1) The accounting department of a large limousine company is analyzing the costs of its services. The cost data and level of activity for the past 16 months follow.

Month	Special Analyses	Customer Accounts	Paychecks Processed	Accounting Service Costs
1	3			220			1,040		$	61,500
2	0			260			1,150			61,900
3	2			150			980			60,200
4	2			340			880			58,600
5	4			160			970			59,000
6	3			280			1,230			60,600
7	3			250			1,060			61,200
8	0			170			1,220			58,900
9	3			320			870			61,700
10	2			210			1,010			58,600
11	0			320			1,250			61,400
12	2			180			1,290			60,700
13	3			200			1,030			60,300
14	0			220			830			60,300
15	3			150			1,040			59,400
16	4			300			820			60,500
Totals	34			3,730			16,670		$	964,800

In addition to the above information, you learn that the accounting department had the following total costs for the past 16 months for each of the following.

Total cost of paychecks processed	$	190,038
Total cost of maintaining customer accounts		112,646
Total cost of performing special analyses		133,280
Total fixed costs (total for 16 months)		528,836
Total costs	$	964,800

Required:

a-1. What is the cost per unit for paychecks processed?

a-2. What is the cost per unit for customer accounts maintained?

a-3. What is the cost per unit for special analyses performed?

b. Assuming the following level of cost-driver volumes for a month, what are the accounting department's estimated costs of doing business using the account analysis approach?

920 paychecks processed.

240 customer accounts maintained.

5 special analyses.

2) Palisades Eco-Park is a small ecological reserve that admits a relatively small number of visitors on any day, but provides both educational and entertaining lectures, exhibitions, and opportunities to observe nature. The company has collected the following data on labor costs and number of visitors to the park over the last 30 months.

Month	Labor Cost	Visitors
1	$	26,420	2,300
2	$	37,134	3,507
3	$	40,897	3,803
4	$	32,383	3,006
5	$	35,618	3,211
6	$	33,432	2,951
7	$	32,767	2,983
8	$	39,225	3,621
9	$	39,464	3,735
10	$	48,023	4,832
11	$	43,137	4,026
12	$	39,937	3,794
13	$	35,244	3,268
14	$	33,944	3,161
15	$	37,831	3,393
16	$	27,116	2,840
17	$	31,376	4,595
18	$	30,657	3,769
19	$	28,232	3,263
20	$	30,700	4,022
21	$	26,289	2,705
22	$	25,228	2,428
23	$	29,563	4,420
24	$	30,854	5,165
25	$	28,773	3,507
26	$	32,426	4,429
27	$	29,317	4,044
28	$	30,622	4,126
29	$	29,099	3,398
30	$	28,522	2,808

Required:

a. Estimate the labor costs assuming 3,100 visitors for the month using the results of a simple regression based on the 30 months of available data. b. What percentage of the variance in the data does the R-squared value explain? c. You learn that starting in month 16, the park started using a different, more automated system for interacting with visitors. Estimate the labor cost assuming 3,100 visitors using the results of a simple regression based on the data for months 16 through 30 only. d. What percentage of the variance in the data does the R-squared value explain?

3) Luke Corporation produces a variety of products, each within their own division. Last year, the managers at Luke developed and began marketing a new chewing gum, Bubbs, to sell in vending machines. The product, which sells for $5.40 per case, has not had the market success that managers expected and the company is considering dropping Bubbs.

The product-line income statement for the past 12 months follows:

Revenue				$	14,686,650
Costs
Manufacturing costs	$	14,441,895
Allocated corporate costs (@5%)		734,333			15,176,228
Product-line margin				$	(489,578	)
Allowance for tax (@20%)					97,915
Product-line profit (loss)				$	(391,663	)

All products at Luke receive an allocation of corporate overhead costs, which is computed as 5 percent of product revenue. The 5 percent rate is computed based on the most recent year's corporate cost as a percentage of revenue. Data on corporate costs and revenues for the past two years follow:

	Corporate Revenue	Corporate Overhead Costs
Most recent year	$	109,750,000	$	5,487,500
Previous year		76,500,000		4,729,400

Roy O. Andre, the product manager for Bubbs, is concerned about whether the product will be dropped by the company and has employed you as a financial consultant to help with some analysis. In addition to the information given, Mr. Andre provides you with the following data on product costs for Bubbs:

