Classical Glasses operates a kiosk at the local mall, selling sunglasses for $30 each. Classical Glasses currently pays $1,000 a month to rent the space and pays two full-time employees to each work 160 hours a month at $10 per hour. The store shares a manager with a neighboring kiosk and pays 50% of the manager’s annual salary of $60,000 and benefits of $12,000. The wholesale cost of the sunglasses to the company is $10 a pair. Required: 1. How many sunglasses does Classical Glasses need to sell each month to break even? 2. If Classical Glasses wants to earn an operating income of $5,300 per month, how many sunglasses does the store need to sell? 3. If the store’s hourly employees agreed to a 15% sales-commission-only pay structure, instead of their hourly pay, how many sunglasses would Classical Glasses need to sell to earn an operating income of $5,300? 4. Assume Classical Glasses pays its employees hourly under the original pay structure, but is able to pay the mall 10% of its monthly revenue instead of monthly rent. At what sales levels would Classical Glasses prefer to pay a fixed amount of monthly rent, and at what sales levels would it prefer to pay 10% of its monthly revenue as rent?
> Cash budgets must be prepared before the operating income budget.” Do you agree? Explain.
> What are some additional considerations that arise when budgeting in multinational companies?
> Explain how the choice of the type of responsibility center (cost, revenue, profit, or investment) affects behavior.
> Describe how nonoutput-based cost drivers can be incorporated into budgeting.
> What steps should a management accountant take if established written policies provide insufficient guidance on how to handle an ethical conflict?
> How can sensitivity analysis be used to increase the benefits of budgeting?
> What are the four elements of the budgeting cycle?
> Department indirect-cost rates are never activity-cost rates.” Do you agree? Explain.
> What are the key reasons for product cost differences between simple costing systems and ABC systems?
> Why is it important to classify costs into a cost hierarchy?
> Describe four levels of a cost hierarchy.
> What is costing system refinement? Describe three guidelines for refinement.
> The controller of a retail company has just had a $50,000 request to implement an ABC system quickly turned down. A senior vice president, in rejecting the request, noted, “Given a choice, I will always prefer a $50,000 investment in improving things a c
> Increasing the number of indirect-cost pools is guaranteed to sizably increase the accuracy of product or service costs.” Do you agree? Why?
> What are the main costs and limitations of implementing ABC systems?
> Name the four areas in which standards of ethical conduct exist for management accountants in the United States. What organization sets forth these standards?
> Describe four signs that help indicate when ABC systems are likely to provide the most benefits.
> What is broad averaging, and what consequences can it have on costs?
> Distinguish between actual costing and normal costing.
> Give two reasons why most organizations use an annual period rather than a weekly or monthly period to compute budgeted indirect-cost rates.
> Describe three major source documents used in job-costing systems.
> Describe the seven steps in job costing.
> Why might an advertising agency use job costing for an advertising campaign by PepsiCo, whereas a bank might use process costing to determine the cost of checking account deposits?
> Describe three alternative ways to dispose of under- or overallocated overhead costs.
> Describe three different debit entries to the Work-in-Process Control T-account under normal costing.
> Comment on the following statement: “In a normal-costing system, the amounts in the Manufacturing Overhead Control account will always equal the amounts in the Manufacturing Overhead Allocated account.”
> Describe the overtime-premium and idle-time categories of indirect labor.
> Define cost pool, cost tracing, cost allocation, and cost-allocation base.
> Describe sensitivity analysis. How has the advent of the electronic spreadsheet affected the use of sensitivity analysis?
> “CVP analysis is both simple and simplistic. If you want realistic analysis to underpin your decisions, look beyond CVP analysis.” Do you agree? Explain.
> Why is it more accurate to describe the subject matter of this chapter as CVP analysis rather than as breakeven analysis?
> Describe three methods that managers can use to express CVP relationships.
> Distinguish between operating income and net income.
> Describe the assumptions underlying CVP analysis.
