1. The variable cost of producing one chocolate chip cookie at a small cookie stand
is $0.75. Fixed costs per week are $1000.
A. Sketch a graph of costs in the relevant range of 0-1000 cookies. Label each
cost graph and the data points for 0and 1000 cookies.
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
Total Cost
0
00
10
0
90
0
80
70
0
60
0
0
50
40
0
30
0
20
10
0
Variable Costs
0
Number of Units
Costs
Cost
B. Provide the equation for the straight line that represents these costs.
Let total Cost be T, and Number of Units be Q. The equation would be:
Y = $1,000 + $0.75Q
3. Your company’s marketing department prepared the following information for the
semiannual sales budget:
January $150,000
April $35,000
February $160,000
May$25,000
March $120,000
June $105,000
Historically, the cash collection of the sales has been:
50% of the sales collected in the month sale
35% of sales collected in the month following sale
15% of sales collected in the 2nd month following sale
Prepare a cash receipt budget for April, May and June showing totals for each
monthe and for the quarter.
Schedule of Cash Collections
April
$17,500
In the Month of Sales
$42,000
In the Month Following Sales
In the Second Month Following Sales $24,000
$83,500
Total
Month
May
June
$12,500 $52,500
$12,250 $8,750
$18,000 $5,250
$42,750 $66,500
Quarter
$82,500
$63,000
$47,250
$192,750
Part B:
1. Based on the following information, prepare a flexible budget for the production
and sale of 50 units:
Sales revenue $100 per unit
Direct material $25 per unit
Direct labor $15 per unit
Commission $10 per unit
Fixed costs $50 for the production of up to 75 units
Flexible Budget
Activity Level
Overhead Costs:
Variable Costs:
Direct Material
Direct Labor
Commission
Total variable cost
Fixed Costs
Total Cost
50
$1,250
$750
$500
$2,500
$50
$2,550
2. Describe the information included on a statement of cash flows.
The statement of cash flows reports the effect of the company’s operating, investing,
and financial activities on the cash inflow and cash outflow of the company. It,
therefore provides information relating to the change in cash balances between two
balance sheet dates; accordingly, the statement of cash flows should be viewed as an
explanation of the changes to the cash balance reported on the balance sheet.
3.HTN. Inc. has begun production on a new type of television satellite dish. The primary
cost of the dish is direct materials with costs of $50, Direct labor is estimated to be $8 per
unit, overhead is estimated to be $10 per unit and selling and administrative expenses are
estimated to be $5 per unit. If HTN desires a profit of $75 per unit, what is the required
markup on the direct materials?
Markup = ($8 + $10 + $5 + $75) / $50
= 196%
4. If a company’s assets are $500,000 for 2005 and $700,000 for 2006, what would a
horizontal analysis tell you about the year-to-year change?
Percentage Change in Assets = ($700,000 - $500,000) / $500,000
= 40%
Therefore horizontal analysis would show that the company’s asset base in
2006 had increased by 40% over 2005
5. You’ve just been informed that you’ll now be evaluated on the basis of your
segment’s return on investment in relation to the ROI values of the other
corporate segments. What are two ways you could increase your segment’s ROI
and boost your evaluation?
Since ROI is calculated using the following formula:
Net Operating Income
Sales

Sales
Average Operating Assets
Then, there are actually three ways to increase the segment’s ROI, First:
Increase Sales, Second: Reduce Expenses, and Third: Reduce Operating
Assets.
Use the following information to complete a contribution margin income
statement and answer the next question.
6. Product
A
B
C
Total
Sales
$20,000
$19,000
$12,000
$51,000
Variable costs $9,000
$7,000
$6,000
$22,000
Fixed costs $7,000
$16,000
$3,000
$26,000
Why would you recommend discontinuing the product that appears unprofitable?
Why or why not?
Product
Sales
Less: Variable Costs
Contribution Margin
Less: Fixed Costs
Net Income
A
$20,000
$9,000
$11,000
$7,000
$4,000
B
$19,000
$7,000
$12,000
$16,000
($4,000)
C
$12,000
$6,000
$6,000
$3,000
$3,000
Sales
Less: Variable Costs
Contribution Margin
Less: Fixed Costs
Net Income
A
$20,000
$9,000
$11,000
$7,000
$4,000
C
$12,000
$6,000
$6,000
$3,000
$3,000
Total
$32,000
$15,000
$17,000
$10,000
$7,000
Total
$51,000
$22,000
$29,000
$26,000
$3,000
As can be seen from the above analysis, if Product B is dropped, net income
for the whole company would increase by $4,000; therefore the product
should be discontinued. This product should be discontinued only if the fixed
cost associated with it would not be allocated to other products because if
those costs are not eliminated ($16,000), then the $4,000 increase in net
income would be lower than the allocated fixed costs.
7. Classify the following examples of quality costs as prevention (p) appraisal (a)
internal failure (if) or external failure (ef)
The cost of repairs made under warranty EF
Downtime caused by quality problems IF
The costs of inspecting raw materials A
They cost of quality improvement projects P
Liability costs arising from legal actions against the seller EF
The costs of scrap and spoilage IF
Lost sales EF
Design and engineering costs P
8. You a manager of a small potato chip manufacturing company. Your company
produces only one type of chip and packages the chips in 1-pound bags only.
These bags are sold to convenience stores within a 10-mile radius of our
operation. How would you suggest that overhead be allocated to each bag of
chips? Why?
Since the company produces only one product, I believe that the best way to
allocate overhead is number of bags produced since it is the number of bags
that is the main cost driver in this situation.
9. Why do capital investment decisions require consideration of the time value of
money?
This is because capital investment decisions involves large sums of money
and usually last for many years, and since time value of money calculations
are based on the concept that a dollar received today is worth more than a
dollar received in the future, therefore capital investment decisions require
the consideration of the time value of money.
10. How do variable costing and absorption costing differ? When is net income
different under these two methods?
Under variable costing, direct materials, direct labor, and variable manufacturing
overhead are considered product costs. Under absorption costing, however, product
costs include direct material, direct labor, and manufacturing overhead (both fixed
and variable) costs. Variable costing is a system for determining product costs that
is used primarily for making managerial decisions; while absorption costing is
required for external reporting purposes and is used by some managers for internal
decisions.
When production is greater than sales and inventories increase, absorption costing
will result in a higher net income than variable costing, while when sales are higher
than production and inventories decrease, variable costing will report a higher net
income. It is only when units produced equal units sold that net income under both
methods will remain the same.