MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 2 Slides 14 – 24: Exercise 13-3, page 646 Solution
Requirement 1
Total cost approach
Current
House-keeping
Total
Dropped
Revenues
$900,000
$660,000
Less variable expenses
490,000
330,000
Contribution margin
410,000
330,000
Less fixed expenses:
Depreciation
68,000
68,000
Liability insurance
42,000
27,000
Program admin. salaries
115,000
78,000
General administrative overhead
180,000
180,000
Total fixed expenses
405,000
353,000
Net operating income/loss
$ 5,000
$(23,000)
Difference
$(240,000)
160,000
(80,000)
0
15,000
37,000
0
52,000
$ (28,000)
Differential cost approach
Contribution margin lost if housekeeping is dropped
Less fixed costs that can be avoided
Liability insurance
Program administrators’ salaries
Total traceable fixed expenses
Decrease in overall company net operating income
Housekeeping
($80,000)
15,000
37,000
72,000
($28,000)
No, the housekeeping program should not be discontinued. It is actually generating a positive
program segment margin and is, of course, providing a valuable service to seniors.
Requirement 2
Revenues
Less variable expenses
Contribution margin
Less traceable fixed expenses:
Depreciation
Liability insurance
Program administrators’ salaries
Total traceable fixed expenses
Program segment margins
General administrative overhead
Net operating income/loss
Total
$900,000
490,000
410,000
Home
Nursing
$260,000
120,000
140,000
Meals on
Wheels
$400,000
210,000
190,000
Housekeeping
$240,000
160,000
80,000
68,000
42,000
115,000
225,000
185,000
8,000
20,000
40,000
68,000
$ 72,000
40,000
7,000
38,000
85,000
$105,000
20,000
15,000
37,000
72,000
$ 8,000
180,000
$ 5,000
To give the administrator of the entire organization a clearer picture of the financial viability of
each of the organization’s programs, the general administrative overhead should not be allocated.
It is a common cost that should be deducted from the total program segment margin.
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MA1_mod9_handout1.doc
MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 2 Slides 29 – 34: Exercise 13-4, page 647 Solution
Requirement 1
Direct materials
Direct labour
Variable manufacturing OH
Fixed manufacturing salaries
Fixed manufacturing OH equipment
Fixed manufacturing OH common
Purchase price of components
TOTAL
Per unit
Make
Buy
$6
8
1
2
--$20
$17
$20
Total-15,000 units
Make
Buy
$90,000
120,000
$15,000
$30,000
$255,000
$300,000
$300,000
Requirement 2
Direct materials
Direct labour
Variable manufacturing OH
Fixed manufacturing salaries
Fixed manufacturing OH equipment
Fixed manufacturing OH common
Purchase price of components
Segment margin foregone
TOTAL
Total-15,000 units
Make
Buy
$90,000
120,000
15,000
30,000
$300,000
$65,000
$320,000
-2-
$300,000
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MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 3 Slides 36 – 39: Exercise 13-5, page 647 Solution
Incremental revenue ($389.95 x 10)
Incremental cost
Variable costs:
Materials
Direct labour
Variable manufacturing OH
Additional materials (for filigree)
Total variable cost
Fixed costs:
Fixed manufacturing OH
Cost of special tool
Total incremental cost
Incremental operating income
Per bracelet 10 bracelets
$349.95
$3,499.50
143.00
86.00
7.00
6.00
$242.00
1,430,00
860.00
70.00
60.00
$2,420.00
465.00
$2,885.00
$ 614.50
Even though the price for the special order is below the company's regular price for such an item, the special
order would add to the company's net operating income and should be accepted. This conclusion would not
necessarily follow if the special order affected the regular selling price of bracelets or if it required the use of a
constrained resource.