Month	Cases	Production Costs
1	210,000	$1,146,328
2	218,700	1,167,828
3	216,400	1,176,481
4	231,000	1,192,023
5	234,900	1,194,327
6	240,000	1,215,173
7	221,700	1,190,199
8	248,700	1,233,274
9	240,300	1,231,726
10	254,100	1,243,825
11	251,700	1,248,260
12	260,700	1,278,951

Required:

a. Bunk Stores has requested a quote for a special order of Bubbs. This order would not be subject to any corporate allocation (and would not affect corporate costs). What is the minimum price Mr. Andre can offer Bunk without reducing profit any further?

b. How many cases of Bubbs does Luke have to sell in order to break even on the product?

c. Suppose Luke has a requirement that all products have to earn 5 percent of sales (after tax and corporate allocations) or they will be dropped. How many cases of Bubbs does Mr. Andre need to sell to avoid seeing Bubbs dropped?

d. Assume all costs and prices will be the same in the next year. If Luke drops Bubbs, how much will Luke's profits increase or decrease? Assume that fixed production costs can be avoided if Bubbs is dropped.

4) Social Media, Inc. (SMI) has two services for users. Toot!, which connects tutors with students who are looking for tutoring services, and TiX, which can be used to buy, sell, or exchange event tickets. For the following year, SMI expects the following results.

	Toot!		TiX	Total
Users		12,500			19,600			32,100
Revenues	$	1,750,000		$	1,680,000		$	3,430,000
Engineering hours		9,025			7,025			16,050
Engineering cost	$	642,875		$	761,500		$	1,404,375
Administrative costs							$	1,123,500

The company is considering using a two-stage cost allocation system and wants to assess the effects on reported product profits. The company is considering using Engineering Hours and Users as the allocation base. Additional information follows.

	Toot!	TiX	Total
Engineering hours		9,025			7,025			16,050
Users		12,500			19,600			32,100
Engineering-hour related administrative cost							$	154,080
User-related administrative cost							$	969,420

Required:

a. Compute the predetermined overhead rate used to apply the two administrative costs pools to the two services assuming SMI uses the proposed two-stage cost systemto allocate administrative costs.

b. Based on the rates computed in requirement (a), what is the profit for each service?

5) Vermont Instruments manufactures two models of calculators. The finance model is the Fin-X and the scientific model is the Sci-X. Both models are assembled in the same plant and require the same assembling operations. The difference between the models is in the cost of the parts. The following data are available for June:

	Fin-X	Sci-X	Total
Number of units		14,000			42,000			56,000
Parts cost per unit		$21			$24
Other costs:
Direct labor							$	59,500
Indirect materials								15,500
Overhead								149,000
Total							$	224,000

Required:

Vermont Instruments uses operations costing and assigns conversion costs based on the number of units assembled. Compute the cost per unit of the Fin-X and Sci-X models for June.

6) I don't understand this. Last year [year 1], we decided to drop our highest-end Red model and only produce the Yellow and Green models, because the cost system indicated we were losing money on Red. Now, looking at the preliminary numbers, our profit is actually lower than last year and it looks like Yellow has become a money loser, even though our prices, volumes, and direct costs are the same. Can someone please explain this to me and maybe help me decide what to do next year?

Robert Dolan

President & CEO

Dolan Products

Dolan Products is a small, family-owned audio component manufacturer. Several years ago, the company decided to concentrate on only three models, which were sold under many brand names to electronic retailers and mass-market discount stores. For internal purposes, the company uses the product names Red, Yellow, and Green to refer to the three components.

Data on the three models and selected costs follow.

Year 1	Red		Yellow		Green		Total
Units produced and sold	8,000		12,000		19,000		39,000
Sales price per unit	$	100		$	70		$	50
Direct materials cost per unit	$	40		$	30		$	15
Direct labor-hours per unit		2			1			0.4
Wage rate per hour	$	15		$	15		$	15
Total manufacturing overhead										$712,000

This year (year 2), the company only produced the Yellow and Green models. Total overhead was $548,800. All other volumes, unit prices, costs, and direct labor usage were the same as in year 1. The product cost system at Dolan Products allocates manufacturing overhead based on direct labor-hours.

Required:

a. Compute the product costs and gross margins (revenue less cost of goods sold) for the three products and total gross profit (loss) for year 1.

b. Compute the product costs and gross margins (revenue less cost of goods sold) for the two remaining products and total gross profit (loss) for year 2.

c. Should Dolan Products drop Yellow for year 3?