1.33 Benefit Cost Analysis Lillis, Ltd., is considering outsourcing its account receivable function, a support service in the finance department. Lillis cost-management analyst expects annual benefits that include personnel cost savings of $121,000, facilities savings of $90,000, other support service cost savings of $60,000, and no loss of service quality. The analyst also estimated annual costs of the decision to include the contract cost to DeGama Enterprises of $160,000, severance costs of dismissed personnel of $20,000, and contract administration costs of $12,000. Required a. Based on the quantifiable benefits and costs of the decision, would you recommend that Lillis outsource its accounts receivable function? What qualitative factors should Lillis also consider? b. Lillis did outsource the accounts receivable function and measured actual benefits to include personnel cost savings of $82,000, facilities cost savings of $100,000, and support service cost savings of $70,000. Actual costs included $160,000 for the outsourced service, $30,000 for training costs, and $13,000 for contract administration. Furthermore, customer billing complaints were lower than in previous years; sales growth was lower; and employee turnover in other support service areas was higher. Prepare an analysis.. c. On balance, do you agree with the outsourcing decision? Why or why not? Problem 1.39 Benefit Cost Analysis: Add the Product Line Aroma Coffee, Inc., operates a small coffee shop in the downtown area. Its profits have been declining, and management is planning to expand and add ice cream to the menu. The annual ice cream sales are expected to increase revenue by $30,000. The cost to purchase ice cream and cones from the manufacturer is $15,000. The present manager will supervise the coffee shop and ice cream shop. Due to an expansion, however, the labor costs and utilities would increase by 30 percent. Rent and other costs will increase by 25 percent. AROMA COFFEE, INC. Annual Income Statement Before Expansion Sales Revenue $55,000 Costs: Food 16,000 Labor 12,000 Utilities 3,000 Rent 6,000 Other costs 3,000 Managers salary 20,000 Total Costs $60,000 Operating Profit (Loss) $(5,000) Required a. Should management open the ice cream shop? Show an analysis of the costs and benefits of adding ice cream. b. BUILD YOUR OWN SPREADSHEET. Build an Excel spreadsheet to solve requirement (a). Analyze the decision to expand if you learn that Baskin-Robbins will open an ice cream store down the block. Aromas ice cream sales could drop by one-third. Exercise 2.33 Income Statement: Schedule of Cost of Goods Sold The following items appeared in the records of Zodiac Corporation for the last year: Supervisory and indirect labor $127,000 Supplies and indirect materials 14,000 Work-in-process inventory, January 1 135,000 Work-in-process inventory, December 31 142,000 Administrative costs 304,000 Depreciation, manufacturing 103,000 Direct Labor 482,000 Finished goods inventory, January 1 160,000 Finished good inventory, December 31 147,000 Heat, light, and power (plant) 87,000 Marketing costs 272,000 Miscellaneous manufacturing costs 12,000 Plant maintenance and repairs 74,000 Raw-material purchases 313,000 Raw-material inventory, January 1 102,000 Raw-material inventory, December 31 81,000 Sales revenue 2,036,000 Required a. Prepare an income statement with a supporting schedule of cost of goods sold. b. BUILD YOUR OWN SPREADSHEET. Build an Excel spreadsheet to complete requirement (a). Exercise 2.45 Straightfoward Exercise on Absorption versus Variable Costing Carolina Catsup Company produces catsup, which it sells exclusively to fast-food restaurant in 5-gallon containers, which sell for $16 each and have the following variable costs: Direct material $5 Direct labor 2 Variable overhead 3 Budgeted fixed overhead in 20x0 was $300,000. Actual production of 5-gallon containers totaled 150,000, of which 125,000 were sold. The company incurred the following selling and administrative expenses: Fixed $50,000 for the year Variable $1 per container sold Required a. Compute the standard product cost per container of catsup under (1) absorption costing and (2) variable costing. b. Prepare income statements for 20x0 using (1) absorption costing and (2) variable costing. c. Reconcile the income reported under two methods by listing the two key places where the income statements differ. d. Reconcile the income reported under the two methods using the shortcut method. e. BUILD YOUR OWN SPREADSHEET. Build an Excel spreadsheet to complete requirements (a) through (c). Exercise 3.37 Overhead Application Using a Predetermined Rate Paige Printing uses a job-order costing system. The following debits (credits) appeared in the Work-in-Process account for May: May 1 Balance $5,000 (Debit) Entire month Direct material 30,000 (Debit) Entire month Direct labor 20,000 (Debit) Entire month Factory over. 16,000 (Debit) Entire month To finished goods $60,000 (Credit) Paige Printing applies overhead to production at a predetermined rate of 80 percent based on direct labor cost. Job 75, the only job still in process at the end of May, has been charged with direct labor of $2,500. Required What was the cost of direct material charged to job 75? Exercise 3.49 Job Costs in a Service Organization During Janurary, Broadway Consultants worked 1,000 hours for Nocando Manufacturing, 300 hours for Sails, Inc., and 500 hours for Original Johns Restaurants. The firm bills clients at $80 and hour; its labor costs are $30 hour. A total of 2,000 hours were worked in January with 200 hours not billable to clients. Overhead costs of $30,000 were incurred and assigned to clients on the basis of direct labor hours. Because 200 hours were not billable, some overhead was not assigned to jobs. Broadway Consultants had $30,000 in selling and administrative costs. All transactions were on account. Required a. What are the revenue and cost per client? b. Prepare an income statement for January. c. BUILD YOUR OWN SPREADSHEET. Build an Excel spreadsheet to complete requirements (a) and (b)