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MA1_mod9_handout1.doc
MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 4 Slides 42 – 49: Exercise 13-6, page 648 Solution
Requirement 1
Product
A
B
$60
$90
C
$80
27
12
3
42
$18
14
32
8
54
$36
40
16
4
60
$20
1.5
$12
4
$9
2
$10
A
$12
3,000
Product
B
$9
3,000
C
$10
3,000
$36,000
$27,000
$30,000
Selling price
Less variable costs:
Direct materials
Direct labour
Variable manufacturing OH
Total variable cost
Contribution margin
Amount of direct labour hours required
Contribution margin per direct labour hour
Requirement 2
Contribution margin per direct labour hour
Times 3,000 direct labour hours available
Total contribution margin
Requirement 3
Product
A
$18
B
$36
C
$20
Amount of direct labour hours required
Contribution margin per direct labour hour
Times 3,000 direct labour hours available
Total contribution margin
1.5
$12
3,000
$36,000
4.0
$9
3,000
$27,000
2.0
$10
3,000
$30,000
Contribution margin per direct labour hour
Current direct labour rate
Maximum overtime rate:
$12
8
$20
Contribution margin
If there are unfilled orders for all of the products, Banner would presumably use the additional time to make
more of product A. Each hour of direct labour time generates $12 of contribution margin over and above the
usual direct labour cost. Therefore, Banner should be willing to pay up to $20 per hour (the $8 usual wage plus
the contribution margin per hour of $12) for additional labour time, but would of course prefer to pay far less.
If all the demand for product A has been satisfied, Banner Company would then use any additional direct
labour-hours to manufacture product C. In that case, the company should be willing to pay up to $18 per hour
(the $8 usual wage plus the $10 contribution margin per hour for product C) to manufacture more product C.
And if all the demand for both products A and C has been satisfied, additional labour hours would be used to
make product B. In that case, the company should be willing to pay up to $17 per hour to manufacture more
product B.
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MA1_mod9_handout1.doc
MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 5 Slides 51 – 54: Joint costs
Solution
Based on relative sales value
Cream
Skim
Total
$28,000
$22,000
$50,000
56%
44%
100%
Allocate $30,000 processing costs
$16,800
$13,200
$30,000
Contribution margin
$11,200
$8,800
$20,000
10,000
30,000
40,000
25%
75%
100%
$7,500
$22,500
$30,000
$20,500
($500)
$20,000
Sales value
% of total
Based on physical measure
Litres
% of total
Allocate $30,000 processing costs
Contribution margin
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MA1_mod9_handout1.doc
MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 5 Slides 57 – 63: Exercise 13-7 page 648 Joint costs
Solution
Product
Sales value after further processing
Sales value at split-off point
Incremental revenue
Cost of further processing
Incremental profit/loss
X
$80,000
50,000
30,000
35,000
($5,000)
Y
$150,000
90,000
60,000
40,000
$20,000
Z
$75,000
60,000
15,000
12,000
$3,000
Products Y and Z should be processed further, but not Product X.
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MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 6 Slides 75 – 80: Economic Order Quantity
Bakerview products sells 24,000 units of the Deluxe-2M each year. The inventory control manager is
concerned about rising costs and wants to determine the economic order quantity. After doing some research,
the manager has determined the following costs:
•
•
Cost to place an order
Cost to carry one Deluxe-2M in inventory for 1 year
$25.00
$2.00
Required
1. What is the EOQ for the Deluxe-2M?
2. What is the total annual cost for the Deluxe-2M?
3. What will happen to EOQ if ordering costs increase to $35 per order?
4. What will happen to EOQ if carrying costs increase to $2.50 per order?
Solution
1.
2. T=25*(24,000/775)+2*(775/2)
T=$1,549 per year
3.
4.
Sum mary of requirements
Order cost
Annual carrying cost/unit
EOQ
Original costs
$25
$2.00
775
Increased order costs
$35
$2.00
917
Increased carrying costs
$25
$2.50
693
As order costs increase, EOQ increases. The manager will want to order larger quantities
resulting in fewer orders
As carrying costs increase, EOQ decreases. The manager will want to order smaller quantities,
resulting in less storage and handling.
