Andreasen Corporation manufactures thermostats for office buildings. The following is the cost of each unit: Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18.00 Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.00 Variable overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.00 Fixed overhead ($900,000 per year; 100,000 units per year) . . . . 9.00 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36.00 Simpson Company has approached Andreasen with an offer to buy 7,500 thermostats at a price of $30 each. The regular price is $50. Andreasen has the capacity to produce the 7,500 additional units without affecting its current production of 100,000 units. Simpson requires that each unit use their branding, which requires a more expensive label, resulting in an additional $1 per unit material cost. The labor cost of affixing the label will be the same as for the current models. The Simpson order will also require a one-time rental of packaging equipment for $10,000. Required a. Prepare a schedule to show the impact of filling the Simpson order on Andreasen’s profits for the year. b. Would you recommend that Andreasen accept the order? c. Considering only profit, what is the minimum quantity of thermostats in the special order that would make it profitable, assuming capacity is available?
> What are the characteristics of the following three costing systems: (a) Job costing, (b) Process costing, and (c) Operation costing?
> The dean of the Midstate University Business School is trying to understand the costs of the school’s two degree programs: Bachelors (BBA) and Masters (MBA). She has asked you for recommendations on how to allocate the costs of the following services, wh
> A friend comes to you with the following problem. “I provided my boss a cost equation using regression analysis. He was unhappy with the results. He told me to do more work and not return until I had a lower cost estimate for one of the variables—the num
> Alameda Tile sells products to many people remodeling their homes and thinks that they could profitably offer courses on tile installation, which might also increase the demand for their products. The basic installation course has the following (tentativ
> Consider the Business Application item “Using Statistical Analysis to Improve Profitability.” Pick a favorite sports team or recurring cultural event (musical concert, opera, play, rock concert, etc). What factors do you think are important in determinin
> A decision maker is interested in obtaining a cost estimate based on a regression equation. There are no problems with changes in prices, costs, technology, or relationships between activity and cost. Only one variable is to be used. What are some questi
> Some people claim that the scattergraph and the regression methods go hand in hand. Why?
> For each of the following statements, indicate whether it is true, false, or uncertain. Explain why. Give examples in your answer. a. A cost is something used up to produce revenues in a particular accounting period. b. The cost of direct materials is fi
> Why might an experienced executive prefer account analysis to statistical cost estimation methods?
> After doing an account analysis and giving the results to your boss, you discover an error in the data for 3 of the 24 months covered by your analysis. In 6 of the 24 months, your assistant had dropped 000 from the costs. Therefore, you thought $10,000,0
> Eagle Company makes the MusicFinder, a sophisticated satellite radio. Eagle has experienced a steady growth in sales for the past five years. However, Ms. Luray, Eagle’s CEO, believes that to maintain the company’s present growth will require an aggressi
> When using past data to predict a cost that has fixed and variable components, it is possible to have an equation with a negative intercept. Does this mean that at a zero production level, the company will make money on its fixed costs? Explain.
> For each of the following costs incurred in a manufacturing firm, indicate whether the costs are fixed (F) or variable (V) and whether they are period costs (P) or product costs (M) under full absorption costing: a. Depreciation on pollution control equi
> How can one compensate for the effects of price instability when preparing cost estimates using high-low or regression techniques?
> Lima Company manufactured 30,000 units of product last month and identified the following costs associated with the manufacturing activity: Variable costs: Direct materials used. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5
> Assume that Painless Dental Clinics, Inc., offers three basic dental services. Here are its prices and costs: Variable costs include the labor costs of the dental hygienists and dentists. Fixed costs of $400,000 per year include building and equipment
> Academy Products manufactures a variety of custom components for use in aircraft navigation and communications systems. The controller has asked for your help in estimating fixed and variable overhead costs for Academy’s Rio Puerco plan
> Cubicle Solutions sells productivity software such as word processors, spreadsheets, and personal information managers. Cubicle prides itself on customer support and maintains a large call center where customers can call in with technical questions about
> Using the same data source as in Problem 5-44, collect a total of 20 years of data. In Problem 5-44 Obtain 13 years of data from the published financial statements of a company. You will be able to find the data on the Internet. Also, Moody’s, Standard
> Consider a digital music service such as those provided by Amazon or Apple. What are some of the major cost categories? Are they mostly fixed or mostly variable?
> Obtain 13 years of data from the published financial statements of a company. You will be able to find the data on the Internet. Also, Moody’s, Standard & Poor’s, and Value-Line are good sources of financial data. Using the first 12 years of data, perfor
> The accounting department of a large limousine company is analyzing the costs of its services. The cost data and level of activity for the past 16 months are presented below: In addition to the above information, you learn that the accounting departmen
> Refer to the example in Appendix B. The numbers in Exhibit 5.21 for the fifth, sixth, and seventh units were given. In Appendix B Engineers have found the following mathematical relationship for the learning phenomenon: Y = aXb where Y = Number of labor
> Assume that Whee, Cheatham, and Howe is an auditing firm that has found that its summer interns are subject to a 90 percent learning curve for one of its important tasks, proofreading financial statements. For one of its interns, Kim Down, the firm has s
> Assume that General Dynamics, which manufactures high-technology instruments for spacecraft, is considering the sale of a navigational unit to a government agency in India that wishes to launch its own communications satellite. The government agency plan
> When is cost-plus pricing most likely to be used?
