During Year 1, Hutton Pharmaceutical Company incurred $35,000,000 of research and development (R&D) costs to develop a new hay fever drug called Allergone. In accordance with FASB standards, the entire R&D cost was recognized as expense in Year 1. Manufacturing costs (direct materials, direct labor, and overhead) to produce Allergone are expected to be $20 per unit. Packaging, shipping, and sales commissions are expected to be $3 per unit. Hutton expects to sell 5,000,000 units of Allergone before developing a new drug to replace it in the market. During Year 1, Hutton produced 800,000 units of Allergone and sold 600,000 of them. Assume all financial statement data are prepared in accordance with GAAP. Required 1. Identify the upstream and downstream costs. 2. Determine the Year 1 amount of cost of goods sold and the December 31, Year 1, ending inventory balance. 3. Determine the unit sales price Hutton should establish assuming it desires to earn a profit margin equal to 40 percent of the total cost of developing, manufacturing, and distributing Allergone. 4. Prepare an income statement for Year 1 using the sales price from Requirement c. 5. Given that the price was properly established using total costs (upstream, midstream and downstream costs), why does the GAAP-based income statement prepared in Requirement d show a loss?
> Murphy Company builds custom sailboats. Murphy currently has three boats under construction. The estimated costs to complete each boat are shown as follows. Murphy expects to incur $48,000 of indirect (overhead) costs in the process of making the boats.
> Underwood Food Corporation makes two products from soybeans: cooking oil and cattle feed. From a standard batch of 100,000 pounds of soybeans, Underwood produces 20,000 pounds of cooking oil and 80,000 pounds of cattle feed. Producing a standard batch co
> Monarch Manufacturing Company expects to make 72,000 travel sewing kits during Year 3. In January, the company made 1,800 kits. Materials and labor costs for January were $9,000 and $11,250, respectively. In February, Monarch produced 2,200 kits. Materia
> Last year, Andy Conway bought an automobile for $28,000 to use in his taxi business. He expected to drive the vehicle for 140,000 miles before disposing of it for $3,500. Andy drove 4,000 miles this week and 2,400 miles last week. Required 1. Determine t
> Tilley Professional Services is composed of two separate divisions: (1) tax services as provided by the tax department and (2) auditing services as provided by the audit department. Each department has numerous clients. Engagement with each individual cl
> Leon Company is considering the production and sale of a new product with fixed costs of $32,000 and variable cost of $7 per unit. Based on its normal profit margins, Leon desires to earn a $40,000 profit and believes it can sell 8,000 units of the produ
> After substantial marketing research, Yilan Corporation management believes that it can make and sell a new battery with a prolonged life for laptop computers. Management expects the market demand for its new battery to be 100,000 units per year if the b
> Maccoa Soft, a division of Zayer Software Company, produces and distributes an automated payroll software system. A contribution margin format income statement for Maccoa Soft for the past year follows. 1. Divide the class into groups and then organize t
> Delaney Corporation manufactures faucets. The variable costs of production are $30 per faucet. Fixed costs of production are $900,000. Delaney sells the faucets for a price of $75 per unit. Required 1. How many faucets must Delaney make and sell to break
> Morse Company manufactures a product that sells for $200 per unit. It incurs fixed costs of $840,000. Variable cost for its product is $80 per unit. Required 1. Determine the sales volume in units and dollars required to break even. 2. Calculate the brea
> Information concerning a product produced by Finn Company appears as follows. Sales price per unit $ 180 Variable cost per unit $ 120 Total fixed manufacturing and operating costs $780,000 Required Determine the following: 1. Contribution margin per unit
> Clifford Corporation produced 60,000 tires and sold them for $100 each during Year 1. The company determined that fixed manufacturing cost per unit was $25 per tire. The company reported gross profit of $2,400,000 on its Year 1 financial statements. Requ
> Martinez Company incurs annual fixed costs of $300,000. Variable costs for Martinez’s product are $42 per unit, and the sales price is $70 per unit. Martinez desires to earn a profit of $120,000. Required Use the contribution margin ratio approach to det
> Halsey Corporation manufactures products that have variable costs of $60 per unit. Its fixed cost amounts to $360,000. It sells the products for $90 each. Required Use the per-unit contribution margin approach to determine the break-even point in units a
> Colorado Sports (CS) manufactures two types of tents. One is made of plastic. The other is made of gortex. The budgeted per-unit contribution margin for each product follows: CS expects to incur annual fixed costs of $450,000. The relative sales mix of
> Oxford Company makes two products. The budgeted per-unit contribution margin for each product follows. Oxford expects to incur fixed costs of $390,000. The relative sales mix of the products is 75 percent for Deluxe and 25 percent for Luxury. Required 1.