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MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 6 Slides 86 – 88: Safety Stock
Aegean distributors sells building materials throughout western Canada. The following information relates to a
line of metal doors carried by the company:
Economic order quantity
Lead time
Average weekly usage
Maximum weekly usage
650 units
4 weeks
65 units
78 units
Required
1. What is the reorder point? (with safety stock)
Solution
First calculate the safety stock required:
Maximum weekly usage
Average weekly usage
Safety stock
Lead time
Safety stock
78 units
(65) units
13 units
x 4 weeks
52 units
Then calculate the reorder point:
= (lead time x average demand) + safety stock
= (4 weeks x 65 units
) + 52
=
260
+ 52
= 312 units
The order should be placed when the inventory level reaches 312 units
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MANAGEMENT ACCOUNTING
MODULE 9
PART 7 Slides 89 – 92: Problem 13 – 22 Pages 656 – 657 Solution
1.
Selling price per unit
Less variable expenses per unit *
Contribution margin per unit
$40
24
$16
* 9.50 + 10.00 + 2.80 + 1.70 = $24.00
Increased unit sales (80,000 × 25%)
20,000
Contribution margin per unit
× 16
Incremental contribution margin
320,000
Less additional fixed selling expense
150,000
Incremental net operating income
$170,000
Yes, the increase in fixed selling expense would be justified.
2. SP(X) - VC(X) - FC = 0
20,000SP – 23.80(20,000) – 14,000 = 0
20,000SP – 476,000 = 14,000
20,000SP = 490,000
SP = $24.50
3. If the plant operates at 25% of normal levels, then only 5,000 units will be produced and sold during the
three-month period:
80,000 units per year × 3/12 = 20,000 units.
20,000 units × 25% = 5,000 units produced and sold.
As shown below, you will see that the dollar disadvantage of closing is $10,000.
Contribution margin: 5,000 x 16 16
FOH = 400,000 x 3/12 (60%)
FSE = 360,000 x 3/12 (2/3)
Total fixed expenses
Net operating income (loss)
Keep Open
80,000
100,000
90,000
190,000
( 110,000)
-9-
Close
0
60,000
60,000
120,000
(120,000)
Increase (Decrease) in
Net Income if Closed
( 80,000)
40,000
30,000
70,000
( 10,000)
MA1_mod9_handout1.doc
MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 7 Slides 89 – 92: Problem 13 – 22 Pages 656 – 657 Solution (continued)
4. The relevant cost is $1.70 per unit, which is the variable selling expense per Zet. Since the
blemished units have already been produced, all production costs (including the variable
production costs) are sunk. The fixed selling expenses are not relevant since they will remain the
same regardless of whether or not the blemished units are sold. The variable selling expense may
or may not be relevant—depending on how the blemished units are sold. For example, the units
may be sold through a liquidator without incurring the normal variable selling expense.
5.
Make
Outside purchase price
Direct materials
Direct labour
Variable overhead
Variable selling 40% x 1.70
FOH 5.00 x 30%
Buy
P
9.50
10.00
2.80
1.70
5.00
29.00
.68
1.50
P + 2.18
29.00 = P + 2.18
P = 26.82
To be acceptable, the outside manufacturer’s quotation must be less than $26.82 per unit.
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MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 8 Slides 93-94: Question 8 March 2006
The most recent income statement for the ladies shoe department of a large department store is given
below:
Sales
$ 1,500,000
Less variable expenses
700,000
Contribution margin
800,000
Less fixed expenses:
Wages
$ 550,000
Insurance on inventory
20,000
Advertising
200,000
770,000
Net operating income
$ 30,000
Compared to other departments, the ladies shoe department has poor profitability. Management is
considering dropping the department entirely. If the department is dropped, a job must be created
elsewhere for one employee who has been with the firm for many years. This employee has an annual
salary of $40,000 and many years until retirement.
REQUIRED:
Prepare an analysis to determine whether the shoe department should be dropped, and make a
recommendation to management about this decision.