> There is no such thing as a fixed cost. All costs can be ‘unfixed’ given sufficient time.” Do you agree? What is the implication of your answer for CVP analysis?
> Give an example of how a manager can increase variable costs while decreasing fixed costs.
> Give an example of how a manager can decrease variable costs while increasing fixed costs.
> As a new controller, reply to this comment by a plant manager: “As I see it, our accountants may be needed to keep records for shareholders and Uncle Sam, but I don’t want them sticking their noses in my day-to-day operations. I do the best I know how. N
> Describe how manufacturing-, merchandising-, and service-sector companies differ from one another.
> What is a cost driver? Give one example.
> Define variable cost and fixed cost. Give an example of each.
> Why do managers consider direct costs to be more accurate than indirect costs?
> Define direct costs and indirect costs.
> Define the following: direct material costs, direct manufacturing-labor costs, manufacturing overhead costs, prime costs, and conversion costs.
> Crystal Clear Products produces two types of water filters. One attaches to the faucet and cleans all water that passes through the faucet. The other is a pitcher-cum-filter that only purifies water meant for drinking. The unit that attaches to the fauce
> The Ronowski Company has three product lines of belts—A, B, and C— with contribution margins of $3, $2, and $1, respectively. The president foresees sales of 200,000 units in the coming period, consisting of 20,000 units of A, 100,000 units of B, and 80,
> Zahner Corporation manufactures housewares products that are sold through a network of external sales agents. The agents are paid a commission of 20% of revenues. Zahner is considering replacing the sales agents with its own salespeople, who would be pai
> Thompson Engine Company manufactures and sells diesel engines for use in small farming equipment. For its 2017 budget, Thompson Engine Company estimates the following: Selling price…………………………..$ 7,000 Variable cost per engine………….$ 2,000 Annual fixed cos
> Distinguish between inventoriable costs and period costs.
> Corporate Printing Company currently leases its only copy machine for $1,500 a month. The company is considering replacing this leasing agreement with a new contract that is entirely commission based. Under the new agreement, Corporate would pay a commis
> Refer to requirement 3 of Problem 3-43. In this problem, assume the role of the owner of HighStep. Required: 1. As owner, which sales compensation plan would you choose if forecasted annual sales of the new store were at least 10,000 units? What do
> The HighStep Shoe Company operates a chain of shoe stores that sell 10 different styles of inexpensive men’s shoes with identical unit costs and selling prices. A unit is defined as a pair of shoes. Each store has a store manager who is paid a fi
> The Derby Shoe Company produces its famous shoe, the Divine Loafer, that sells for $70 per pair. Operating income for 2017 is as follows: Sales revenue ($70 per pair)…………..$350,000 Variable cost ($30 per pair)…&hell
> J.T. Brooks and Company, a manufacturer of quality handmade walnut bowls, has had a steady growth in sales for the past 5 years. However, increased competition has led Mr. Brooks, the president, to believe that an aggressive marketing campaign will be
> Marketing Docs prepares marketing plans for growing businesses. For 2017, budgeted revenues are $1,500,000 based on 500 marketing plans at an average rate per plan of $3,000. The company would like to achieve a margin of safety percentage of at least 4
> The Museum of America is preparing for its annual appreciation dinner for contributing members. Last year, 525 members attended the dinner. Tickets for the dinner were $24 per attendee. The profit report for last year’s dinner follows. Ticket sa
> The Stackpole Company retails two products: a standard and a deluxe version of a luggage carrier. The budgeted income statement for next period is as follows: Required: 1. Compute the breakeven point in units, assuming that the company achieves
> Portal Corporation produces the same power generator in two Illinois plants, a new plant in Peoria and an older plant in Moline. The following data are available for the two plants: All fixed costs per unit are calculated based on a normal capac
> What are three different types of inventory that manufacturing companies hold?
> How does management accounting differ from financial accounting?
> Delta Products has determined the following costs: Order processing (per order)……………………………………………………$ 6 Additio
> The Sunny Valley Wheat Cooperative is considering the construction of a new silo. It will cost $126,000 to construct the silo. Determine the payback period if the expected cash inflows are $21,000 per year.
