a tax rate of 40%

Potential unit sales of 2,500 at the current sales price, and a maximum of 3,000 in unit sales to reach market saturation

1. Calculate breakeven point in units?
2. Calculate breakeven point in dollars?

Answer 13

1. BE point in units = total fixed costs / contribution margin per unit

= $150K / $75
=2000 units

2.BE point in units = unit price x BE point in units

=$125 x 2000 units = $250K

**the company will need sales of $250K in order to cover total variable costs of $100K and total fixed costs of $150K

Question 14

Sales price per unit of $125 and variable costs per unit of $50.

Fixed costs of $150K

Desired pretax profit of $60K, a tax rate of 40%

Potential unit sales of 2,500 at the current sales price, and a maximum of 3,000 in unit sales to reach market saturation

1. Calculate the breakeven point in dollars, using the contribution margin ratio?
2. Calculate unit sales needed in order to achieve its desired pretax profit of $60K?

Answer 14

1. Breakeven point in dollars = total fixed costs / contribution margin ratio

= $150K / 60% = $250K

2. Sales (units) = (Fixed Cost + Pretax profit) / Contribution margin per unit

= ($150K + $60K) / $75 = 2,800 units

**must sell 2,800 units in order to cover its fixed and variable costs and to achieve its desired pretax profit of $60K

Question 15

Sales price per unit of $125 and variable costs per unit of $50.

Fixed costs of $150K

Desired pretax profit of $60K, a tax rate of 40%

Potential unit sales of 2,500 at the current sales price, and a maximum of 3,000 in unit sales to reach market saturation

1. Calculate sales (in dollars) needed in order to achieve its desired pretax profit
2. Calculate sales (in dollars) needed in order to achieve its desired pretax profit using Contribution Margin Ratio

Answer 15

1. Sales dollars = variable costs + fixed costs + pretax profit

first calculate total variable costs = 2,800 units x $50 per unit = $140K

Sales (dollars) = $140K + $150K + $60K = $350K

2. Sales = (Fixed cost + Pretax profit) / Contribution margin ratio

= ($150K + $60K) / 60% = $350K

Question 16

Sales price per unit of $125 and variable costs per unit of $50.

Fixed costs of $150K

Desired pretax profit of $60K, a tax rate of 40%

Potential unit sales of 2,500 at the current sales price, and a maximum of 3,000 in unit sales to reach market saturation

1. Calculate profit if the company sells 2500 units

Answer 16

1. Profit = units above the breakeven point x contribution margin per unit

=500 x $75
=$37,500

**every unit sold above 2000 units, the company will book a $75 profit

2. Sale price per unit = (Fixed costs + variable costs + pretax profit) / number of units sold

= [$150K + (3000 units x $50 per unit) + $60K] / 3000
=$120 per unit

if a company can sell 3000 units at $120 per unit, it will cover all fixed costs, variable costs, and desired pretax profit

Question 17

What is the margin of safety and what is the formula?

Answer 17

is the excess of sales over breakeven sales, and generally is expressed as either dollars or a percentage

Margin of safety (in dollars) = Total sales (in dollars) - break even sales (in dollars)

Margin of safety percentage = margin of safety in dollars / total sales

Question 18

What is target costing and formula?

Answer 18

it is a technique used to establish the product cost allowed to ensure both profitability per unit and total sales volume

uses the selling price of the product to determine the production costs to be allowed

target cost = market price - required profit

Question 19

Kator Company is a MFG of industrial components. Product KB-96 is normally sold for $150 per unit and has the following costs per unit:

DM - $20
DL - $15
Var. MOH - $30
Ship & Handling costs - $3
Fixed selling costs - $10
Total cost - $90

Kator has received a special, one time order for 1,000 units of KB-96.

Assuming that Kator has excess capacity, calculate the minimum acceptable price for this one time special order?

Answer 19

The fixed manufacturing overhead and fixed selling costs are not relevant to the decision. The incremental per unit production cost is the total variable cost per unit of $50. Kator should accept the special order only if the selling price per unit is greater than $50

Question 20

Kator Company is a MFG of industrial components. Product KB-96 is normally sold for $150 per unit and has the following costs per unit:

DM - $20
DL - $15
Var. MOH - $30
Ship & Handling costs - $3
Fixed selling costs - $10
Total cost - $90

Kator has received a special, one time order for 1,000 units of KB-96.

Assume that the next best alternative use of the capacity is the production of LB-64, which would provide a contribution margin of $10K.

Calculate the minimum acceptable price for this one time special order?