Solution
Keep Open
Contribution margin
Fixed Expenses:
Wages
Insurance on inventory
Advertising
Total fixed expenses
Net operating income (loss)
800,000
550,000
20,000
200,000
770,000
30,000
Drop Increase (Decrease) in
Net Income if Drop
0
( 800,000)
40,000
0
0
40,000
( 40,000)
510,000
20,000
200,000
730,000
( 70,000)
Based on this analysis, the department should not be dropped because the overall company net operating
income would decrease by $70,000.
EXAMINERS COMMENTS
On average, performance on this question was satisfactory; students tended to do either well or poorly.
In addition to the $30,000 impact on net operating income, it was necessarry to add the $40,000 cost of
creating a position for a displaced employee, for a total impact on net operating income of $70,000. A
common error was to net the two figures, resulting in an estimated impact of $10,000.
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MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 8 Slide 95: Question 7 June 2007
Green’s Gaming Company specializes in creating and manufacturing adult board games. Each game
has a unique game board to accompany the other pieces of the game. The company is at the final
development stage of a new game called “Mission Done Like Dinner,” based on a recent movie of the
same name. Since it is important that the game be on the shelves quickly to capitalize on the
advertising and promotion done by the movie studio for the film, the manager of Green’s is
considering an offer from another game manufacturer to make the game boards on behalf of Green’s
for $3.50 per board. This is a common practice in the game industry as the life of a toy is very short
and there is a need to act quickly to get the product to market before demand has shifted.
The cost accountant at Green’s has developed the following cost estimates for the production of the
game board:
Cost per unit of game board for “Mission Done Like Dinner”
Direct material
Direct labour
Factory overhead
Corporate overhead
Cost of game board
$ 2.00
0.50
1.24
0.30
$ 4.04
The accountant has also provided the following information:
•
•
•
•
The board can be produced using current machinery that has a capacity to produce 1,000,000 units per
month and is 50% utilized.
The anticipated demand for the game will not exceed 50,000 units a month, according to the sales
team.
Half of the factory overhead is fixed.
The corporate overhead allocation is based on 15% of the direct materials charge.
Required
State whether Green’s should make or buy the game boards from the competitor. Briefly explain and
show your calculations.
Solution
The relevant costs of making the game board are:
Make
Buy
Direct material
$ 2.00
Direct labour
0.50
Factory overhead (1.24 × 0.50)
0.62
Cost of game board
$ 3.12
$3.50
The benefit of making the game boards per month are ($3.50 – $3.12) × 50,000 units is $19,000 in
additional profit per month for Green’s games. Conclusion: Green’s should make the game boards.
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MA1_mod9_handout1.doc
MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 9 Slides 96 – 98: Hillclimber Inc. – EOQ, Safety Stock and JIT Inventory
1
Hillclimber Inc. manufactures a four-wheeler, off-road vehicle. The company purchases one of
the parts used in the manufacture of the vehicle from a supplier located in another province. In
total, Hillclimber purchases 18,000 parts per year at a cost of $30 per part.
The parts are used evenly throughout the year in the production process on a 360 day per year
basis. The company estimates that it costs $75 to place a single purchase order and about $1.20
to carry one part in inventory for a year.
Delivery from the supplier generally takes 9 days, but it can take as much as 13 days. The days
of delivery time and the percentage of their occurrence are shown in the following tabulation:
Delivery Time (Days)
9
10
11
12
13
Percentage of Occurrence
70
12
6
6
6
Required:
1. Compute the EOQ.
2. Assume the company is willing to assume an 18% risk of being out of stock. What would
be the safety stock? The reorder point?
3. Assume the company is willing to assume only 6% risk of being out of stock. What would be the
safety stock? The reorder point?
4. Assume a 6% stock out risk as stated in (3) above. What would be the total cost of ordering and
carrying inventory for one year?
5.
Refer to the original data. Assume that the company decides to adopt JIT purchasing policy. This
change allows the company to reduce its cost of placing a purchase order to only $6. Also, the
company estimates that when the waste and inefficiency caused by inventories is considered, the true
cost of carrying a unit in stock is $5.40 per year.
a) Compute the new EOQ.
b) How frequently would the company be placing an order, as compared to the old purchasing
policy?
