Planning/Measurement - Hard Qs Flashcards
The following information pertains to a by-product called Moy:
Sales in Year 2 5,000 units
Selling price per unit $6
Selling costs per unit 2
Processing costs 0
The inventory of Moy was recorded at net realizable value when produced in Year 1 and net proceeds from the sale were used to reduce joint costs. No units of Moy were produced in Year 2. What amount should be recognized as profit on Moy's Year 2 sales? A. $0. B. $10,000. C. $20,000. D. $30,000.
A. $0.
Where the net proceeds from the sale are used to reduce joint costs, no profit is recognized on sales of by-products.
A company manufactures two products, X and Y, through a joint process. The joint (common) costs incurred are $500,000 for a standard production run that generates 240,000 gallons of X and 160,000 gallons of Y. X sells for $4.00 per gallon, while Y sells for $6.50 per gallon.
If there are no additional processing costs incurred after the split-off point, what is the amount of joint cost for each production run allocated to X on a physical-quantity basis? A. $200,000. B. $240,000. C. $260,000. D. $300,000.
D. $300,000.
The total physical quantity produced is 400,000 gallons (240,000 + 160,000). Sixty percent of this quantity is attributable to Product X (240,000 gallons / 400,000 gallons); therefore, 60% of the joint costs should be allocated to Product X ($500,000 * 60% = $300,000).
Mighty, Inc. processes chickens for distribution to major grocery chains. The two major products resulting from the production process are white breast meat and legs. Joint costs of $600,000 are incurred during standard production runs each month, which produce a total of 100,000 pounds of white breast meat and 50,000 pounds of legs. Each pound of white breast meat sells for $2 and each pound of legs sells for $1.
If there are no further processing costs incurred after the split-off point, what amount of the joint costs would be allocated to the white breast meat on a net realizable value basis? A. $120,000. B. $200,000. C. $400,000. D. $480,000.
D. $480,000.
The calculation is Value of breast meat / Value of both meats * Joint costs = (100,000 lbs. * $2) / ((100,000 lbs * $2) + (50,000 lbs. * $1)) * $600,000 = $480,000.
Which of the following is not a basic approach to allocating costs for costing inventory in joint-cost situations?
A. Sales value at split-off. B. Flexible budget amounts. C. Physical measures, such as weights or volume. D. Constant gross margin percentage net realizable value method.
B. Flexible budget amounts.
Acceptable joint cost allocation methods include sales value at split-off, physical measures, and constant gross margin. Flexible budget amounts are not used for joint cost allocation.
Mig Co., which began operations in Year 1, produces gasoline and a gasoline by-product. The following information is available pertaining to Year 1 sales and production:
Total production costs to split-off point $120,000 Gasoline sales 270,000 By-product sales 30,000 Gasoline inventory, 12/31/03 15,000 Additional by-product costs: Marketing 10,000 Production 15,000
Mig accounts for the by-product at the time of production. What are Mig's Year 1 cost of sales for gasoline and the by-product? Gasoline By-Product A. $105,000 $25,000 B. $115,000 $0 C. $108,000 $37,000 D. $100,000 $0
D. $100,000 $0
The value of the by-product, being insignificant in relation to the cost of the primary product, is treated as a reduction in the cost of the primary product at production. The separable costs associated with the by-product reduce the amount by which the cost of sales of gasoline is decreased.
In this question, the value of the by-products is recognized at production (not sale). In this case, the net realizable value of the by-product at production is subtracted from the cost of the primary product (gasoline). None of the joint production cost is allocated to the by-product. Thus, the cost of sales for the by-product is zero. The $25,000 of costs associated with the by-product ($10,000 + $15,000) reduces the net realizable value of the by-product. For the primary product:
Net Realizable Value of the By-product:
+Sales value $30,000
-Less separable by-product costs (25,000)
=Equals net realizable value $5,000
Cost of Goods Sold for Main Product:
+Joint production cost $120,000
-Less net realizable value of by-product (5,000)
=Adjusted production cost for main product $115,000
-Less ending inventory of gasoline (15,000)
=Equals cost of goods sold for gasoline $100,000
LM Enterprises produces two products in a common production process, each of which is processed further after the split-off point. Joint costs incurred for the current month are $36,000. The following information for the current month was
Product Units produced Units sold Separable costs Selling price per unit
L 10,000 9,500 $20,000 $ 8
M 5,000 4,000 40,000 20
What amount would be the joint cost allocated to product M, assuming that LM Enterprises uses the estimated net realizable value method to allocate costs? A. $20,000 B. $12,000 C. $15,000 D. $18,000
D. $18,000
Using NRV, the final revenue for L is $8 (10,000 units produced) = $80,000; the final revenue for M is $20 (5,000 units produced) = $100,000; Sales less separable costs is $80,000 - $20,000 = $60,000 for L, while sales less separable costs for M is $100,000 - $40,000 = $60,000 for M also. Accordingly, both products have the same net realizable value, so the $36,000 in joint costs would be split 50/50 providing each with an allocation of $18,000.