> Tobin Company manufactures a product that has a variable cost of $38 per unit and a sales price of $78 per unit. The company’s annual fixed costs total $720,000. It had net income of $360,000 in the previous year. In an effort to increase the company’s m
> Arnold Company currently produces and sells 10,000 units of a telephone per year that has a variable cost of $10 per unit and a fixed cost of $500,000. The company currently earns a $200,000 annual profit. Assume that Arnold has the opportunity to invest
> As discussed in the Curious Accountant, Target Corporation believed it could increase the company’s profits by closing its stores in Canada. Other companies have also tried to improve their financial performance by downsizing. In Novem
> Use Exhibit 3.3 in this chapter to answer the following questions. Required 1. Determine the mix of sales volume, fixed cost, and variable cost per unit required to produce a desired profit of $82,000. 2. Determine the expected profit if Bright Day proje
> Vogel Company manufactures scanners that sell for $150 each. The company pays $60 per unit for the variable costs of the product and incurs fixed costs of $1,800,000. Vogel expects to sell 60,000 scanners. Required Determine Vogel’s margin of safety expr
> Trent, a 10-year-old boy, wants to sell lemonade on a hot summer day. He hopes to make enough money to buy a new iPad. Joe, his older brother, tries to help him compute his prospect of doing so. The following is the relevant information. Variable costs
> Ziegler Corporation manufactures products that it sells for $32 each. Variable costs are $18 per unit, and annual fixed costs are $840,000. Ziegler desires to earn a profit of $140,000. Required 1. Use the equation method to determine the break-even poin
> Parry Computers leases space in a mall at a monthly rental cost of $3,000. The following graph setups depict rental cost on the vertical axes and activity level on the horizontal axes. Required 1. Draw a line that depicts the relationship between the tot
> In the evenings, Shawn Corder works telling fortunes using his friend Fred Molloy’s booth at the city market. Mr. Molloy pays the booth rental, so Mr. Corder has no rental cost. As a courtesy, Mr. Corder provides each customer a soft drink. The drinks co
> Shawn Corder needs extra money quickly to help cover some unexpected school expenses. Mr. Corder has learned fortune-telling skills through his long friendship with Fred Molloy, who tells fortunes during the day at the city market. Mr. Molloy has agreed
> Nielsen Chairs Corporation produces ergonomically designed chairs favored by architects. The company normally produces and sells from 2,000 to 5,000 chairs per year. The following cost data apply to various production activity levels. Required 1. Complet
> Russell Company’s production and total cost data for two recent months follow. Required 1. Separately calculate the depreciation cost per unit and the factory supplies cost per unit for both January and February. 2. Identify which cost
> The following variable manufacturing costs apply to goods produced by Bure Manufacturing Corporation. Required Determine the total variable manufacturing cost if Bure produces 4,000, 6,000, or 8,000 units.
> Beasley Company makes three types of exercise machines. Data have been accumulated for four possible overhead drivers. Data for these four possible drivers are shown in rows 4 to 7 of the following spreadsheet. Required Construct a spreadsheet that will
> Tameron Corporation incurs the following annual fixed production costs. Required Determine the total fixed production cost per unit if Tameron produces 10,000, 20,000, or 50,000 units.
> At the various sales levels shown, Parsons Company incurred the following costs. Required Identify each of these costs as fixed, variable, or mixed.