1
Garrison, Ray, Noreen, Eric, Chesley, G.R., Carroll, Raymond. ‘Supplement A: Inventory Decisions’. Managerial
Accounting, Sixth Canadian Edition. Toronto: McGraw-Hill Ryerson, 2003. Problem SA-5, page SA-11.
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MA1_mod9_handout1.doc
MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 9 Slides 96 – 98: Hillclimber Inc. – EOQ, Safety Stock and JIT Inventory Solution
1. EOQ =
2. :18% risk of being out of stock; 82% in stock
: Looking at the chart on the previous page tells us a maximum of 10 days delivery.
: maximum delivery
10 days
delivery generally takes
9 days
safety stock
1 day
Therefore, safety stock is 18,000 parts/360 = 50 parts
: reorder point = usage during lead time 50 x 9 =
safety stock (one day)
450
50
500 parts
: A new order would be placed when the inventory dropped to 500 parts on hand. The safety stock
would be 50 parts.
3. : 6% risk of being out of stock; 94% in stock
: Looking at the chart on the previous page tells us a maximum of 12 days delivery.
: maximum delivery
12 days
delivery generally takes
9 days
safety stock
3 days
therefore, safety stock is 18,000 parts/360 x 3 days = 150 parts
: reorder point = usage during lead time (as above)
safety stock (three days)
450
150
600 parts
: A new order would be placed when the inventory dropped to 600 parts on hand. The
safety stock would be 150 parts.
4. Total cost = ordering cost +
carrying cost
=
P(Q/EOQ )
+
C (EOQ/2)
=
75 x 18,000 +
1.20 x1,500
1,500
2
=
900
+
900
=
1,980
+ 3 days carrying cost for safety stock
+
150 x 1.20
+
180
+
180
5. C = 5.40 and P = 6.00
(a) EOQ =
(b) Note: 18,000/360 = 50 per day
Old purchasing policy: 1,500/50 per day = every 30 days
New purchasing policy: 200/50 per day = every 4 days
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MANAGEMENT ACCOUNTING
MODULE 9
PART 10 Slides 99-102: Question 3 December 2005
Consolidated Industries Ltd. (CIL) produces meat products for various labels. One of the company’s plants
processes beef cattle into 3 products — steak, hamburger, and hides (for simplicity, assume there are no
other products). The average steer costs $700.00. The 3 products result from a process that costs $100.00
per steer to operate, and the output from 1 steer can be sold for the following net amounts:
Product
Steak (100 kg)
Hamburger (500 kg)
Hide (120 kg)
Total
Amount
$ 400.00
600.00
100.00
$ 1,100.00
Each of these products can be sold immediately after this process is complete, or can be processed further
in another CIL plant.
The steak would be processed into 3-course frozen gourmet dinners. The 100 kilograms of steak would be
used in the main course for 400 dinners. The additional components in the 400 dinners (vegetables,
dessert) would cost $120.00, and the production, sales, and other costs would total $350.00 for the
400 dinners. Each one of the dinners would be sold wholesale for $2.15.
The hamburger can be made into frozen patties. The only additional cost would be a $200.00 processing
cost for the whole 500 kilograms of hamburger. The frozen patties would sell for $1.70 per kilogram.
The hides can be sold before or after tanning. The cost of tanning 1 hide is $80 and the resulting tanned
hide would be sold for $175.
Required
a. Compute the profit if all 3 products are sold at the split-off point.
b. Compute the profit if all 3 products are processed further before being sold.
c. Compute the profit at the optimum mix of sales either at, or after, split-off.
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MANAGEMENT ACCOUNTING
MODULE 9
PART 10 Slides 99-102: Question 3 December 2005 Solution
a.
Profit from sales at split-off:
Net sales revenue
Less: Common costs
Raw material
Processing
Profit at split-off
b.
