Assignment
Five – CVP Analysis, Costing Methods
To demonstrate your ability to apply
accounting techniques, complete the following exercises from your textbook. Be
sure to demonstrate the process used to complete each exercise. Present your
answers and analysis in a professional manner.
Submit your answers for each of
these problems as an attachment in the Assignment area. Where appropriate
include your work, spreadsheets, and answers to each part of the problems. The
Breakeven Analysis Example may be useful as you work through these exercises.
P-12.20, CVP
application – eliminate product from operations? This provides a simple illustration of CVP analysis.
Body Sculpture, Inc., makes three models of high-performance
weight-training benches. Current operating data are summarized here:
MegaMuscle PowerGym ProForce
Selling
price per unit $
280
$ 400 $ 580
Contribution
margin per unit 84 154 116
Monthly
sales volume-units 6,000 4,000 2,000
Fixed
expenses per month Total of
$1,280,000
Required:
a. Calculate the
contribution margin ratio of each product.
b. Calculate the firm’s
overall contribution margin ratio.
c. Calculate the
firm’s monthly break-even point in sales dollars.
d. Calculate the
firm’s monthly operating income.
e. Management is
considering the elimination of the ProForce model due to its low sales volume and low contribution margin ratio.
As a result, total fixed expenses can be reduced to $1,080,000 per month.
Assuming that this change would not affect the other models, would you
recommend the elimination of the ProForce model? Explain your answer.
f. Assume the same
facts as in part e.Assume also that
the sales volume for the PowerGym model will increase by 1,000 units per month
if the PowerForce model is eliminated. Would you recommend eliminating the
ProForce model? Explain your answer.
C-12.26, Understanding
the Effects of Operating Leverage. This provides an
illustration of CVP analysis.
HighTech, Inc., and OldTime Co. complete within the same industry and
had the following operating results in 2010:
HighTech, OldTime
Inc. Co.
Sales …………………………………… $2,100,000 $2,100,000
Variable expenses ……………………… 420,000 1,260,000
Contribution margin …………………… $1,680,000 $
840,000
Fixed expenses ………………………… 1,470,000
630,000
Operating income ……………………… $ 210,000 210,000
Required:
a. Calculate the
break-even point for each firm in terms of revenue.
b. What observations
can you draw by examining the break-even point of each firm given that they
earned an equal amount of operating income on identical sales volumes in 2010?
c. Calculate the
amount of operating income (or loss) that you would expect each firm to report
in 2011 if sales were to
1.
Increase by 20%.
2.
Decrease by 20%.
d. Using the amounts
computed in requirement c,calculate
the increase or decrease in the amount of operating income expected in 2011
from the amount reported in 2010.
e. Explain why an
equal percentage increase (or decrease) in sales for each firm would have such
differing effects on operating income.
f. Calculate the
ratio of contribution margin to operating income for each firm in 2010. (Hint: Divide contribution margin by
operating income.)
g. Multiply the expected increase
in sales of 20% for 2011 by the ratio of contribution margin to operating
income for 2010 computed in requirement f
for each firm. (Hint: Multiply your
answer in requirementfby 0.2.)
h. Multiply your
answer in requirement gby the
operating income of $210,000 reported in 2010 for each firm.
i. Compare your
answer in requirement hwith your
answer in requirement d.
What conclusions can you draw
about the effects of operating leverage from the steps you performed in
requirements f, g,and h?
E-13.10, Product
Costing—Manufacturing Overhead—Over/Underapplied. This illustrates the issues for allocating manufacturing overhead.
LampArt Co. makes
specialty table lamps. Manufacturing overhead is applied to production on a
direct labor hours basis. During November, the first month of the company’s
fiscal year, $173,250 of manufacturing overhead was applied to Work in Process
Inventory using the predetermined overhead application rate of $15 per direct
labor hour.
Required:
a. Calculate the number of hours of direct labor used during November.
b.
Actual manufacturing overhead costs incurred during November totaled
$166, 425. Calculate the amount of over- or underapplied overhead for November.
c.
Identify two possible explanations for the over- or underapplied
overhead.
d. Explain the accounting appropriate for the
over- or underapplied overhead at the end of November.
P-13.16, Activity-Based
Costing Versus Traditional Overhead Allocation Methods. This illustrates the differences between activity-based costing and
traditional methods.
Galvaset Industries manufactures and sells custom-made windows. Its job
casting system was designed using an activity-based casting approach. Direct
materials and direct labor costs are accumulated separately, along with
information concerning three manufacturing overhead cost drivers (activities).
Assume that the direct labor rate is $20 per hour and that there were no
beginning inventories. The following information was available for 2010, based
on an expected production level of 50,000 units for the year, which will
require 200,000 direct labor hours:
Activity
Budgeted Cost Driver Used Cost
(Cost Driver) Cost for 2010
as Allocation Bas
Allocation Rate
Materials
handling $ 325,000 Number of parts used $ 0.25 per part
Cutting
and lathe work 2,340,000 Number of parts used 1.80 per part
Assembly
and inspection 5,000,000 Direct labor hours 25.00 per hour
The following production, costs, and
activities occurred during the month of March:
Units Direct Number Direct
Produced Materials Costs of Parts Used Labor Hours
3,800 $142,000 83,600 17,180
Required:
- Calculate the total manufacturing costs and the cost per unit of
the windows produced during the month of March (using the activity-based
costing approach). - Assume instead that Galvaset Industries applied manufacturing
overhead on a direct labor basis (rather than using the activity-based
costing system previously described). Calculate the total manufacturing
cost and the cost per unit of the windows produced during the month of
March. (Hint: You will need to
calculate the predetermined overhead application rate using the total
budgeted overhead coasts for 2010.) - Compare the per unit costs figures calculated in parts aand b. Which approach do you think provides better information for
manufacturing managers? Explain your answer.
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