Answer 20

Kator’s next best alternative use of its capacity would produce a contribution margin of $10K. If Kator produces 1,000 units of KB-96, this $10 per unit ($10K / 1K units) opportunity cost would be added to the variable cost of $50 to determine the minimum justifiable price for the special order. Kator should accept the special order only if the selling price per unit is greater than $60

Question 21

Jackson processes raw materials into beauty products. The soap division (Soap) processes fats and lye at a cost of $200 per batch, which yields 2,000 bars of soap. Soap can sell the sap for $0.50 per bar at this point. Alternatively, various fragrances and oils can be added to produce fines soaps for the high-end retail market from the given batch of raw materials. Soap could incur an additional cost of $1.20 per bar of soap for the perfumes and attractive packaging and create lavender scented soap. Or, for an additional cost of $1.75 per bar, Soap could create rose scented soap. The high end soap would sell for $1.30 per bar for the lavender scent and $3 per bar for the rose scent.

Determine whether the soap division will produce the lavender soap, rose scented soap, or both?

Answer 21

The Soap Division will not produce the lavender soap because the costs after the split off point are $1.20 per bar and the incremental revenue is only $0.80 ($1.30 for lavender soap minus the $0.50 revenue for basic soap). Incremental revenue is less than incremental costs.

If the company decides to produce rose scented soap, incremental costs are $1.75 per bar and incremental revenue is $2.50 ($3 minus $0.50) per bar. Because the incremental revenue exceed incremental costs, Soap would produce rose soap.

Question 22

What are the formulas for the following?

1. DM price variance
2. DM quantity usage variance

Answer 22

1. DM price variance = actual quantity purchased x (actual price - standard price)
2. DM quantity usage variance = standard price x (actual quantity used - standard quantity quantity allowed)

Question 23

What are the formulas for the following?

1. DL rate variance
2. DL efficiency variance

Answer 23

1. DL rate variance = actual hours worked x (actual rate - standard rate)
2. DL efficiency variance = Standard x (Actual hours worked - Standard hours allowed)

Question 24

Actual qty purchased: 200 units
Actual qty used: 110 units
Units standard qty: 100 units
Actual price: $8 per unit
Standard price: $10 per unit

1. What is the DM price variance?
2. What is the DM quantity variance?

Answer 24

1. DM Price Variance = AQ purchased x (AP - SP)

= 200 units x ($8 - $10)
=$400 favorable

2. DM quantity variance = SP x (AQ -SQ allowed)

= $10/unit x (110 units - 100 units)
=$100 Unfavorable

Question 25

Actual hours worked: 450 hours
Standard hours: 500 hours
Actual paid rate: $20 per hour
Standard rate $15 per hour

1. What is the DL rate variance?
2. What is the DL efficiency variance?

Answer 25

1. DL rate variance = AH x (AR - SR)
   =450 hours worked x ($20/hour -$15/hour)
   =$2,250 Unfavorable
2. DL efficiency variance = SR x (AH - SH)
   =$15/hour x (450 hours worked - 500 hours allowed)
   =$750 Favorable

Question 26

What the formulas for the following:

1. VOH rate (spending) variance
2. VOH efficiency variance

Answer 26

1. VOH rate (spending) variance = actual hours x (actual rate - standard rate)
2. VOH efficiency variance = Standard rate x (actual hours - standard hours allowed for actual production volume)

Question 27

What the formulas for the following:

1. FOH Budget (spending) variance
2. FOH volume variance

Answer 27

1. FOH Budget (spending) variance = actual fixed overhead - budgeted fixed overhead
2. FOH volume variance = budgeted fixed overhead - standard fixed overhead costs allocated to production*

*based on actual production x standard rate

Question 28

When standard costing is used, the application of overhead is accomplished in two steps?

Answer 28

1. Calculate overhead rate = budgeted overhead costs / estimated cost driver
2. Applied overhead = standard cost driver for actual level of activity x overhead rate (from step 1)

Question 29

What are the formulas for the following:

1. Sales price variance
2. Sales volume variance

Answer 29

1. Sales price variance = actual sold units x (actual SP/unit - budgeted SP/unit)
2. Sales volume variance = standard contribution margin per unit x (actual sold units - budgeted sales units)

Question 30

In Cascade Company’s January budget, the company shows 3,000 budgeted units sold, a sale price of $16 per unit, and variable costs of $10 per unit. The company actually sells 4,000 units at a price of $14 per unit.

Calculate Cascade’s sales price variance for January?

Answer 30

Sales price variance = actual sold units x (actual SP/unit - budgeted SP/unit)

= 4000 units sold x ($14 -$16)
=$8,000 unfavorable

Question 31

In Cascade Company’s January budget, the company shows 3,000 budgeted units sold, a sale price of $16 per unit, and variable costs of $10 per unit. The company actually sells 4,000 units at a price of $14 per unit.