> Pettit Ice Cream Company produces various ice cream products for which demand is highly seasonal. The company sells more ice cream in warmer months and less in colder ones. Last year, the high point in production activity occurred in August when Pettit p
> Century Entertainment Company operates a movie theater that has monthly fixed expenses of $4,000. In addition, the company pays film distributors $1.00 per ticket sold. The following chart shows the number of tickets Century expects to sell in the coming
> The following budgeted income statement applies to Johnson Company. Required 1. Use the contribution margin approach to calculate the magnitude of operating leverage. 2. Use the operating leverage measure computed in Requirement a to determine the amount
> Nagano Company, a merchandising firm, reported the following operating results. Required 1. Reconstruct the income statement using the contribution margin format. 2. Calculate the magnitude of operating leverage. 3. Use the measure of operating leverage
> Standard and Variant compete in the same market. The following budgeted income statements illustrate their cost structures. Required 1. Assume that Standard can lure all 150 customers away from Variant by lowering its sales price to $85 per customer. Rec
> Top Hats Corporation uses workers in Indonesia to manually weave straw hats. The company pays the workers a daily base wage plus $0.50 per completed hat. On Monday, workers produced 100 hats for which the company paid wages of $95. Required Calculate the
> Dillon Computers purchases computers from a manufacturer for $500 per computer. The following graph setups depict product cost on the vertical axes and activity level on the horizontal axes. Required 1. Draw a line that depicts the relationship between t
> Borris Copies Company provides professional copying services to customers through the 35 copy stores it operates in the southwestern United States. Each store employs a manager and four assistants. The manager earns $4,000 per month plus a bonus of 3 per
> Tameron Corporation produces video games in three market categories: commercial, home line, and miniature handheld. Tameron has traditionally allocated overhead costs to the three product categories using the companywide base of direct labor hours. The c
> Fastidious Vincent washed his hair at home and then went to a barbershop for a haircut. The barber explained that shop policy is to shampoo each customer’s hair before cutting, regardless of how recently it had been washed. Somewhat annoyed, Vincent subm
> Greg Madrid, a HealthSouth billing clerk, filed a suit under the False Claims Act charging that HealthSouth purchased computer equipment from a company owned by Richard Scrushy’s parents at prices two and three times the normal price. At the time, Richar
> The accounting records of Abbott Manufacturing Company (AMC) revealed that the company incurred $3 million of materials, $5 million of production labor, $4 million of manufacturing overhead, and $6 million of selling, general, and administrative expense
> Melinda’s Beauty Salon purchases inventory supplies from a variety of vendors, some of which require a four-week lead time before delivering inventory purchases. To ensure that she will not run out of supplies, Melinda Lowe, the owner, maintains a large
> Denise Jensen is the editor-in-chief of her school’s yearbook. The school has 1,200 students and 40 faculty and staff members. The firm engaged to print copies of the yearbook charges the school $20 per book and requires a 10-day lead time for delivery.
> In reviewing Fargo Company’s financial statements for the past two years, Lilian Stone, a bank loan officer, noticed that the company’s inventory level had increased significantly while sales revenue had remained constant. Such a trend typically indicate
> The following horizontal financial statements model shows the effects of recording the expiration of insurance in two different circumstances. Assume all financial statement data are prepared in accordance with GAAP. One circumstance represents the expir
> Because friends and neighbors frequently praise her baking skills, Susan Nazari plans to start a new business baking cakes for customers. She wonders how to determine the cost of her cakes. Assume financial statement data are prepared in accordance with
> Identify each of the items shown in the left column of the following table as being an upstream, a midstream, or a downstream cost by placing an X in the one of the columns to the right of the items column. The first item is shown as an example. Item Tel
> This case examines potential ethical issues faced by the dialysis clinic described in ATC 5-2. It is, however, an independent case that students may study in conjunction with or separately from ATC 5-2. The dialysis clinic provides two types of treatment
> Fuji Manufacturing Company began operations on January 1. During January, it started and completed 6,000 units of product. Assume all financial statement data are prepared in accordance with GAAP. The company incurred the following costs. 1. Raw material
> Mueller Electronics Company experienced the following events during its first accounting period. 1. Received $87,000 cash by issuing common stock. 2. Paid $30,000 cash for wages to production workers. 3. Paid $15,000 for salaries to administrative staff.
> In reviewing Larson Company’s September accounting records, Andy Miranda, the chief accountant, noted the following depreciation costs. Assume product costs are defined by GAAP. 1. Factory buildings—$75,000. 2. Computers used in manufacturing—$12,000. 3.
