1. (8 points) AgroPharm Corporation manufactures pharmaceutical products that are sold through a network of external sales agents. The agents are paid a commission of 18% of revenues. AgroPharm is considering replacing the sales agents with its own salespeople, who would be paid a commission of 12% of revenues and total salaries of $7,950,000. The income statement for the year ending December 31, 20x7, under the two scenarios is shown here. AgroPharm Corporation Income Statement For the Year Ended December 31, 20x7 Using Sales Agents Using Own Sales Force Revenues $45,000,000 $45,000,000 Cost of goods sold Variable $15,750,000 $15,750,000 Fixed 5,425,000 21,175,000 5,425,000 21,175,000 Gross margin $23,825,000 $23,825,000 Marketing costs Commissions $8,100,000 $5,400,000 Fixed costs 5,250,000 13,350,000 7,950,000 13,350,000 Operating income $10,475,000 $10,475,000 a. (6 points) Calculate AgroPharm's 20x7 contribution margin percentage, breakeven revenues, and degree of operating leverage under the two scenarios. b. (2 points) In 20x8, AgroPharm uses its own salespeople, who demand a 14% commission. If all other cost-behavior patterns are unchanged, how much revenue must the salespeople generate in order to earn the same operating income as in 20x7? 2. (8 points) The Zaf Radiator Company uses a normal-costing system with a single manufacturing overhead cost pool and machine-hours as the cost-allocation base. The following data are for 20x7: Budgeted manufacturing overhead costs Overhead allocation base Budgeted machine-hours Manufacturing overhead costs incurred Actual machine-hours $4,800,000 Machine-hours 80,000 $4,900,000 75,000 Machine-hours data and the ending balances (before proration of under- or overallocated overhead) are as follows: Cost of Goods Sold Finished Goods Control Work-in-Process Control Actual Machine-Hours 20x7 End-of-Year Balance 60,000 $8,000,000 11,000 1,250,000 4,000 750,000 a. (2 points) Compute the budgeted manufacturing overhead rate for 20x7. b. (6 points) Compute the under- or overallocated manufacturing overhead of Zaf Radiator in 20x7. Dispose of this amount using the following: O Write-off to Cost of Goods Sold Proration based on ending balances (before proration) in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold. Proration based on the overhead allocated in 20x7 (before proration) in the ending balances of Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold. 3. (8 points) Zarson's Netballs is a manufacturer of high-quality basketballs and volleyballs. Setup costs are driven by the number of setups. Equipment and maintenance costs increase with the number of machine-hours, and lease rent is paid per square foot. Capacity of the facility is 14,000 square feet, and Zarson is using only 80% of this capacity. Zarson records the cost of unused capacity as a separate line item and not as a product cost. The following is the budgeted information for Zarson: Zarson's Netballs Budgeted costs and Activities For the Year Ended December 31, 20x7 Direct materials-basketballs $168,100 Direct materials-volleyballs 303,280 Direct manufacturing labor-basketballs 111,800 Direct manufacturing labor-volleyballs 100,820 Setup 157,500 Equipment and maintenance costs 115,200 Lease rent 210,000 Total 1,166,700 Other budget information follows: 300 Basketballs Volleyballs Number of balls 58,000 85,000 Machine-hours 13,500 10,500 Number of setups 450 Square footage of production space used 3,200 8,000 a. (2 points) Calculate the budgeted cost per unit of cost driver for each indirect cost pool. b. (2 points) What is the budgeted cost of unused capacity? c. (4 points) What is the budgeted total cost and the cost per unit of resources used to produce (a) basketballs and (b) volleyballs
