Armstrong Helmet Company manufactures a unique model of bicycle helmet.

The company began operations December 1, 2013. Its accountant quit the second

week of operations, and the company is searching for a replacement. The company

has decided to test the knowledge and ability of all candidates interviewing

for the position. Each candidate will be provided with the information below and

then asked to prepare a series of reports, schedules, budgets, and recommendations

based on that information. The information provided to each candidate is

as follows.

Cost Items and Account Balances

Administrative salaries $15,500

Advertising for helmets 11,000

Cash, December 1 0

Depreciation on factory building 1,500

Depreciation on offi ce equipment 800

Insurance on factory building 1,500

Miscellaneous expensesfactory 1,000

Offi ce supplies expense 300

Professional fees 500

Property taxes on factory building 400

Raw materials used 70,000

Rent on production equipment 6,000

Research and development 10,000

Sales commissions 40,000

Utility costsfactory 900

Wagesfactory 70,000

Work in process, December 1 0

Work in process, December 31 0

Raw materials inventory, December 1 0

Raw materials inventory, December 31 0

Raw material purchases 70,000

Finished goods inventory, December 1 0

Production and Sales Data

Number of helmets produced 10,000

Expected sales in units for December

($40 unit sales price) 8,000

Expected sales in units for January 10,000

Desired ending inventory 20% of next months sales

Direct materials per finished unit 1 kilogram

Direct materials cost $7 per kilogram

Direct labor hours per unit .35

Direct labor hourly rate $20

Cash Flow Data

Cash collections from customers: 75% in month of sale and 25% the following month.

Cash payments to suppliers: 75% in month of purchase and 25% the following month.

Income tax rate: 45%.

Cost of proposed production equipment: $720,000.

Manufacturing overhead and selling and administrative costs are paid as incurred.

Desired ending cash balance: $30,000.

Instructions

Using the data presented above, do the following.

1. Under what circumstances might Armstrong use a different cost accounting system?

2. Compute the unit variable cost for a helmet.

3. Compute the unit contribution margin and the contribution margin ratio.

4. Calculate the break-even point in units and in sales dollars.

5. Identify one potential cause of direct materials, direct labor, and manufacturing overhead variances in the production of the helmet.