> Finch Corporation recognized accrued compensation cost. Use the following model to show how this event would affect the company’s financial statements under the following two assumptions: (1) the compensation is for office personnel and
> Use the following table to classify each cost as a product cost or an SG&A cost. Also indicate whether the cost would be recorded as an asset or an expense. Assume product cost is defined by generally accepted accounting principles. The first item is sho
> Identifying product versus selling, general, and administrative (SG&A) costs Required Indicate whether each of the following costs should be classified as a product cost or as an SG&A cost in accordance with GAAP: 1. Direct materials used in a manufactur
> Identifying financial versus managerial accounting items Required Indicate whether each of the following items is representative of managerial or of financial accounting. 1. Information is factual and is characterized by objectivity, reliability, consist
> Parliament Company, which expects to start operations on January 1, Year 2, will sell digital cameras in shopping malls. Parliament has budgeted sales as indicated in the following table. The company expects a 10 percent increase in sales per month for F
> Jacob Long, the controller of Arvada Corporation, is trying to prepare a sales budget for the coming year. The income statements for the last four quarters follow. Historically, cost of goods sold is about 60 percent of sales revenue. Selling and adminis
> Lois Bragg owns a small restaurant in Boston. Ms. Bragg provided her accountant with the following summary information regarding expectations for the month of June. The balance in accounts receivable as of May 31 is $40,000. Budgeted cash and credit sale
> Lucy Sawyer, who owns and operates Sawyer Toy Company, is a perfectionist. She believes literally in the “zero-defects” approach to quality control. Her favorite saying is, “You can’
> The accountant for Jean’s Dress Shop prepared the following cash budget. Jean’s desires to maintain a cash balance of $10,000 at the end of each month. Funds are assumed to be borrowed and repaid on the last day of eac
> January budgeted selling and administrative expenses for the retail shoe store that Craig Shea plans to open on January 1, Year 1, are as follows: sales commissions, $50,000; rent, $30,000; utilities, $10,000; depreciation, $5,000; and miscellaneous, $2,
> The budget director for Kanosh Cleaning Services prepared the following list of expected selling and administrative expenses. All expenses requiring cash payments are paid for in the month incurred except salary expense and insurance. Salary is paid in t
> Executive officers of Stoneham Company are wrestling with their budget for the next year. The following are two different sales estimates provided by two difference sources. Stoneham’s past experience indicates that cost of goods sold i
> Teresa Flanagan, the accountant, is a perfectionist. No one can do the job as well as she can. Indeed, she has found budget information provided by the various departments to be worthless. She must change everything they give her. She has to admit that h
> Hensely Company, which produces and sells a small digital clock, bases its pricing strategy on a 25 percent markup on total cost. Based on annual production costs for 25,000 units of product, computations for the sales price per clock follow. Unit-level
> Describe the qualitative factors that Katzev should consider before accepting the special order described in Exercise 6-7A. Data from Exercise 6-7A: Katzev Company manufactures a personal computer designed for use in schools and markets it under its own
> Katzev Company manufactures a personal computer designed for use in schools and markets it under its own label. Katzev has the capacity to produce 40,000 units a year but is currently producing and selling only 32,000 units a year. The computer’s normal
> Visburg Concrete Company pours concrete slabs for single-family dwellings. Lancing Construction Company, which operates outside Visburg’s normal sales territory, asks Visburg to pour 40 slabs for Lancing’s new development of homes. Visburg has the capaci
> Norman Dowd owns his own taxi, for which he bought a $10,000 permit to operate two years ago. Mr. Dowd earns $30,000 a year operating as an independent but has the opportunity to sell the taxi and permit for $36,500 and take a position as dispatcher for
> In June, 2020, The Volvo Group announced a recall of over 2 million vehicles worldwide, including more than 300,000 in the United States. Consumer Reports website has a good summary of this recall and the issue causing it. Use the following link to find
> Costs can be classified into one of four categories, including unit-level, batch-level, product-level, or facility-level costs. Required Classify each of the items listed below into one of the four categories listed previously. The first item has been ca
> Boyle Company makes fine jewelry that it sells to department stores throughout the United States. Boyle is trying to decide which of two bracelets to manufacture. Cost data pertaining to the two choices follow. Required 1. Identify the fixed costs and de
> Sweet Taste has the capacity to produce either 45,000 corncob pipes or 21,000 cornhusk dolls per year. The pipes cost $3.00 each to produce and sell for $7.50 each. The dolls sell for $10.00 each and cost $4.00 to produce. Required Assuming that Sweet Ta
> Because of rapidly advancing technology, Chicago Publications Corporation is considering replacing its existing typesetting machine with leased equipment. The old machine, purchased two years ago, has an expected useful life of six years and is in good c