$ 1,100
700
100
$ 300
Profit from processing further:
Sales value after further processing
Sales value at split-off point
Incremental revenue
Cost of further processing
(hamburger 350+120)
Incremental profit(loss)
Steak
($2.15x400)
860
400
460
470
Hamburger
($1.70x500)
850
600
250
200
Hide
TOTAL
175
100
75
80
1885
1100
785
750
(10)
50
(5)
35
While some of the individual products show a loss when processed further, in total there is a profit of $35.
c.
(You can either use the format from part b, or the format that follows to answer this part of the question.)When
looked at individually, the only product of the 3 that brings benefits from further processing is hamburger, as
follows:
Steak
Revenue after split-off $ 860.00
Less: Split-off costs
470.00
Opportunity cost 400.00
Reduction in profit
$ (10.00)
Hamburger
Revenue after split-off $ 850.00
Less: Split-off costs
200.00
Opportunity cost 600.00
Increase in profit
$ 50.00
Hides
Revenue after split-off $ 175.00
Less: Split-off costs
80.00
Opportunity cost 100.00
Reduction in profit
$ (5.00)
Therefore, the optimum mix is to sell steak and hides at split-off and hamburger after processing further.
The optimum profit will be $300.00 + $50.00 = $350.00. (original profit at split off plus the incremental revenue
from the hamburger)
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MANAGEMENT ACCOUNTING
MODULE 9
PART 11 Slides 103 – 106: Question 2 June 1989
Quality Produce orders 100,000 bottles per year of a special drink from Koala Products Co.
Each case of the special drink contains 24 bottles and costs Quality Produce $7.20 including freight.
It costs Quality Produce $300 to place an order. The annual storage expense for one bottle of the
special drink is $0.05 per bottle.
REQUIRED
(a)
How many bottles should Quality Produce request in each order?
(b)
If Koala Products offers Quality Produce a 10% discount off the delivered price for
minimum orders of 50,000 bottles what should Quality Produce do?
Solution
(a)
= 34,641.016
=
(b)
34,641 bottles (rounded)
Total annual cost (without the discount)
Total cost
= Inventory cost + ordering cost + carrying cost
=
QV
+ P(Q/EOQ) +
(EOQ/2)C
= 100,000(.30)
+ 300(100,000) + (34,641/2)(.05)
34,641
=
30,000
+
866
+
866
= 31,732
Total annual cost (with the discount)
Total cost
= Inventory cost + ordering cost + carrying cost
=
QV
+
P(Q/E)
+
(E/2)C
= 100,000(.30)(.90) + 300(100,000) + (50,000/2)(.05)
50,000
=
27,000
+
600
+
1,250
= 28,850
Conclusion: Take the discount as the total cost is reduced.
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MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 12 Slides 107-110: Multiple Choice Questions - Module 9
Q1.
In an effort to minimize its carrying costs, Holbrook Manufacturing decided to reduce its safety stock
of raw materials by 75%. What is the effect of this decision on Holbrook’s economic order quantity
(EOQ)?
1)
2)
3)
4)
No effect
75% decrease
75% increase
25% increase
Remember the EOQ formula.
There’s no safety stock in it
June 1999 exam: answer 1)
Q2.
IPM Co. is considering closing down one of its divisions. The division presently has a contribution
margin of $500,000. Overhead allocated to the division is $1,250,000, of which $125,000 cannot be
eliminated. If this division were discontinued, by what amount would IPM’s pretax income increase?
1)
2)
3)
4)
$125,000
$500,000
$625,000
$750,000
Savings
1,250,000
( 125,000)
1,125,000
Lost CM
( 500,000)
Net savings 625,000
December 1999 exam: answer 3)
Q3.
Popcorn Co. sells 1,000,000 units of product per year. Sales occur evenly throughout the year. The
carrying cost of 1 unit in inventory is $5. The cost of placing a purchase order is $40. What is the
economic order quantity (EOQ)?
1)
2)
3)
4)
2,000 units
2,828 units
4,000 units
8,000 units
EOQ = 4,000
December 1999 exam: answer 3)
Q4.
Warson Ltd. is considering closing its Alberta division. Which of the following would not be relevant
to the closure decision?