> What is the difference between short-run and long-run decisions? Give one example of each.
> What is the difference between a sunk cost and a differential cost?
> Fixed costs are often defined as “fixed over the short run.” Does this mean that they are not fixed over the long run? Why or why not?
> According to the theory of constraints, what are the ways to increase profits?
> The friend in question 2-16 decides that she does not want to go to Oklahoma after all. How will the costs of your trip change? Was your choice of allocation in question 2-16 incorrect? Why? Information From question 2-16 You and two friends drive your c
> In the theory of constraints, what are ways to improve performance at the bottleneck?
> Management notes that the contribution from one product is higher than the contribution from a second product. Hence, it concludes that the company should concentrate on production of the first product. Under what, if any, conditions will this approach r
> Consider the Business Application item, “Cost-Volume-Profit Analysis and Airline Pricing” in Chapter 3. Based on the article alone, was go! engaging in predatory pricing? Why or why not?
> You buy an airline ticket to New York City to see a play. You buy the ticket on the day you fly and pay $100. The person sitting next to you, who bought a ticket two months earlier, paid $200. Are the costs different or is this an example of price discri
> A company has several units of old-model telephones that it is selling for $10 per unit. The units cost $25 to produce. Is the company engaging in predatory pricing? Explain.
> Consider the Business Application item, referred to in Question 4-17. Suppose the company had signed a lease for five years and had two years remaining on the contract. Would the remaining lease payments be relevant to the decision to move? Explain why o
> Consider the Business Application item, “Cost Analysis and the Choice of Office Space for a Small Business”. In the decision to relocate to the virtual office, what are the differential costs? What costs would not be differential?
> A company has learned that a particular input product required for its production of several products is in limited supply. What approach should management take to maximize profits in the presence of this constraint?
> What is dumping? What role would a cost accountant play in determining whether dumping has occurred?
> Atlantic Soup Company is presently operating at 75 percent of capacity. Worried about the company’s performance, the president is considering dropping its clam chowder line. If clam chowder is dropped, the revenue associated with it wou
> You and two friends drive your car to Texas for spring break. A third friend asks if you can drop her off in Oklahoma. How would you allocate the cost of the trip among the four of you?
> Refer to the facts in Exercise 4-42. Mel suddenly finds an opportunity to sell boxed dinners. The new opportunity would require the use of the 30 percent unused capacity. The contribution margin from the dinners would amount to $3,000 annually. In Exerc
> 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 $0.60 each but is considering making
> Mobility Partners makes wheelchairs and other assistive devices. For years it has made the rear wheel assembly for its wheelchairs. A local bicycle manufacturing firm, Trailblazers, Inc., offered to sell these rear wheel assemblies to Mobility. If Mobili
> Terracotta, Inc., makes toy soldiers. Company management believes that a new model would sell well at a price of $65. The company estimates unit materials costs to be $16 for the model, and overhead costs would average $20 per unit. The local wage rate f
> 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 $36 each. Dino’s desires an operating
> Sid’s Skins makes a variety of covers for electronic organizers and portable music players. The company’s designers have discovered a market for a new clear plastic covering with college logos for a popular music player. Market research indicates that a
> Mission Electronics manufactures and sells basic DVD players under various generic store brand names. The cost of one of their models follows: Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18.0
> Mother’s Bottlers, Inc., is a small bottling company that bottles and sells cold teas for $5 per unit. The cost of each unit follows: Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.50 Labor .
> Assume that Cold Rock sells ice cream for $4.80 per gallon. The cost of each gallon follows: Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.80 Labor . . . . . . . . . . . . . . . . . . . .
> In evaluating product profitability, we can ignore marketing costs because they are not considered product costs. Do you agree?
> Carlsbad Enterprises has a capacity to produce 400,000 computer cases per year. The company is currently producing and selling 320,000 cases per year at a selling price of $80 per case. The cost of producing and selling one case follows: Variable manufac
> Maria’s Food Service provides meals that nonprofit organizations distribute to handicapped and elderly people. Here is her forecasted income statement for April, when she expects to produce and sell 3,000 meals: Fixed costs included i
> Under what circumstances would fixed costs be relevant when management is making decisions in a multiproduct setting?
> If you are considering buying a second car, what are the differential costs of that decision? Are they the same as in Question 4-26? Why or why not? In Question 4-26 If you are considering driving to a weekend resort for a quick break from school, what
> If you are considering driving to a weekend resort for a quick break from school, what are the differential costs of operating your car for that drive?
> Many airline frequent-flier programs upgrade elite (high volume) flyers one, three, or five days in advance from economy to first class. What are the differential costs of doing this? What are the opportunity costs? What are the opportunity costs of not
> A manager in your organization just received a special order at a price that is “below cost.” The manager points to the document and says, “These are the kinds of orders that will get you in trouble. Every sale must bear its share of the full costs of ru
> One of your acquaintances notes, “This whole subject of differential costing is easy; variable costs are the only costs that are relevant.” How would you respond?