> Kahn Company paid $240,000 to purchase a machine on January 1, Year 1. During Year 3, a technological breakthrough resulted in the development of a new machine that costs $300,000. The old machine costs $100,000 per year to operate, but the new machine c
> Kilgore Company makes and sells a single product. Kilgore incurred the following costs in its most recent fiscal year. Kilgore could purchase the products that it currently makes. If it purchased the items, the company would continue to sell them using i
> Mead Company is considering the replacement of some of its manufacturing equipment. Information regarding the existing equipment and the potential replacement equipment follows. The amounts shown for operating expenses are the cumulative total of all suc
> Tesla management are trying to decide whether to keep an older piece of machinery or buy a replacement. Management was presented with the following information to assist in their decision: - The old machine was purchased three years ago for $720,000 and
> Roadrunner Freight Company owns a truck that cost $42,000. Currently, the truck’s book value is $24,000, and its expected remaining useful life is four years. Roadrunner has the opportunity to purchase for $31,200 a replacement truck that is extremely fu
> Lake Corporation is considering the elimination of one of its segments. The segment incurs the following fixed costs. If the segment is eliminated, the building it uses will be sold. Required Based on this information, determine the amount of avoidable c
> A dialysis clinic provides two types of treatment for its patients. Hemodialysis (HD), an in-house treatment, requires that patients visit the clinic three times each week for dialysis treatments. Peritoneal dialysis (PD) permits patients to self-adminis
> Use the January 28, 2019, Form 10-K for Stanley Black & Decker, Inc. (Stanley), to complete the following requirements. To obtain the Form 10-K, you can use the EDGAR system following the instructions in Appendix A, or it can be found under “Corporate In
> Dudley Transport Company divides its operations into four divisions. A recent income statement for its West Division follows. Required 1. Should West Division be eliminated? Support your answer by explaining how the division’s eliminati
> Buckley Company operates three segments. Income statements for the segments imply that profitability could be improved if Segment A were eliminated. Required 1. Explain the effect on profitability if Segment A is eliminated. 2. Prepare comparative income
> Omron Electronics currently produces the shipping containers it uses to deliver the electronics products it sells. The monthly cost of producing 10,000 containers follows. Unit-level materials $7,500 Unit-level labor 8,250 Unit-level overhead 5,250 Pr
> Kawai Corporation, which makes and sells 85,000 radios annually, currently purchases the radio speakers it uses for $8.00 each. Each radio uses one speaker. The company has idle capacity and is considering the possibility of making the speakers that it n
> Levesque Company makes and sells lawn mowers for which it currently makes the engines. It has an opportunity to purchase the engines from a reliable manufacturer. The annual costs of making the engines are shown here. Cost of materials (20,000 units × $2
> Steele Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Steele produces and sells only 10,000 bikes each year. Due to the low volume of activity, S
> Gayla Ojeda is trying to decide which of two different kinds of candy to sell in her retail candy store. One type is a name-brand candy that will practically sell itself. The other candy is cheaper to purchase but does not carry an identifiable brand nam
> Sheridan Publishing identified the following overhead activities, their respective costs, and their cost drivers to produce the three types of textbooks the company publishes. Deluxe textbooks are made with the finest-quality paper, six-color printing, a
> Vaulker Company produces commercial gardening equipment. Since production is highly automated, the company allocates its overhead costs to product lines using activity-based costing. The costs and cost drivers associated with the four overhead activity c
> Use the information in Exercise 5-6A to complete the following requirements. Assume that before shifting to activity-based costing, Snowden Industries allocated all overhead costs based on direct labor hours. Direct labor data pertaining to the two decod
> Hydraulic Hoses, Inc., produces specialized industrial hoses for applications such as high-pressure hydraulics and the transference of highly corrosive materials. The company has recently implemented an ABC system for three of its products, and is intere
> Snowden Industries produces two electronic decoders, P and Q. Decoder P is more sophisticated and requires more programming and testing than does Decoder Q. Because of these product differences, the company wants to use activity-based costing to allocate
> Evert Company makes two types of circuit boards. One is a high-caliber board designed to accomplish the most demanding tasks; the other is a low-caliber board designed to provide limited service at an affordable price. During its most recent accounting p
> Describe a set of circumstances in which the cost of painting could be classified as a unit-level, a batch-level, a product-level, or a facility-level cost.
> Anniston Manufacturing incurred the following costs during Year 2 to produce its high-quality precision instruments. The company used an activity-based costing system and identified the following activities: 1. Depreciation on manufacturing equipment. 2.