Kode Co. manufactures a major product that gives rise to a by-product called May. May’s only separable cost is a $1 selling cost when a unit is sold for $4. Kode accounts for May’s sales by deducting the $3 net amount from the cost of goods sold of the major product. There are no inventories.
If Kode were to change its method of accounting for May from a by-product to a joint product, what would be the effect on Kode’s overall gross margin?
A. No effect.
B. Gross margin increases by $1 for each unit of May sold.
C. Gross margin increases by $3 for each unit of May sold.
D. Gross margin increases by $4 for each unit of May sold.
B. Gross margin increases by $1 for each unit of May sold.
The current method of accounting for May is to reduce the cost of goods sold of the major product by net sales of $3 per unit of May. The effect of this method of accounting is to increase gross margin by $3 per unit of May sold.
If the method of accounting were changed to joint product accounting, then sales would increase to $4 per unit of May sold, without any addition to variable cost. The $1 cost associated with each unit of May would be classified as a sales expense, which is subtracted below gross margin. The $1 expense would no longer affect gross margin. Therefore, by changing the method of accounting, the gross margin increases by $1, while expenses below gross margin in the income statement increase by $1. Gross margin would reflect the full $4 gross sales of May, rather than only the net reduction in the cost of goods sold of $3.
The regression analysis results for ABC Co. are shown as y = 90x + 45. The standard error (Sb) is 30 and the coefficient of determination (r2 ) is 0.81. The budget calls for the production of 100 units. What is ABC's estimate of total costs? A. $3,090. B. $4,590. C. $9,030. D. $9,045.
D. $9,045.
Total cost (y) is expressed as $90 of variable cost per unit + $45 of fixed cost. Given that x represents units, we solve for y = $90(100) + $45 = $9,045.
Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs $2 and sells for $3 through regular stores. Any boxes not sold through regular stores are sold through Dough’s thrift store for $1. Dough assigns the following probabilities to selling additional boxes:
Additional sales Probability 60 .6 100 .4 What is the expected value of Dough's decision to buy 100 additional boxes of muffins? A. $28. B. $40. C. $52. D. $68.
C. $52.
Income or net cash inflow is expected to increase:
$52 = .6[60($3-$2) + 40($1-$2)] + .4[100($3-$2)].
The .6[ ] term reflects the expected sales of 60 units at regular price less their cost, and 40 at the reduced price less their cost. The .4[ ] term reflects the expected sales all at regular prices less their cost.
Under frost-free conditions, Cal Cultivators expects its strawberry crop to have a $60,000 market value.
An unprotected crop subject to frost has an expected market value of $40,000.
If Cal protects the strawberries against frost, then the market value of the crop is still expected to be $60,000 under frost-free conditions and $90,000 if there is a frost.
What must be the probability of a frost for Cal to be indifferent to spending $10,000 for frost protection? A. .167. B. .200. C. .250. D. .333.
B. .200.
There are two states of nature that can affect the firm’s earnings: frost and no frost. There are also two actions under consideration: provide frost protection for $10,000, or do not. The expected income under each action will depend on the probability of frost. Let p = the probability of frost. Expected net income if frost protection is provided = $90,000(p) + $60,000(1-p) - $10,000. Expected net income if frost protection is not provided = $40,000(p) + $60,000(1-p). The firm is indifferent between the two actions when the expected net income is the same for both. Setting the two expressions equal to each other and solving for p determines at what probability of frost the two actions provide the same income.
$90,000(p) + $60,000(1-p) - $10,000 = $40,000(p) + $60,000(1-p)
$50,000(p) = $10,000
p = .20
When the probability of frost exceeds .20, the expected income from providing frost protection exceeds that of not providing frost protection. This can be verified by entering a probability higher than .20 into both income expressions and determining the income. This is the expected result. As the probability of frost increases, the expected benefits of providing frost protection also increase.
