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QUESTION NO: 1 Case Material: Douglas and Pamela Frank are a married couple. They both worked for a railroad company for 30 years. At age 57, Douglas and age 52, Pamela retired and moved to the small town of Ovilla, TX, which has a population of approximately 3,500 residents. When the Franks moved to the town, they decided to start a child care business in their home called Nanna's House Nanna's House is licensed by the state. The state charges an annual fee of $225 to maintain the license. Insurance is required at a cost of $3,840 annually. The facility is licensed to care for a maximum of six children. The Franks charge a fee of $800 per month for each child. The monthly fee is based on a full day of care, from 8:00 a.m. to 4:00 p.m. If additional time is required beyond 4:00 p.m., parents must pay an additional charge of $15 per hour for each child. The couple provides two meals and a snack for the children. The cost of the meals and snack is $3.20 per child per day. There are six children currently enrolled. The facility is very nice. It is an 820 square foot addition to their home that was built in 1964. The Franks purchased the home and completed the renovations for $79,500 and they believe the addition has a useful life of 25 years. The facility has a large open space for play, reading, and other activities. There is a section for sleeping which contains small cots. The facility is equipped with a small kitchen, two bathrooms and a small laundry area. The daycare increased the Franks'utility cost by $50 each month. During the first week of operations, the washer and dryer stopped working. Both appliances were old and had been used by the couple for many years. The old appliances cost a total of $440. While a laundry room was not initially a necessity, it became increasingly important for laundering the soiled clothes of the children, blankets, and sheets. A company nearby, Red Oak Laundry and Dry Cleaning, can launder clothing for the Franks, including pick-up and delivery, for $52 per month. Alternatively, the Franks can take clothes to the laundromat once a week, which is three miles away (one way). The applicable mileage rate is $0.56/mile. They can launder the clothes themselves at a cost of $8 per week. The self-service alternative does not include detergent or fabric sheets. The couple would need to purchase these items in order to use the laundromat. Purchasing laundry supplies in bulk from MegaMart would cost $35 every quarter. The final alternative is for the Franks to purchase a washer and dryer. The cost of the appliances is: washer $420 and dryer $380. The additional accessories for both appliances, needed for installation, cost $43.72. The store will deliver the appliances at a total cost of $35. The cost of installing the appliances is free. Both appliances are expected to last 8 years. According to the manufacturer the washer will increase energy costs by $120 per year. The dryer will increase energy costs by $145 per year. The Franks need some assistance in decision making and evaluation. They have contacted Emily Smith, their accountant, to provide some advice. Requirements: Respond to the following Case Discussion Questions to help Douglas and Pamela make their decisions. Case Discussion Questions Consider the different types of costs discussed in this course. List the costs discussed in the case and provide one specific example of each. EXAMPLE Cost Fixed cost Specific Example Annual license fee of $225. The license fee does not change regardless of the couple's activities. Note: You cannot use this specific example of a fixed cost. There are however other fixed costs that you may use. QUESTION NO: 2 What effect does an increase in volume have on 1. Unit fixed costs ii. Unit variable cost tili. Total fixed cost iv. Total variable cost QUESTION NO:3 The Fine manufacturing company uses job order costing system. The company uses machine hours to apply overhead cost to jobs. At the beginning of 2012, the company estimated that 150,000 machine hours would be worked and $900,000 overhead cost would be incurred during 2012. The balances of raw materials, work in process (WIP), and finished goods at the beginning of 2012 were as follows: Raw materials: $40,000 Work in process: $30,000 Finished goods: $60,000 The Fine manufacturing company recorded the following transactions during 2012: a. Raw materials purchased on account, $820,000. b. Raw materials were requisitioned for use in production, $760,000 ($720,000 direct materials and $40,000 indirect materials). c. Direct labor labor, $150,000; indirect labor, $220,000; sales commission, $180,000; and administrative salaries, $400,000. . d. Sales travel costs were $34,000. .e. Utility costs incurred in the factory, $86,000. . f. Advertising expenses were $360,000. g. Depreciation for the year was $700,000 ($560,000 relates to factory and $140,000 relates to selling and administrative activities). . h. Insurance expired during the year, $20,000 ($14,000 relates to factory operations and $6,000 relates to selling and administrative activities). i. Fine manufacturing company worked 160,000 machine hours. Manufacturing overhead was applied to production. j. Goods costing $1,800,000 were completed during the year. k. The goods costing $1,740,000 were sold to customers for $3,000,000. Required: 1. Prepare journal entries, T-accounts and income statement from the above information. 2. Prepare a journal entry to close the balance in manufacturing overhead account (over or under applied manufacturing overhead) to cost of goods sold