> Mississippi Retailers expects to make inventory purchases in the next quarter as follows: April…………$60,000 May……………70,000 June…………..95,000 Prior experience h
> Drake Limousine Service is considering acquisition of an additional vehicle. The model under consideration will cost $160,000 and have a five-year life and a $45,000 residual value. The company anticipates that the effect on annual net income will be a
> Strauss Corporation is making a $90,000 investment in equipment with a five-year life. The company uses the straight-line method of depreciation and has a tax rate of 40 percent. The company’s required rate of return is 15 percent. Required:
> Tanya Sinclair, owner of Sinclair Fine Wine, is considering investing $195,000 in a temperature-controlled wine storage room. She plans to rent space to customers and expects to generate $55,000 annually (rental charges less miscellaneous expenses othe
> An investment that costs $200,000 will reduce operating costs by $35,000 per year for 12 years. Determine the internal rate of return of the investment (ignore taxes). Should the investment be undertaken if the required rate of return is 18 percent? &
> Mary Martinez is ready to retire and has a choice of three pension plans. Plan A provides for an immediate cash payment of $350,000. Plan B provides for the payment of $40,000 per year for 8 years and the payment of $200,000 at the end of year 8. Plan
> The Warrenburg Antique Mall expects to make purchases in the first quarter of 2018 as follows: January……..$95,000 February……120,000 March…………85,000 Purchases in December 2017 are expected to be
> The Warrenburg Antique Mall budgeted credit sales in the first quarter of 2018 to be as follows: January……. $160,000 February……..170,000 March………..182,000 Credit sales in December 2017 are expected t
> Power Electronics manufactures portable power supply units. Power has recently decided to use an activity-based approach to cost its products. Production line setups is a major activity at Power. Next year Power expects to perform 2,000 setups at a tot
> Classic Attire is the designer and manufacturer of prom dresses. The president of Classic wants to switch to an activity-based approach in the upcoming year to assign prices to the gowns. Production line setups are a major activity at Classic. Next yea
> Budget Tax Service prepares tax returns for small businesses. The cost of preparing 800 tax returns in the prior year was: Direct labor……………. $360,000 Variable overhead……. 320,000 Fixed overhead&helli
> Division managers at Creighton Aerospace are evaluated and rewarded based on ROI (return on investment) targets. In the current year, Delmar Richards, the president of the commercial products division, has an ROI target of 12 percent. If the division has
> Based on the information in Problem 9-14, what is the internal rate of return of the investment, assuming an inflation rate of 4 percent applicable to labor and costs other than depreciation? Should the company make the investment if its cost of capital
> Edward Laren, an accountant with Tenergy Industries, prepared the following analysis of an investment in manufacturing equipment: Edward’s boss, Megan Mangione, reviewed the calculation and made the following observation: â€
> True Fresh Grocery operates a chain of 40 grocery stores. Currently the company is considering starting a new division, TrueFresh.com, to provide home delivery services. Customers will be able to order groceries by phone or using the Internet, and TrueFr
> Van Doren Corporation is considering producing a new temperature regulator called Digidial. Marketing data indicate that the company will be able to sell 45,000 units per year at $30. The product will be produced in a section of an existing factory that
> Pritchard Manufactured Products is considering investing in a flexible manufacturing system that will enable the company to respond rapidly to customer requests. Ben Jarvis, the controller of Pritchard, has estimated that the system will have a nine-year
> Island Ferry plans to expand operations by acquiring another boat. It has a bid of $950,000 from a boat manufacturer to provide a boat that can carry 40 passengers. The boat has an expected life of 7 years with an expected residual value for financial re
> Pronto Cleaners, a chain of dry cleaning stores, has the opportunity to invest in one of two dry cleaning machines. Machine A has a four-year expected life and a cost of $30,000. It will cost an additional $6,500 to have the machine delivered and install
> Adrian Sonnetson, the owner of Adrian Motors, is considering the addition of a paint and body shop to his automobile dealership. Construction of a building and the purchase of necessary equipment is estimated to cost $800,000, and both the building and e