> As a marketing manager for an airline, would you sell a seat to a passenger who walked up to the gate at the last minute at the variable (marginal) cost? Why or why not? Do the costs from the accounting system include all relevant costs for the decision?
> On what three main factors does the theory of constraints focus?
> The cost per seat-mile for a major U.S. airline is 13.7¢. Therefore, to estimate the cost of flying a passenger from Detroit to Los Angeles, we should multiply 1,980 miles by 13.7¢. Do you agree?
> What are some nonfinancial factors in decisions to drop a product line?
> Why are production constraints important in determining the optimal product mix?
> If we want to maximize profit, why do we use unit contribution margins in our analysis instead of unit gross margins?
> What is price discrimination? How could a cost accountant help determine if differences in prices were evidence of price discrimination?
> What is predatory pricing? Why is it illegal in many jurisdictions?
> What do the terms target cost and target price mean? Explain how they are developed.
> What are life-cycle product costing and pricing?
> What costs are included in the full cost of a product? Is a product’s full cost always the appropriate cost for decision makers to use?
> Are sunk costs ever differential costs?
> The Liquid Chemical Company manufactures and sells a range of high-grade products. Many of these products require careful packaging. The company has a special patented lining made that it uses in specially designed packing containers. The lining uses a s
> “Materials and labor are always direct costs, and supply costs are always indirect.” What is your opinion of this statement?
> To win a predatory pricing case, law enforcement officials traditionally have had to prove that a company has sold products or services for less than their average variable cost. Companies with relatively high fixed costs and low variable costs are less
> Layton Machining Company (LMC) manufactures two versions of a basic machine tool. One version is a standard model and one is a custom model, which requires some additional work and slightly higher-grade materials. The manufacturing process at LMC require
> Slavin Corporation manufactures two products, Alpha and Delta. Each product requires time on a single machine. The machine has a monthly capacity of 500 hours. Total market demand for the two products is limited to 150 units (each) monthly. Slavin is cur
> The Bubble Company produces a variety of bottles from recycled plastic. The company has one particular machine on which it can produce either of two types of water bottles, 1-liter bottles or 1/2-liter bottles. Sales demand for both products is such that
> You have been asked to assist the management of Ironwood Corporation in arriving at certain decisions. Ironwood has its home office in Michigan and leases factory buildings in Wisconsin, Minnesota, and North Dakota, all of which produce the same product.
> Power Music owns five music stores, where it sells music, instruments, and supplies. In addition, it rents instruments. At the end of last year, the new accounts showed that although the business as a whole was profitable, the Fifth Avenue store had show
> Carson Corporation produces and sells three products, Alpha, Beta, and Gamma, in a local market and in a regional market. At the end of the first quarter of the current year, the following income statement (in thousands of dollars) has been prepared: M
> King City Specialty Bikes (KCSB) produces high-end bicycles. The costs to manufacture and market the bicycles at the company’s volume of 2,000 units per month are shown in the following table: The company has the capacity to produce 2
> M. Anthony, LLP, produces music in a studio in London. The cost of producing one typical song follows: Average Cost per Song: Labor, including musicians and technicians . . . . . . . . . . . . . . . $17,000 Variable overhead, including clerical support .
> Sam, Martina, Aretha, Roxi, and Tomas (SMART) operate a management consulting firm. The firm has just received an inquiry from a prospective client about its prices for educational seminars to teach its supervisors better communications skills. The prosp
> What do the terms variable costs and fixed costs mean?
> Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, which
> Playful Pens, Inc., makes a single model of a pen. The cartridge for the pen (which contains the ink) is manufactured on one machine. The cartridge holder (which you hold when you hold the pen) is manufactured on another machine. Monthly capacities and p
> CompDesk, Inc., makes a single model of an ergonomic desk (with chair) for computer usage. The desk is manufactured in building 1, and the chair is manufactured in building 2. Monthly capacities and production levels are as follows: The company will se
> Freeflight Airlines is presently operating at 70 percent of capacity. Management of the airline is considering dropping Freeflight’s routes between Europe and the United States. If these routes are dropped, the revenue associated with t
> Fixed costs are often defined as “fixed over the short run.” Does this mean that they are not fixed over the long run? Why or why not?
> Compare cost-volume-profit (CVP) analysis with profit-volume analysis. How do they differ?
> How does the total contribution margin differ from the gross margin that is often shown on companies’ financial statements?
> What are the components of total costs in the profit equation?
> Why is it common to assume a fixed sales mix before finding the break-even volume with multiple products?
> How do income taxes affect the break-even equation? Why?
> What do the terms step costs and semivariable costs mean?
> Write out the equation for the target volume (in units) profit equation when the income tax rate is t.
> What is the margin of safety? Why is this important for managers to know?
> What is operating leverage? Why is knowledge of a firm’s operating leverage important to its managers?
> Rio Coffee Shoppe sells two coffee drinks, a regular coffee and a latte. The two drinks have the following prices and cost characteristics: The monthly fixed costs at Rio are $6,720. Based on experience, the manager at Rio knows that the store sells 60
