Rosiek Corporation uses part A55 in one of its products. The company’s Accounting Department reports the following costs of producing the 4,000 units of the part that are needed every year.
Direct Materials 2.80
Direct Labor 6.30
Variable Overhead 8.50
Supervisor’s Salary 2.60
Depreciation Of Special Equipment 6.80
Allocated General Overhead 6.10
An outside supplier has offered to make the part and sell it to the company for $32.30 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s offer were accepted, only $4,000 of these allocated general overhead costs would be avoided.
In addition, the space used to produce part A55 could be used to make more of one of the company’s other products, generating an additional segment margin of $26,000 per year for that product.
Required:
a. Prepare a report that shows the effect on the company’s total net operating income of buying part A55 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?
Prepare written responses to the following assignments from Managerial Accounting: Tools for Business Decision Making:
· Ch. 2 – Exercises E-2-6 and E2-9
· Ch. 3 – Exercises E3-5 and E3-9
· Ch. 3 – Questions 2 and 3
E2-2
(a) Qualitative characteristic being employed when companies in the same industry are using the same accounting principles.
(b) Quality of information that confirms users’ earlier expectations.
(c) Imperative for providing comparisons of a company from period to period.
(d) Ignores the economic consequences of a standard or rule
(e) Requires a high degree of consensus among individuals on a given measurement.
(f) Predictive value is an ingredient of this primary quality of information.
(g) Two qualitative characteristics that are related to both relevance and reliability.
(h) Neutrality is an ingredient of this primary quality of accounting information
(i) Two primary qualities that make accounting information useful for decision-making purposes.
(j) Issuance of interim reports is an example of what primary ingredient of relevance?
E2-4
(a) Allocates expenses to revenues in the proper period.
(b) Indicates that market value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.)
(c) Ensures that all relevant financial information is reported. 7
(d) Rationale why plant assets are not
(e) Anticipates all losses, but reports no gains.
(f) Indicates that personal and
(g) Separates financial information into time periods for reporting purposes
(i) Requires that information significant enough to affect the decision of reasonably informed users should be disclosed. (Do not use full disclosure principle.)
(j) Assumes that the dollar is the “measuring stick” used to report on financial performance. 3
E2-7
(a) The entry is inappropriate due to the fact that the information is misleading. The journal entry needs to explain that the purchase is for personal purposes.
(b) The entry is inappropriate due to the fact tat the entry is made on an expectation. In order for revenue to be recognized it has to be realized, realizable or earned.
(c) I think the entry is inappropriate because no determination has been made on the case. No entry should be made until the case has been settled.
(d) The entry is appropriate due to the matching principle
(e) In accordance to the historical cost principle, the entry is inappropriate. The acquisition price needs to be accounted for instead of the current selling price
(f) Based on the historical cost principle, the entry should reflect the acquisition price and not the price that the company thinks is fit.
Exercise 18-16
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Glacial Company estimates that variable costs will be60% of sales, and fixed costs will total $926,000. The selling price of the product is $5.
Compute the break-even point in (1) units and (2) dollars.
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Compute the margin of safety in (1) dollars and (2) as a ratio, assuming actual sales are $2,930,380.(Round ratio to 0 decimal places, e.g. 20%.)
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(2)Margin of safety ratio.wileyplus.com/edugen/art2/common/pixel.gif”>%
Problem 18-1A
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Telly Savalas owns the Bonita Barber Shop. He employs6barbers and pays each a base rate of $1,300per month. One of the barbers serves as the manager and receives an extra $520per month. In addition to the base rate, each barber also receives a commission of $5.90per haircut.
Other costs are as follows.
Advertising$260per month
Rent$960per month
Barber supplies$0.40per haircut
Utilities$170per month plus $0.20per haircut
Magazines$20per month
Telly currently charges $11.70per haircut.
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Determine the variable cost per haircut and the total monthly fixed costs.(Round variable costs to 2 decimal places, e.g. 2.25.)
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Total fixed$.wileyplus.com/edugen/art2/common/pixel.gif”>
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Compute the break-even point in units and dollars.(Round answers to 0 decimal places, e.g. 1,225.)
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Determine net income, assuming2,370haircuts are given in a month.
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Problem 18-3A
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Dousmann Corp.s sales slumped badly in 2014. For the first time in its history, it operated at a loss. The companys income statement showed the following results from selling618,000units of product: sales $2,472,000; total costs and expenses $2,616,200; and net loss $144,200. Costs and expenses consisted of the amounts shown below.
TotalVariableFixed
Cost of goods sold$2,163,000$1,483,200$679,800
Selling expenses247,20074,160173,040
Administrative expenses206,00049,440156,560
$2,616,200$1,606,800$1,009,400
Management is considering the following independent alternatives for 2015.
1.Increase unit selling price24% with no change in costs, expenses, and sales volume.
2.Change the compensation of salespersons from fixed annual salaries totaling $154,500to total salaries of $61,800plus a6% commission on sales.
(a)Compute the break-even point in dollars for 2014.(Round final answer to 0 decimal places, e.g. 1,225.)
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(b)Compute the contribution margin under each of the alternative courses of action.(Round final answer to 0 decimal places, e.g. 1,225.)
Contribution margin for alternative 1.wileyplus.com/edugen/art2/common/pixel.gif”>%
Contribution margin for alternative 2.wileyplus.com/edugen/art2/common/pixel.gif”>%
Compute the break-even point in dollars under each of the alternative courses of action.(Round selling price per unit to 2 decimal places, e.g. 5.25 and other calculations to 0 decimal places, e.g. 20% and also final answer to 0 decimal places, e.g. 1,225.)
Break-even point for alternative 1$.wileyplus.com/edugen/art2/common/pixel.gif”>
Break-even point for alternative 2$.wileyplus.com/edugen/art2/common/pixel.gif”>
Which course of action do you recommend?.wileyplus.com/edugen/art2/common/pixel.gif”>Alternative 1Alternative 2
Exercise 18-9
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The Green Acres Inn is trying to determine its break-even point. The inn has 50 rooms that it rents at $75a night. Operating costs are as follows.
Salaries$8,547per month
Utilities$1,832per month
Depreciation$1,221per month
Maintenance$610per month
Maid service$9per room
Other costs$36per room
Determine the inns break-even point in (1) number of rented rooms per month and (2) dollars.
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(2)Break-even point$.wileyplus.com/edugen/art2/common/pixel.gif”>
Exercise 18-11
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Kare Kars provides shuttle service between four hotels near a medical center and an international airport. Kare Kars uses two 10-passenger vans to offer 12 round trips per day. A recent months activity in the form of a cost-volume-profit income statement is shown below.
Fare revenues (1,400fares)$35,000
Variable costs
Fuel$6,300
Tolls and parking3,150
Maintenance1,05010,500
Contribution margin24,500
Fixed costs
Salaries12,495
Depreciation1,176
Insurance1,02914,700
Net income$9,800
(a)Calculate the break-even point in (1) dollars and (2) number of fares.
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(2)Break-even point.wileyplus.com/edugen/art2/common/pixel.gif”>fares
(b)Without calculations, determine the contribution margin at the break-even point.
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