> Penguin Productions is evaluating a film project. The president of Penguin estimates that the film will cost $20,000,000 to produce. In its first year, the film is expected to generate $16,500,000 in net revenue, after which the film will be released to
> Albert Shoe Company is considering investing in one of two machines that attach heels to shoes. Machine A costs $70,000 and is expected to save the company $20,000 per year for 6 years. Machine B costs $95,000 and is expected to save the company $25,000
> Memory Florist is considering replacing an old refrigeration unit with a larger unit to store flowers. Because the new refrigeration unit has a larger capacity, Memory estimates that it can sell an additional $9,000 of flowers a year. (The cost of the fl
> Palermo Pizzeria is considering expanding operations by establishing a delivery business. This will require the purchase of an oven that will cost $50,000, including installation. The oven is expected to last 5 years, have a $5,000 residual value, and wi
> Refer to the information in Exercise 8-15. For the coming year, Delta Products has told Johnson Brands that it will be switched to an activity-based pricing system or it will be dropped as a customer. In addition to regular prices, Johnson will be requir
> The chief engineer at Future Tech has proposed production of a portable electronic storage device to be sold at a 30 percent markup above its full cost. Management estimates that the fixed costs per year will be $210,000, and the variable cost of the sto
> World View is considering production of a lighted world globe that the company would price at a markup of 25 percent above full cost. Management estimates that the variable cost of the globe will be $80 per unit and fixed costs per year will be $240,000.
> PowerDrive produces a hard disk drive that sells for $175 per unit. The cost of producing 25,000 drives in the prior year was: Direct material……………..$ 725,000 Direct labor……………………..475,000 Variable overhead……………225,000 Fixed overhead……………. 1,500,000 Tota
> Erin Hamill is the owner/operator of a tanning salon. She is considering four prices for a weekly tanning pass. Her estimate of price and quantity demanded are: Price………………. Quantity Demanded $12.50……………………….330 $11.50………………………..380 $10.50…………………
> The editor of Spunk magazine is considering three alternative prices for her new monthly periodical. Her estimate of price and quantity demanded are: Price…………………Quantity Demanded $7.95…………………………………25,000 $6.95 …………………………………..1,000 $5.95…………………………………37,0
> The Portland Brewing Company is a small craft brewer that produces five standard varieties of beer. The beers sell for $6 per six-pack, and the company currently sells 10,000 six-packs per month. The company is considering producing a seasonal beer that
> The Brindle Corporation is considering an initiative to assess customer profitability. The company’s CFO, John Bradley, stated his position as follows: “I strongly suspect that some of our customers are losers—in other words, they’re not covering product
> Consider a company that manufactures and sells personal computers (let’s call the company Bell Computers). Recently the company lowered its prices dramatically. The company is very efficient and needs only 5 days of inventory, collects its receivables wi
> Refer to the information in Exercise 8-17. For the coming year, the Triumph Corporation has told the Julius Company that it will be switched to an activity-based pricing system or it will be dropped as a customer. In addition to regular prices, Julius wi
> Selzer & Hollinger, a legal services firm, is considering outsourcing its payroll function. It has received a bid from ABC Payroll Services for $22,000 per year. ABC Payroll will provide all payroll processing, including employee checks and payroll tax r
> Oakland College is considering outsourcing grounds maintenance. In this regard, Oakland has received a bid from Highline Grounds Maintenance for $300,000 per year. Highline states that its bid will cover all services and planting materials required to “k
> Joan Paxton, VP of marketing for Supertone Recording Equipment, has developed a marketing plan for presentation to the company’s president. The plan calls for television ads, something the company has never used. As part of her presenta
> Primus is a firm of consultants that focuses on process reengineering and quality improvement initiatives. Northwood Industries has asked Primus to conduct a study aimed at improving on-time delivery. Normal practice for Primus is to bill for consultant