Calculate Cascade’s sales price variance for January?

Answer 31

Sales volume variance = standard contribution margin per unit x (actual sold units - budgeted sales units)

= $6 CM per unit x (4000 - 3000)

Question 32

A company uses a standard costing system. The production budget for Year 1 was based on 200,000 units of output. Each unit requires 2 standard hours of manufacturing labor for completion. Total overhead was budgeted at $900,000 for the year, and the budgeted fixed overhead rate was $1.50 per direct manufacturing labor hour. Both variable and fixed overheads are allocated to the product based on direct manufacturing labor hours. The actual data for Year 1 are as follows:

Actual production in units - 198,000
Actual direct manufacturing labor hours - 425,000
Actual variable overhead - $352,000
Actual fixed overhead - $575,000

What is the amount of unfavorable variable overhead efficiency variance?

Answer 32

A. $21,750

The variable overhead efficiency variance is the difference between the standard hours allowed for actual production and the actual quantity of hours used, times the standard variable overhead (VOH) rate. In this case, the standard hours allowed for the actual production is 396,000 hours (198,000 units produced × 2 standard hours of manufacturing labor per unit). The total budgeted variable overhead cost for Year 1 is $300,000 [$900,000 total budgeted overhead costs – (200,000 × 2 × $1.50) total budgeted fixed overhead cost]. Thus, the VOH rate is $0.75 [$300,000 total budgeted variable overhead cost ÷ (200,000 × 2) total budgeted variable overhead hours]. The unfavorable variable overhead efficiency variance is $21,750 [(396,000 standard hours allowed for the actual production – 425,000 actual quantity of hours used) × $0.75 VOH rate].

Question 33

Flatbush corporation has a standard costing system for each of its products. The standard direct material cost to produce a unit of its premier product Brook is 4 pounds of material at $2.50 per pound, or $10.00 per unit. During May Year 1, 8,400 pounds of materials costing $20,160 were purchased and used to produce 2,000 units of Brook.

What was the material usage variance?

Answer 33

material used per budget 8,000 lbs (4 x 2000)
materials actually used 8400 lbs

Difference in usage is 400 lbs

DM usage variance: std price x (actual usage - std usage)

= $2.5 x 400
= $1000 unfavorable

Question 34

Bedford Corporation produces 2,500 units of its broadband router each month. Each unit is expected to required 4 labor hours at a cost of $10 per hour. Total labor cost was $104,500 for 9,500 hours worked.

What is the labor rate variance for the production of the router?

Answer 34

Budgeted labor rate $10 per hour
Actual labor rate $11 per hour ($104,500 for 9,500 hours worked)

labor rate variance = actual hours worked (difference in labor rate)

= 9,500 hours ($11 - $10)
= $9,500 unfavorable

Question 35

Norwood Corporation produces a single product. The standard costs for one unit of its Bedford product are as follows:

DM (6 lbs at $0.5 per pound) $3
DL (2 hrs at $10 per hour) $20
Variable MOH (2 hrs $5 per hour) $10
Total costs is $33

During October Year 2, 4,000 units of Bedford were produced. The costs associated with October operations were as follows:

Material purchased (36,000 lbs at $0.60 per pound) $21,600
Material used in production (28,000 lbs)
Direct labor (8,200 hours at $9,75 per hour) $79,950
Variable MOH incurred $41,820

What is the variable overhead spending variance for Bedford for October Year 2?

Answer 35

Actual production hours for 4000 units = 8,200 hours

Standard production hours for 4000 units = 8,000 hours

Actual variance overhead rate is $5.1 ($41,820 / 8200)

Standard variance overhead rate is $5.0

Var OH spend variance = actual hours x (difference in rate)

= 8200 hours ($5.1 - $5.0)

=$820 unfavorable

Question 36

Becky Co. plans to shift from a traditional operation to a just-in-time (JIT) operation for inventory management. Which of the following is an expected effect of adopting the JIT system?

A. Reduced ordering costs because orders are made in smaller lots.
B. An increase in the reorder point due to a higher safety stock.
C. Reduced inspection costs.
D. An increase in the number of suppliers.

Answer 36

C. Reduced inspection costs.

In a JIT system, materials go directly into production without being inspected. The assumption is that the vendor has already performed all necessary inspections. As a result, inspection costs are expected to decrease.

Question 37

Fact Pattern: Morton Company needs to pay a supplier’s invoice of $50,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 12% per annum plus a 10% compensating balance.