1)
2)
3)
4)
All variable production costs
Contribution margin on lost sales
Site cleanup costs
The salary of the branch manager to be transferred
March 2005 exam: answer 4)
The reason 4) is the answer is because if the salary of the manager is transferred that means it exists
regardless of whether the division is closed or not.
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MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 12 Slides 107-110: Multiple Choice Questions - Module 9 (continued)
Q5
When using relevant costing to analyze decision alternatives, amortization for machinery and
equipment is considered to be which of the following?
1)
2)
3)
4)
An avoidable cost
A differential cost
A sunk cost
An incremental cost
June 2007 exam: answer 3)
Q6
Produce Ltd. has approached Farmers’ Supply Co. with a proposal to build a greenhouse supply
warehouse. Farmers’ Supply would provide a building to store supplies and would handle all
recordkeeping. Farmers’ Supply has a storage barn that is not currently in use. Shelving would be
required for stacking the product and a special concrete pad would be added for delivery truck access.
The existing Farmers’ Supply accountant would assume the additional accounting duties and would
receive an additional $5,000 per annum. Farmers’ Supply would be paid a fee based on the volume of
product stored. Which of the following items is not a relevant consideration in deciding whether to
establish a greenhouse supply warehouse?
1)
2)
3)
4)
Book value of storage barn
Cost of special concrete pad
Farmers’ Supply accountant’s raise
Projected volume of product for storage
June 2005 exam: answer 1)
Q7
Scantle Inc. has received an offer from an outside supplier to supply Scantle’s annual needs of 10,000
component parts used in the manufacture of one of its products. Information on making versus buying
is as follows:
Cost to Make
(per unit)
$10.00
8.00
2.00
3.00
7.00
Direct materials
Direct labour
Variable overhead
Allocated overhead
Production supervisor’s salary
Outside supplier price
Cost to Buy
(per unit)
$24
The production supervisor will be transferred to another department if the production of the
component part is discontinued. Which of the following is the appropriate decision and related cost?
1)
2)
3)
4)
Produce internally, based on a positive margin of $10,000
Purchase externally, based on a positive margin of $30,000
Produce internally, based on a positive margin of $40,000
Purchase externally, based on a positive margin of $60,000
June 2005 exam: answer 3)
10,000 [$24 – ($10 + $8 + $2)] = $40,000
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MA1_mod9_handout1.doc
MA1 2008
MANAGEMENT ACCOUNTING
MODULE 9
PART 12 Slides 107-110: Multiple Choice Questions - Module 9 (continued)
Q8
HeartHealthy Ltd. produces two models of treadmill, standard and deluxe. The manufacturing
capacity of the specialized machinery needed to produce the treadmill rollers is 12,000 hours per year.
The two models have the following production data:
Machine time per unit
Contribution margin per unit
Maximum sales volume per year
Standard
Deluxe
2 hours
$10
5,000 units
4 hours
$15
4,000 units
How many units should the company produce of the standard and deluxe models, respectively?
1)
2)
3)
4)
1,000 units; 4,000 units
1,000 units; 5,000 units
5,000 units; 500 units
6,000 units; 0 units
June 2005 exam: answer 3)
Q9
CM/unit
CM/hr
Standard
$10
$10/2 = $5
Deluxe
$15
$15/4 = $3.75
Therefore maximum production of standard = 5,000 units
Number of units of deluxe = [12,000 – (5,000 × 2)]4 = 500
units
BBG Ltd.’s weekly production output is 400 units of a product that sells for $20 per unit and has variable
costs of $16 per unit. Maximum capacity is 500 units per month. Total fixed costs per month are $3,400.
A special order is received for 100 units at a price of $18 per unit. In deciding whether to accept or reject
the order at this price, what should be considered?
1)
2)
3)
4)
The
The
The
The
difference between the offered price and the variable cost per unit
old fixed cost of $8.50 per unit
new fixed cost of $6.80 per unit
difference between the offered price per unit and old price per unit
March 2004 exam: answer 1)
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MA1_mod9_handout1.doc