Question 1 Auto Tires has been in the tire business for four years. It rents a building but owns all of its equipment. All employees are paid a fixed salary except for the busy season (April - June), when temporary help is hired by the hour. Utilities and other operating charges remain fairly constant during each month except those in the busy season. Selling prices per tire average $75 except during the busy season. Because a large number of customers buy tires prior to winter, discounts run above average during the busy season. A 15% discount is given when two tires are purchased at one time. During the busy months, selling prices per tire average $60. The president of Auto Tires is somewhat displeased with the company's management accounting system because the cost behavior patterns displayed by the monthly breakeven charts are inconsistent; the busy months' charts are different from the other months of the year. The president is never sure if the company has a satisfactory margin of safety or if it is just above the breakeven point. Required: a. What is wrong with the accountant's computations? b. How can the information be presented in a better format for the president? Question 2 Axle and Wheel Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The following per unit data apply for sales to regular customers: Direct materials $33 Direct labor 15 Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (50%) 62 Targeted selling price $186 24 52 12 Axle and Wheel Manufacturing has excess capacity. Required: a. What is the full cost of the product per unit? b. What is the contribution margin per unit? c. Which costs are relevant for making the decision regarding this one-time-only special order? Why? d. For Axle and Wheel Manufacturing, what is the minimum acceptable price of this one-time- only special order? e. For this one-time-only special order, should Axle and Wheel Manufacturing consider a price of $100 per unit? Why or why not? Question 3 The management accountant for the Chocolate S'more Company has prepared the following income statement for the most current year: Chocolate Other Candy Fudge Total Sales $40,000 $25,000 $35,000 $1 00,000 Cost of goods sold 26,000 15,000 19,000 60,000 Contribution margin 14,000 10,000 16,000 40,000 Delivery and ordering costs 2,000 3,000 2,000 7,000 Rent (per sq. foot used) 3,000 3,000 2,000 8,000 Allocated corporate costs 5,000 5,000 5,000 15,000 Corporate profit $4,000 $(1,000) $7,000 $10,000 Required: a. Do you recommend discontinuing the Other Candy product line? Why or why not? b. If the Chocolate product line had been discontinued, corporate profits for the current year would have decreased by what amount? Question 1 Auto Tires has been in the tire business for four years. It rents a building but owns all of its equipment. All employees are paid a fixed salary except for the busy season (April - June), when temporary help is hired by the hour. Utilities and other operating charges remain fairly constant during each month except those in the busy season. Selling prices per tire average $75 except during the busy season. Because a large number of customers buy tires prior to winter, discounts run above average during the busy season. A 15% discount is given when two tires are purchased at one time. During the busy months, selling prices per tire average $60. The president of Auto Tires is somewhat displeased with the company's management accounting system because the cost behavior patterns displayed by the monthly breakeven charts are inconsistent; the busy months' charts are different from the other months of the year. The president is never sure if the company has a satisfactory margin of safety or if it is just above the breakeven point. Required: a. What is wrong with the accountant's computations? b. How can the information be presented in a better format for the president? Question 2 Axle and Wheel Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The following per unit data apply for sales to regular customers: Direct materials $33 Direct labor 15 Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (50%) 62 Targeted selling price $186 24 52 12 Axle and Wheel Manufacturing has excess capacity. Required: a. What is the full cost of the product per unit? b. What is the contribution margin per unit? c. Which costs are relevant for making the decision regarding this one-time-only special order? Why? d. For Axle and Wheel Manufacturing, what is the minimum acceptable price of this one-time- only special order? e. For this one-time-only special order, should Axle and Wheel Manufacturing consider a price of $100 per unit? Why or why not? Question 3 The management accountant for the Chocolate S'more Company has prepared the following income statement for the most current year: Chocolate Other Candy Fudge Total Sales $40,000 $25,000 $35,000 $1 00,000 Cost of goods sold 26,000 15,000 19,000 60,000 Contribution margin 14,000 10,000 16,000 40,000 Delivery and ordering costs 2,000 3,000 2,000 7,000 Rent (per sq. foot used) 3,000 3,000 2,000 8,000 Allocated corporate costs 5,000 5,000 5,000 15,000 Corporate profit $4,000 $(1,000) $7,000 $10,000 Required: a. Do you recommend discontinuing the Other Candy product line? Why or why not? b. If the Chocolate product line had been discontinued, corporate profits for the current year would have decreased by what amount