1. The amount Morton Company must borrow to pay the supplier within the discount period and cover the compensating balance is
2. Assuming Morton Company borrows the money on the last day of the discount period and repays it 30 days later, the effective interest rate on the loan is

Answer 37

1. $54,444

Morton’s total borrowings can be calculated as follows:
Total borrowings = Amount needed ÷ (1.0 – Compensating balance %)

=($50,000 × 98%) ÷ (100% – 10%)

=$49,000 ÷ 90%

=$54,444

2. 13.33%

Morton’s effective rate on this loan can be calculated as follows:

Effective rate= Stated rate ÷ (1.0 – Compensating balance %)

=12% ÷ (100% – 10%)

=12% ÷ 90%

=13.33%

Question 38

If an all-on-credit wholesaler wants to change its term of credit from 1/15, n/45 to 2/15, n/45, which of the following ratios will increase if sales remain constant?

A. Current ratio.
B. Accounts receivable turnover.
C. Quick ratio.
D. Operating cycle.

Answer 38

B. Accounts receivable turnover.

Because the discount rate on the term of credit increases, a customer’s cost of not taking the discount will increase. Thus, more customers will pay earlier for the discount and the wholesaler’s average accounts receivable will decrease. Accounts receivable turnover equals the net credit sales divided by the average accounts receivable. As the denominator decreases and the numerator is unchanged, the accounts receivable turnover increases.

Question 39

Employing a lockbox will likely cause all of the following except

A. No change in quick ratio.
B. Decrease in operating cycle.
C. Increase in cash conversion cycle.
D. No change in days’ sales in inventory.

Answer 39

C. Increase in cash conversion cycle.

A lockbox accelerates cash collection and thus decreases the average collection period (days sales in receivable). Consequently, the cash conversion cycle (average collection period + days’ sales in inventory – average payables period) will also decrease.

Question 40

The accounting rate of return

A. Is inconsistent with the divisional performance measure known as return on investment.
B. Recognizes the time value of money.
C. Is synonymous with the internal rate of return.
D. Focuses on income as opposed to cash flows.

Answer 40

D. Focuses on income as opposed to cash flows.

The accounting rate of return (also called the unadjusted rate of return or book value rate of return) is calculated by dividing the increase in accounting net income by the required investment. Sometimes the denominator is the average investment instead of the initial investment. This method ignores the time value of money and focuses on income rather than cash flows.

Question 41

What are the assumptions for BE analysis?

Answer 41

1. all costs can be divided into variable and fixed components
2. selling prices are to be unchanged
3. volume is the only relevant factor affecting costs

**NOT AN ASSUMPTION – total costs are directly proportional to volume over the relevant range

Question 42

What is the contribution margin per unit?

Sale price $80

DM $5
DL $20
VOH $20
Var. Selling $5

Answer 42

$80 - ($20+$20+$5+$5) = $30

Question 43

What is the cash conversion cycle vs the operating cycle?

Answer 43

The cash conversion cycle is Days sales outstanding + Days Sales of Inventory - Days Payable Outstanding

The operating cycle is Days sales outstanding + Days Sales of Inventory

Question 44

In joint product costing and analysis, which one of the following costs is relevant when deciding the point at which a product should be sold in order to maximize profits?

Answer 44

separable costs after the split off point

Question 45

Increasing the efficiency of all phases of a given process is specifically discouraged by which of the following models?

A. Theory of constraints.
B. Six Sigma.
C. Demand flow technology.
D. Lean operation.

Answer 45

A. Theory of constraints.

Under the theory of constraints, increasing the efficiency of processes that are not constraints (bottlenecks) merely creates backup in the system.

Question 46

The balanced scorecard provides an action plan for achieving competitive success by focusing management attention on critical success factors. Which one of the following is not one of the perspectives on the business into which critical success factors are commonly grouped in the balanced scorecard?

A. Internal business processes.
B. Financial performance.
C. Competitor business strategies.
D. Employee innovation and learning.

Answer 46

C. Competitor business strategies.

A typical balanced scorecard classifies critical success factors and measures into one of four perspectives on the business: financial, customer satisfaction, internal business processes, and learning and growth.

Question 47

At the breakeven point, the contribution margin equals total

A. Sales revenues.
B. Selling and administrative costs.
C. Variable costs.
D. Fixed costs.

Answer 47

D. Fixed costs.

No profit or loss occurs at the breakeven point. Thus, operating income equals zero, and fixed cost must equal the contribution margin (total revenue – total variable cost).

Question 48

The risk of a single stock is

A. Unsystematic risk.
B. Interest rate risk.
C. Market risk.
D. Portfolio risk.

Answer 48

A. Unsystematic risk.

Unsystematic risk is the risk of a single stock, but portfolio risk is the net risk of holding a portfolio of diversified securities. Portfolio risk therefore includes systematic and unsystematic risk.