If you have questions, please consult with the instructor. The evaluation of the work, especially the qualitative questions depends on the organization of the material and the depth of the answers. The quantitative questions should show the computations/process not just an answer.

1. Riley Corp. produces motors for industrial fans. Sales have been very erratic, with some months showing a loss. The company's contribution-format income statement for the most recent month is given below:

Sales (30,000 units at $20 per unit) $600,000

Variable expenses 270,000

Contribution margin (CM) 330,000

Fixed expenses 450,000

Net operating loss $ (120,000)

Required:

1. Compute the company's break-even point in both units and dollars.
2. The sales manager feels that a $50,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $300,000 increase in monthly sales. If the sales manager is right, what will be the effect on the company's monthly net operating income or loss?
3. Refer to the original data. The president is convinced that a 20% reduction in the selling price, combined with an increase of $40,000 in the monthly advertising budget, will cause unit sales to double. What will the new contribution-format income statement look like if these changes are adopted?
4. Refer to the original data. The company's advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $1.00 per unit. Assuming no other changes, how many units would have to be sold each month to earn a pretax profit of $60,000?

2. For Apple Inc., identify one example of each of the following:

• Variable cost
• Fixed cost
• Product cost
• Period cost
• Direct cost
• Indirect cost
• Prevention cost
• Internal failure cost

3. Herro Corporation has established the following cost pools for 2020.

COMMITTED

COST POOLS COSTS COST DRIVERS LEVEL

Maintenance $ 40,000 Machine hours 10,000

Materials handling 50,000 Number of moves 250

Machine setup 60,000 Setup hours 1,000

Inspection 50,000 Number of inspections 500

Total $200,000

The following information pertains to two representative jobs completed during January 2020.

ITEM Job A1 Job B2

Direct materials cost $ 20,000 $ 15,000

Direct labor cost $ 15,000 $ 8,000

Number of units 3,000 2,000

Direct labor hours 800 600

Machine hours 800 700

Number of material moves 50 20

Number of setup hours 100 50

Number of inspections 40 20

Required:

1. Determine the unit cost of each job using machine hours to allocate all support costs.
2. Determine the unit cost of each job using activity-based costing.
3. Which of the two methods produces better estimates of job costs and profits? Explain.

4. Crowder Manufacturing Corporation makes an electronic component in two departments, Machining and Assembly. The capacity per month is 100,000 units in the Machining Department and 80,000 units in the Assembly Department. The only variable cost of the product is direct material of $300 per unit. All direct material cost is incurred in the Machining Department. All other costs of operating the two departments are fixed costs. Crowder can sell as many units of this electronic component as it produces at a selling price of $500 per unit.

Required:

1. Crowder's Machining managers believe that they could increase the capacity in their department by 10,000 units, if they were able to increase fixed costs by $100,000. Should the money be spent? Explain.
2. An outside contractor offers to do assembly for 10,000 units at a cost of $1,800,000. Should Crowder accept the offer from the subcontractor? Show calculations.
3. How do your answers in parts (a) and (b) relate to the theory of constraints? Explain.

5. Nunn Confections is a small bakery that rents space in a neighborhood shopping mall for $30,000 a year. Utilities add another $10,000 yearly. The total staff salaries and benefits projected for next year equal $70,000. In addition, Nunn spends $1,000 on advertising and $2,500 on professional services. Other overhead expenses total $12,000.

Ms. Nunn, the company's owner, would like to make a $60,000 profit after taxes next year. The tax rate will be 25 percent. The bakery sells loaves of bread, cakes, and pies. The average variable cost of each category of items and Nunn's markup on cost is loaves of bread, $2.00 and 50 percent: cakes, $5.00 and 60 percent: pies, $6.00 and 60 percent. (Note the selling price is the average variable cost plus the markup on the variable cost.)

In past years, 60 percent of the store's sales revenue came from loaves of bread, 10 percent from cakes, and the remaining 30 percent from pies.

Required:

1. What is the contribution margin of each item?
2. What are the projected fixed costs of the company next year?
3. What is the breakeven point in units for Nunn Confections?
4. What sales dollar level will the company need to reach the target after-tax profit?

6. Consider the following information for BAM Manufacturing Inc. for the year ended December 31, 2020:

Accumulated depreciation $ 400,000

Depreciation expense (80%-Plant) 200,000

Direct labor - Wages 600,000

Direct materials inventory, Dec. 31, 2020 50,000

Direct materials inventory, Jan. 1, 2020 30,000

Direct material purchases 200,000

Finished goods inventory, Dec. 31, 2020 20,000

Finished goods inventory, Jan. 1, 2020 40,000

Heat, light & power (80%-Plant) 60,000

Indirect labor 40,000

Property taxes (80%-Plant) 60,000

Sales representatives' salaries 800,000

Sales revenue 4,000,000

Plant supervisor's salary 100,000

Accounts receivable 600,000

Supplies (80%-Plant) 80,000

Accounts payable 500,000

Work-in-Progress inventory, Dec. 31, 2020 50,000

Work-in-Progress inventory, Jan. 1, 2020 30,000

Determine:

1. The cost of goods manufactured.
2. The gross profit.
3. The operating income (loss).