The opposite is true for probabilities lower than .20.
Wren Co. manufactures and sells two products with selling prices and variable costs as follows:
A B Selling price $18.00 $22.00 Variable costs 12.00 14.00
Wren's total annual fixed costs are $38,400. Wren sells four units of A for every unit of B. If the operating income last year was $28,800, what was the number of units Wren sold? A. 5,486. B. 6,000. C. 9,600. D. 10,500.
D. 10,500.
Adding an operating income of $28,800 to fixed costs of $38,400 = contribution margin (CM) of $67,200. Total CM for A = $6, while CM for B = $8. Since the ratio of units in the sales mix is 4 parts A to 1 part B, the proper equation would be 6(4/5)Q + 8(1/5)Q = $67,200; thus, Q = 10,500.
In Year 1, Thor Lab supplied hospitals with a comprehensive diagnostic kit for $120. At a volume of 80,000 kits, Thor had fixed costs of $1,000,000 and a profit before income taxes of $200,000. Due to an adverse legal decision, Thor’s Year 2 liability insurance increased by $1,200,000 over Year 1.
Assuming the volume and other costs are unchanged, what should the Year 2 price be if Thor is to make the same $200,000 profit before income taxes? A. $120.00. B. $135.00. C. $150.00. D. $240.00.
B. $135.00.
The problem first requires that the variable cost per unit (V) be computed so that the price can then be made a variable. V does not change in the question.
80,000($120 - V) - $1,000,000 = $200,000
V = $105
Now to solve for the new selling price S
80,000(S - $105) - $2,200,000 = $200,000
S = $135
A ceramics manufacturer sold cups last year for $7.50 each. Variable costs of manufacturing were $2.25 per unit. The company needed to sell 20,000 cups to break even. Net income was $5,040. This year, the company expects the following changes: sales price per cup to be $9.00; variable manufacturing costs to increase 33.3%; fixed costs to increase 10%; and the income tax rate to remain at 40%. Sales in the coming year are expected to exceed last year's sales by 1,000 units. How many units does the company expect to sell this year? A. 21,000 B. 21,600 C. 21,960 D. 22,600
D. 22,600
This is a detailed problem that requires working backwards through a contribution margin (CM) formatted income statement to determine total CM of $113,400. CM per unit ($5.25) is given by subtracting variable cost ($2.25) from price ($7.50). Year one units sold of 21,600 is calculated by dividing total CM ($113,400) by CM per unit ($5.25). Year two units sold (22,600 units) is equal to year one units plus 1,000 units.
A company that produces 10,000 units has fixed costs of $300,000, variable costs of $50 per unit, and a sales price of $85 per unit. After learning that its variable costs will increase by 20%, the company is considering an increase in production to 12,000 units. Which of the following statements is correct regarding the company’s next steps?
A. If production is increased to 12,000 units, profits will increase by $50,000.
B. If production is increased to 12,000 units, profits will increase by $100,000.
C. If production remains at 10,000 units, profits will decrease by $50,000.
D. If production remains at 10,000 units, profits will decrease by $100,000.
D. If production remains at 10,000 units, profits will decrease by $100,000.
At the current level of 10,000 units, a contribution margin per unit of $35 = $85 - $50, and fixed costs of $300,000, the contribution margin is $350,000 and the operating income is $50,000. If variable costs increase by 20%, the contribution margin per unit decreases to $25 = $35 - $60, or $250,000 total, resulting in an operating loss of $50,000. Thus, profits would decrease by $100,000.
Trendy Co. produced and sold 30,000 backpacks during the last year at an average price of $25 per unit. Unit variable costs were the following:
Variable manufacturing costs $9
Variable selling and administrative costs 6
Total $15
Total fixed costs were $250,000. There was no year-end work-in-process inventory. If Trendy had spent an additional $15,000 on advertising, then sales would have increased by $30,000. If Trendy had made this investment, what change would have occurred in Trendy's pretax profit? A. $3,000 increase. B. $4,200 increase. C. $3,000 decrease. D. $4,200 decrease.
C. $3,000 decrease.
This problem compares the increase in revenue due to the possible increased spending on advertising. The $15,000 for advertising is just another fixed cost. The contribution margin ratio is used to determine 40% of the new revenue of $780,000 = $312,000 resulting in only $12,000 more in contribution margin as compared to a new fixed advertising cost $15,000. The difference between the $15,000 and the $12,000 is a $3,000 decrease in income.
