EXERCISE #1

(3 points)

Hamilton Heating Company is a small manufacturer of auxiliary heaters. The units sell for $100 each. In 2008, the company produced 1,200 units and sold 1,000 units. Below are variable and full costing income statements for 2008.

Income Statement Prepared Using Variable Costing Hamilton Heating Company Income Statement For the Year Ending December 31, 2008
Sales		$ 100,000
Less variable costs:
Variable cost of goods sold	$20,000
Variable selling expense	10,000	30,000
Contribution margin		70,000
Less fixed costs:
Fixed manufacturing expense	24,000
Fixed selling expense	8,000
Fixed administrative expense	12,000	44,000
Net Income		$26,000

Income Statement Prepared Using Full Costing Hamilton Heating Company Income Statement For the Year Ending December 31, 2008
Sales		$ 100,000
Less cost of goods sold		40,000
Gross margin		60,000
Less selling and administrative expenses:
Selling expense	$18,000
Administrative expense	12,000	30,000
Net Income		$30,000

Required:

Reconcile the difference in profit between the two income statements.

EXERCISE #2

(3 points)

The following information relates to Ronald Industries for fiscal 2008, the companys first year of operation:

Units produced	100,000
Units sold	80,000
Units in ending inventory	20,000
Fixed manufacturing overhead	$500,000

Required:

• Calculate the amount of fixed manufacturing overhead that would be expensed in 2008 using full costing.
• Calculate the amount of fixed manufacturing overhead that would be expensed in 2008 using variable costing.
• Calculate the amount of fixed manufacturing overhead that would be included in ending inventory under full costing and reconcile it to the difference between parts a and b.

EXERCISE # 3

(3 points)

Cales Instrumentation manufactures a variety of electronic instruments that are used in military and civilian applications. Sales to the military are generally on a cost-plus profit basis with profit equal to 10 percent of cost. Instruments used in military applications require more direct labor time because fail-safe devices must be installed. (These devices are generally omitted in civilian applications.)

At the start of the year, Cales estimates that the company will incur $50,000,000 of overhead, $5,000,000 of direct labor, and 500,000 machine hours. Consider the Model KV10 gauge that is produced for both civilian and military uses:

	Civilian	Military
Direct material	$2,000	$2,500
Direct labor	$600	$900
Machine hours	80	80

Required:

Calculate the cost of civilian and military versions of Model KV10 using both direct labor dollars and machine hours as alternative allocation bases.Explain why Cales Instruments may decide to use direct labor as an overhead allocation base.Is it ethical for Cales to select an allocation base that tends to allocate more of overhead costs to government contracts? Explain.Calculate the overhead rate per unit of activity for each of the five cost pools.

Calculate the total overhead assigned to the production of The Ricoh Weekly.

Calculate the overhead cost per unit for The Ricoh Weekly.Calculate the total unit cost for The Ricoh Weekly.Suppose that Ricoh Printing allocates overhead by a traditional production volume-based method using direct labor dollars as the allocation base and one cost pool. Determine the overhead rate per direct labor dollar and the per unit overhead assigned to The Ricoh Weekly. Discuss the difference in cost allocations between the traditional method and the activity-based costing approach.Assuming sales of 1,000 units, what is the full cost of a globe and what is the price with a 20 percent markup?

Assume that the quantity demanded at the price calculated in part a is only 500 units. What is the full cost of the globe and what is the price with a 20 percent markup?

Is the company likely to sell 500 units at the price calculated in part b?

EXERCISE #8

(4 points)

Roger Electronics has just developed a low-end electronic calendar that it plans on selling via a cable channel marketing program. The cable programs fee for selling the item is 15 percent of revenue. For this fee, the program will sell the calendar over six 10-minute segments in September.

Rogers fixed cost of producing the calendars are $120,000 per production run. The company plans to wait for all orders to come in, and then it will produce exactly the number of units ordered. Production time will be less than three weeks. Variable production costs are $20 per unit. In addition, it will cost approximately $6 per unit to ship the calendars to customers.

Kourtney Bow, a product manager at Roger, is charged with recommending a price for the item. Based on her experience with similar items, focus group responses, and survey information, she estimated the number of units that can be sold at various prices:

Price	Quantity
$69.99	10,000
$59.99	15,000
$49.99	25,000
$39.99	40,000
$29.99	60,000

Required:

• Calculate expected profit for each price.
• Which price maximizes company profit?