Question 1 (40 mins, 20 marks)

Cabanos Company manufactures two products, Product C and Product D. The company estimated it would incur $160,790 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labour hours.

Data concerning the current period's operations appear below:

	Product C	Product D
Estimated Volume	3,400 units	4,800 units
Direct Labour hours per unit	1.40 hours	1.90 hours
Direct Materials cost per unit	$7.40	$12.70
Direct Labour cost per unit	$14.00	$19.00

Required:

1. Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year. (9 marks)
2. The company is considering using an activity-based costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labour hours. The activity-based costing system would use three activity cost pools. Data relating to these activities for the current period are given below:

Activity Cost Pools	Estimated Overhead Costs	Expected Activity	Total
Product C	Product D
Machine set-ups	$12,190	80	150	230
Purchase orders	79,200	730	920	1,650
General factory	69,400	4,730	9,120	13,880
Total	$160,790

Determine the unit product cost of each product for the current period using the activity-based costing approach. (9 marks)

3. Was Product C over-costed or under-costed under the current method? By how much in total? (2 marks)

Question 2 (15 mins, 8 marks)

Unified Parcel, Inc. operates a local parcel delivery service. The company keeps detailed records relating to operating costs of trucks, and has found that if a truck is driven 110,000 kilometres per year, the operating cost is 7.5 cents per kilometre. This cost increases to 8.75 cents per kilometre if a truck is driven 60,000 kilometres per year.

Required:

Estimate the cost formula for truck operating costs using the high-low method.

Question 3 (10 mins, 6 marks)

The 4 x 4 Shop is a large retailer of equipment for pickup trucks. An income statement for the company's Bed Liner Department for the most recent quarter is presented below:

The 4 x 4 Shop
Income Statement (Liner Department)
For the first quarter of the year
Sales		$ 700,000
Less: Cost of goods sold		250,000
Gross margin		450,000
Less: Operating expenses
	Selling expenses	195,000
	Administrative expenses	145,000	340,000
Net income		$ 110,000

The liners sell, on average, for $350 each. The department's variable selling expenses are $35 per liner sold. The remaining selling expenses are fixed. The administrative expenses are 25% variable and 75% fixed. The company purchases its liners from a supplier at a cost of $125 per liner. Required:

How to prepare an income statement for the quarter, using the contribution approach?

Question 4 (20 mins, 12 marks)

The following monthly data are available for the Challenger Company and its only product, Product SW:

	Total		Per Unit
Sales (400 units)	$110,000		$ 275
Variable expenses	44,000		110
Contribution margin	$ 66,000		$ 165
Fixed expenses	52,800
Net income	$ 13,200

Required:

1. Without resorting to calculations, what is the total contribution margin at the break-even point? (1 mark)
2. Management is contemplating the use of plastic gearing rather than metal gearing in Product SW. This change would reduce variable costs by $15. The company's marketing manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 350 units per month. Should this change be made? (3 marks)
3. Assume that Challenger Company is currently selling 400 units of Product SW per month. Management wants to increase sales and feels that this can be done by cutting the selling price by $25 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50%. Should these changes be made? (4 marks)
4. Assume that Challenger Company is currently selling 400 units of Product SW. Management wants to automate a portion of the production process for Product SW. The new equipment would reduce direct labour costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SW, thus resulting in an increase in monthly sales of 12%. Should these changes be made? (4 marks)

Question 5 (30 mins, 24 marks)

Barnes Company sells three products: A, B, and C. Budgeted sales by product and in total for the coming month are as follows:

	Product A	Product B	Product C	Total
% of total sales	48%	20%	32%	100%
Sales	$240,000	100%	$100,000	100%	$160,000	100%	$500,000	100%
Variable expenses	72,000	30%	80,000	30%	88,000	30%	240,000	48%
Contribution margin	$168,000	70%	$ 20,000	70%	$ 72,000	70%	$260,000	52%
Fixed expense							223,600
Operating income							$ 36,400

As shown by these data, operating income is budgeted at $36,400 for the month.

Assume that actual sales for the month total $500,000 as planned. Actual sales by product, however, are: A = $160,000 B = $200,000 C = $140,000

Required:

1. Calculate the break-even sales for the coming month, based on budgeted data. (2 marks)
2. Prepare a contribution income statement for the month based on actual sales data. Assume variable expenses are a percentage of sales and total fixed expenses are the same as budgeted. Present the income statement in the same format as shown above. (16 marks)

3. Calculate the break-even sales for the month, based on actual data. (2 marks)

4. Explain why the company did not meet the budgeted operating income or break-even sales even though it met its $500,000 sales budget. (4 marks)

Question 6 (30 mins, 20 marks)

The Miller Company had the following results for its first two years of operation:

	Year 1	Year 2
Sales	$1,200,000	$1,200,000
Cost of goods sold	800,000	680,000
Gross margin	400,000	520,000
Selling and administrative expense	300,000	300,000
Operating income	$ 100,000	$ 220,000

In Year 1, the company produced and sold 40,000 units of its only product; in Year 2, the company again sold 40,000 units, but increased production to 50,000 units. The company's variable production cost is $5 per unit, and its fixed manufacturing overhead cost is $600,000 a year. Fixed manufacturing overhead costs are applied to the product on the basis of each year's unit production (i.e., a new fixed overhead rate is computed each year). Variable selling and administrative expenses are $2 per unit sold.

Required:

1. Compute the unit product cost for each year under absorption costing and under variable costing. (5 marks)
2. Prepare an income statement for each year, using the contribution format with variable costing. (7 marks)
3. Reconcile the variable costing and absorption costing income figures for each year. (4 marks)
4. Explain why the operating income for Year 2 under absorption costing was higher than the operating income for Year 1, although the same number of units were sold in each year. (4 marks)